MNI: Bank of Canada Says Housing Risks Are Climbing Further

Canada's housing market and consumer debts have become even riskier in the last year, leaving the nation vulnerable to a correction that could derail the consumer spending that's carried the economy over the last decade, the central bank said Thursday.

"Two key household vulnerabilities—high household indebtedness and imbalances in the housing market—have intensified over the past year," the Bank of Canada's Financial System Review said. "The housing market boom and the corresponding rise in mortgage debt support economic growth in the short term but increase the risk to the Canadian economy and financial system over the medium term."

Governor Tiff Macklem since taking office last year has given different messages on housing, saying at one point the economy needed any growth it could get while pointing to the danger of home purchases driven by fears that prices could only go up. Macklem and his predecessors have said the housing boom is a side effect of low-for-long policy interest rates needed to prop up the wider economy, and other regulators must take the lead in preventing reckless borrowing.

MORTGAGE INCOME MULTIPLES

Mortgages worth more than 4.5 times a borrower's income have climbed to 22% of the market, a larger share than around five years ago, a time when governments cracked down on speculators. Year over year home resale prices are also now rising faster than back then, gaining almost 50% over the last year according to realtor data.

"Buyers may be purchasing homes because they expect prices to keep going up, which contributes to market imbalances and leaves homeowners vulnerable to future price declines. A large fall in house prices could weigh on consumption, particularly by highly indebted households, especially if accompanied by declines in employment and income," the BOC said.

The pandemic further shifted household wealth towards the housing market as Canadians used income gains and government supports to pay down other forms of debt while boosting their mortgage obligations, the BOC said. Housing has risen to 42% of household wealth from 36% in 2000, the BOC said, meaning any correction could also imperial consumer spending.

POLICY ERROR RISK

The report also noted an earlier investor survey noting the risk of a policy error and "uncertainty surrounding the withdrawal of monetary and fiscal policy support and reduced flexibility for policy-makers to respond to future shocks."

Other major vulnerabilities remain but haven't changed much over the past year, the BOC said: climate change that could shift asset prices; cyber attacks; and "fragile" corporate debt funding markets.

"Assets exposed to climate-related risks are generally mispriced. This can leave investors and financial institutions exposed to sudden losses in the value of carbon-intensive assets in the transition to a low-carbon economy," the BOC said.