Bank of Canada Governor Tiff Macklem takes part in a news conference at the Bank of Canada in Ottawa on Tuesday, Dec. 15, 2020. THE CANADIAN PRESS/Sean Kilpatrick

Bank of Canada Governor Tiff Macklem takes part in a news conference at the Bank of Canada in Ottawa on Tuesday, Dec. 15, 2020. THE CANADIAN PRESS/Sean Kilpatrick

Bank of Canada warns of rising risks from household debt, and a hot housing market

Many households have taken on large mortgages compared with their income

The Bank of Canada says its concerns are mounting that households are piling on too much debt and posing what the central bank says is a key vulnerability to the economy.

In its latest financial system review, the Bank of Canada said Thursday that many households have taken on large mortgages compared with their income, limiting their flexibility to deal with an unforeseen financial shock like the loss of a job.

The bank notes that total household debt has increased by four per cent since the start of the pandemic, picking up sharply since the middle of last year as the housing market started to heat up.

The Bank of Canada’s report says the boom may help the economy rebound in the short-term, but could lead to a future bust if households have to cut spending because of another downturn in the economy.

The bank’s latest review of the risks to the country’s financial system also highlighted concerns about a too-soon withdrawal of pandemic aid for businesses.

For businesses, the concern is about their future viability when government support ends because much remains uncertain about what post-pandemic life and economic activity will look like, the central bank said.

For banks and insurance companies, the Bank of Canada said cybersecurity remains one of their top three concerns.

But it is housing and high household debt levels that plays a key role in the central bank’s report Thursday.

Government aid and work by the central bank to drive down interest rates during the pandemic have helped put a financial floor on households and businesses, many of whom have fared far better than could have been expected during the economic downturn.

The report adds that the activity in the market and troubling figures on mortgages is reminiscent of 2016 just before stress tests were brought in on mortgage applications to make sure buyers could handle payments if rates went up.

House prices were up 23 per cent nationally relative to one year earlier, the bank said in its report. The Canadian Real Estate Association said this week that the average price of a home sold in Canada in April was just under $696,000.

The bank said the recent surge in prices is more widespread in cities than five years ago when things were largely concentrated in and around Toronto and Vancouver. In the bank’s view, the Greater Toronto Area, Hamilton and Montreal are overheated and Ottawa is on the precipice of joining them.

With house prices rising, and supply of available homes lagging demand, some homeowners may be tempted to buy now out of concern that they won’t be able to afford something in the future.

The bank’s report warns that some households are biting off more than they can chew with a new mortgage, making them more vulnerable to rising interest rates when it comes time to renew their loan.

A federal bank regulator is looking at tightening the test for uninsured mortgages, and the Trudeau Liberals have been pressed to do something similar for insured mortgages.

The federal budget last month proposed a one per cent foreign-buyers tax on vacant property. The central bank said the measure “would likely reduce speculative demand in the housing market.”

On Wednesday, Finance Minister Chrystia Freeland met with a panel of private sector economists. A readout from the meeting provided by Freeland’s office noted that she asked about the housing market and affordability issues.

—Jordan Press, The Canadian Press

RELATED: Canadian economy lost 207,000 jobs in April, unemployment rate rises

RELATED: Small business struggling amid COVID-19 pandemic looks for aid in Liberals’ budget

FinanceHousing

Just Posted

A Grade 8 class at L.A. Matheson Secondary. March 2021. (Photo: Lauren Collins)
B.C.’s return-to-school plan good, but Surrey teachers hope there is room for adjustments

Surrey school district to receive $1.76M of the $25.6M provincial pandemic-related funding

Surrey Fire Service battled a dock fire along the Fraser River late Friday night (June 18). It was on Musqueam Drive, near Industrial Road, around 10:45 p.m. (Photo: Shane MacKichan)
Fire engulfs pier on Surrey side of the Fraser River

Pier has reportedly been unused for a long time

Marco Mendicino, Minister of Immigration, Refugees and Citizenship during a press conference in Ottawa on Thursday, May 13, 2021. THE CANADIAN PRESS/Sean Kilpatrick
Canada to welcome 45,000 refugees this year, says immigration minister

Canada plans to increase persons admitted from 23,500 to 45,000 and expedite permanent residency applications

Emily Steele holds up a collage of her son, 16-year-old Elijah-Iain Beauregard who was stabbed and killed in June 2019, outside of Kelowna Law Courts on June 18. (Aaron Hemens/Capital News)
Kelowna woman who fatally stabbed teen facing up to 1.5 years of jail time

Her jail sentence would be followed by an additional one to 1.5 years of supervision

Cpl. Scott MacLeod and Police Service Dog Jago. Jago was killed in the line of duty on Thursday, June 17. (RCMP)
Abbotsford police, RCMP grieve 4-year-old service dog killed in line of duty

Jago killed by armed suspect during ‘high-risk’ incident in Alberta

The George Road wildfire near Lytton, B.C., has grown to 250 hectares. (BC Wildfire Service)
B.C. drone sighting halts helicopters fighting 250 hectares of wildfire

‘If a drone collides with firefighting aircraft the consequences could be deadly,’ says BC Wildfire Service

A dose of the Pfizer-BioNTech COVID-19 vaccine is pictured at a vaccination site in Vancouver Thursday, March 11, 2021. THE CANADIAN PRESS/Jonathan Hayward
NACI advice to mix vaccines gets varied reaction from AstraZeneca double-dosers

NACI recommends an mRNA vaccine for all Canadians receiving a second dose of a COVID-19 vaccine

A aerial view shows the debris going into Quesnel Lake caused by a tailings pond breach near the town of Likely, B.C., Tuesday, Aug. 5, 2014. THE CANADIAN PRESS/Jonathan Hayward
Updated tailings code after Mount Polley an improvement: B.C. mines auditor

British Columbia’s chief auditor of mines has found changes to the province’s requirements for tailings storage facilities

A North Vancouver man was arrested Friday and three police officers were injured after a 10-person broke out at English Bay on June 19, 2021. (Youtube/Screen grab)
Man arrested, 3 police injured during 10-person brawl at Vancouver beach

The arrest was captured on video by bystanders, many of whom heckled the officers as they struggled with the handcuffed man

Kalyn Head, seen here on June 4, 2021, will be running 100 kilometres for her “birthday marathon” fundraiser on July 23. (Jenna Hauck/ Chilliwack Progress)
Woman’s 100-km birthday marathon from Chilliwack to Abbotsford will benefit Special Olympics B.C.

Kalyn Head hopes run raises awareness, advocates for inclusion of people with intellectual disabilities

Most Read