Poloz Sees Tighter Mortgage Rules Helping Ease Housing Risksby
Bank of Canada also flags consumer debt as oil shock fades
Latest financial stability report reflects weaker fundamentals
The Bank of Canada said elevated levels of household debt and imbalances in the housing market remain the primary risks to the country’s financial system, dangers that new government rules will mitigate over time.
“Overall, the risk of nationwide household financial stress combined with a sharp correction in house prices across the country remains ‘elevated,’” policy makers led by Governor Stephen Poloz said Thursday in their semi-annual Financial System Review. “Since the June FSR, the likelihood of this risk materializing has increased modestly as a result of weaker economic fundamentals.”
New government measures designed to cool a residential real-estate boom -- including mortgage-tightening rules introduced in October by Finance Minister Bill Morneau -- will in time slow the market and mitigate the risks, they said.
Canadian officials are keeping a close eye on consumer debt levels, which have climbed steadily since the financial crisis, fueled by historically low interest rates. Household debt reached a record C$2 trillion ($1.5 trillion) in the third quarter, according to a report Wednesday from the government statistics agency, and the widely-followed ratio of household debt to after-tax income rose to another record high of almost 167 percent.
The Bank of Canada flagged the increase of highly indebted households in several cities. In Toronto, for example, the proportion of new high-ratio mortgages where the loan is more than 450 percent of income increased to 49 percent in the third quarter, from 41 percent and 32 percent in the same quarter the previous two years.
Thursday’s report also said the dangers from the drop in commodity prices are fading, and the jump in global borrowing costs since U.S. President-elect Donald Trump’s victory appears to be manageable.
The risk from a prolonged period of weakness in commodity prices was cut to the weakest rating of “low” in the new report, from “moderate” in June. Jumps in global long-term interest rates were kept at the “moderate” rating even as government yields have climbed since the U.S. election because the rise has been “orderly,” the central bank said.
Poloz said Thursday the government mortgage rules “will help mitigate financial stability risks over time.”