In its latest look at the threats to the country’s financial system, the Bank of Canada puts household debt and imbalances in the housing market at the top of the list.
The Bank says these are not new problems, but they have intensified during the pandemic. Consumer debt has actually dropped in the past year or so, but rising mortgage debt has more than offset that decline. At the end of last year Statistics Canada reported that the household debt-to-income ratio stood at 170.7, or $1.71 of debt for every $1.00 of disposable income.
The housing boom has been supporting the overall economy in the short-term but it is also adding to the vulnerability of the economy and financial system. The BoC is also expressing concerns about the declining quality of mortgage borrowing during the pandemic.
The key concern is that any significant economic shock that leads to loss of employment, a drop in income, or a sharp reduction in home prices would force “overstretched” households to cut other spending in order to make their mortgage payments. That, in turn, would curtail the economy as a whole, and could put significant stress on the financial system. Just because the central bank says there could be a problem, does not mean there will be a problem. There are a number of market watchers who see the Bank using its annual Financial System Review as a bully pulpit in an effort to talk down overly exuberant market expectations that might lead to trouble.
Other key concerns include cybersecurity, too much reliance on cheap credit and the possibility of a premature withdrawal of pandemic support for businesses.