MNI FIVE THINGS:BOC:Hsehold Debt Key Fin Vulnerability,Easing>

--Clarifying Headline

--Financial System Continues To Be Resilient

By Courtney Tower

     OTTAWA (MNI) - Following are the main points contained in the now 

annual Financial System Review of the Bank of Canada, released Thursday. 

     - High household indebtedness remains rated by the BOC as the main 

vulnerability for Canada's financial stability, along with housing 

market imbalances, but both are reported to be easing. As in the FSR 

last November, these two chief vulnerabilities remain "elevated" but the 

financial system is found to remain "resilient". A third chief 

vulnerability, cyber threats, needs to be met with collaboration between 

financial institutions and authorities with "a greater pooling of 

defensive sources." 

     - The overall risk to the financial system in Canada is "broadly 

unchanged" since November. The ability to manage negative shocks "is 

being further improved by new policy measures" constraining mortgage 

lending. The ratio of household debt to disposable income was 170% at 

end 2017 and likely is just below that now. But higher interest rates 

and tighter measures on lending are restraining credit growth and the 

quality of new mortgage debt "continues to improve." However, the sheer 

size of indebtedness means "this vulnerability will persist for some 

time." 

     - Stress tests required in 2016 and 2017 on mortgage borrowing, 

reducing sizes of loans for borrowers at given income levels, have 

dampened credit growth and improved quality of mortgages, the BOC says. 

For instance, the 2016 regulation cut in half the proportion of 

high-ratio borrowers who take on mortgage debt higher than 450% of their 

gross income. Highly indebted households have begun to decline as a 

share of new borrowers. New low-ratio mortgages with an amortization 

period longer than 25 years are declining. 

     - Vulnerability 2, imbalances in the housing market, "shows some 

signs of lessening but remains elevated." The huge rise in prices in 

Greater Toronto and Greater Vancouver areas has slowed sharply in the 

past year because of declining affordability and government policies. 

Growth in national house prices is down from a peak of near 20% in April 

2017, year-over-year, to about 1.5% last April. This was driven by price 

declines in overheated Greater Toronto, which, with Greater Vancouver, 

commands about half Canada's housing market. 

     - Risk scenarios remain "broadly unchanged" from last November, 

although the FSR incorporated an increase in global protectionism into 

its risk scenarios of a Canadian recession and a sharp rise in long-term 

interest rates due to higher global risk premiums (the latter is 

"moderate but increasing"). Risk of a severe national recession from 

foreign shocks or housing and household stresses is "elevated but 

decreasing." The risk of a large house price correction in overheated 

markets is rated as "moderate". Growth in home prices has already slowed 

markedly and resales are down but are expected to pick up. 

--MNI Ottawa Bureau; email: yali.ndiaye@marketnews.com 

[TOPICS: M$C$$$,MACDS$]