Canada’s Banks Could Withstand a Housing Shock, Schembri Says

Bank of Canada Deputy Governor Larry Schembri said the country’s financial system is strong enough to deal with a housing shock, if it emerges.

The risk the housing market will fall into a cycle of defaults and crashing prices “remains low,” Schembri said in the text of a speech he’s giving Wednesday in Guelph, Ontario. Tougher regulatory oversight has also improved the resiliency of lenders.

“The Canadian financial system is very resilient and could withstand the triggering of this vulnerability,” in household debt loads, Schembri said. Monetary policy is “a very blunt instrument to address financial stability.” He didn’t comment on the outlook for the policy interest rate in his remarks.

The rise in household debt has been driven by highly-indebted households under the age of 45, according to the central bank, and household debt rose to a record 163.7 percent of after-tax income in the third quarter according to figures from the federal statistics agency. More of that borrowing in the last decades has become concentrated in families with large debt obligations, Schembri said.

Policy makers cut interest rates twice last year to 0.5 percent and some investors are betting on another move this year as the damage from falling commodity prices overtake the risks of a housing collapse fed by cheap mortgages. Schembri said other regulators must take the lead in protecting the financial system from housing risks, while the central bank focuses on stimulus to meet its 2 percent inflation target.

The central bank still has “flexibility” to adjust monetary policy if needed to address financial stability, and policy makers “continue to monitor it closely,” Schembri said.

Finance Minister Bill Morneau helped out in December with tighter mortgage lending requirements, aimed in part at young indebted families in Toronto and Vancouver. Mortgage debt was at least 500 percent of disposable income in 10.8 percent of households in 2012, up from 3.4 percent of households in 1999, according to a paper published in December by the C.D. Howe Institute, a Toronto-based research group.

Schembri reiterated economic growth probably stalled in the fourth quarter of last year and will quicken to an annualized pace faster than 2 percent after the first quarter of this year.

“This vulnerability should stabilize as the economy and household incomes strengthen and interest rates normalize,” Schembri said, referring to household debt.

Before it's here, it's on the Bloomberg Terminal.