Bank of Canada Governor Tiff Macklem takes part in a news conference at the Bank of Canada in Ottawa on Tuesday, Dec. 15, 2020. THE CANADIAN PRESS/Sean Kilpatrick

Bank of Canada Governor Tiff Macklem takes part in a news conference at the Bank of Canada in Ottawa on Tuesday, Dec. 15, 2020. THE CANADIAN PRESS/Sean Kilpatrick

Bank of Canada warns of rising risks from household debt, and a hot housing market

Many households have taken on large mortgages compared with their income

The Bank of Canada says its concerns are mounting that households are piling on too much debt and posing what the central bank says is a key vulnerability to the economy.

In its latest financial system review, the Bank of Canada said Thursday that many households have taken on large mortgages compared with their income, limiting their flexibility to deal with an unforeseen financial shock like the loss of a job.

The bank notes that total household debt has increased by four per cent since the start of the pandemic, picking up sharply since the middle of last year as the housing market started to heat up.

The Bank of Canada’s report says the boom may help the economy rebound in the short-term, but could lead to a future bust if households have to cut spending because of another downturn in the economy.

The bank’s latest review of the risks to the country’s financial system also highlighted concerns about a too-soon withdrawal of pandemic aid for businesses.

For businesses, the concern is about their future viability when government support ends because much remains uncertain about what post-pandemic life and economic activity will look like, the central bank said.

For banks and insurance companies, the Bank of Canada said cybersecurity remains one of their top three concerns.

But it is housing and high household debt levels that plays a key role in the central bank’s report Thursday.

Government aid and work by the central bank to drive down interest rates during the pandemic have helped put a financial floor on households and businesses, many of whom have fared far better than could have been expected during the economic downturn.

The report adds that the activity in the market and troubling figures on mortgages is reminiscent of 2016 just before stress tests were brought in on mortgage applications to make sure buyers could handle payments if rates went up.

House prices were up 23 per cent nationally relative to one year earlier, the bank said in its report. The Canadian Real Estate Association said this week that the average price of a home sold in Canada in April was just under $696,000.

The bank said the recent surge in prices is more widespread in cities than five years ago when things were largely concentrated in and around Toronto and Vancouver. In the bank’s view, the Greater Toronto Area, Hamilton and Montreal are overheated and Ottawa is on the precipice of joining them.

With house prices rising, and supply of available homes lagging demand, some homeowners may be tempted to buy now out of concern that they won’t be able to afford something in the future.

The bank’s report warns that some households are biting off more than they can chew with a new mortgage, making them more vulnerable to rising interest rates when it comes time to renew their loan.

A federal bank regulator is looking at tightening the test for uninsured mortgages, and the Trudeau Liberals have been pressed to do something similar for insured mortgages.

The federal budget last month proposed a one per cent foreign-buyers tax on vacant property. The central bank said the measure “would likely reduce speculative demand in the housing market.”

On Wednesday, Finance Minister Chrystia Freeland met with a panel of private sector economists. A readout from the meeting provided by Freeland’s office noted that she asked about the housing market and affordability issues.

—Jordan Press, The Canadian Press

RELATED: Canadian economy lost 207,000 jobs in April, unemployment rate rises

RELATED: Small business struggling amid COVID-19 pandemic looks for aid in Liberals’ budget

FinanceHousing

Just Posted

A for sale sign is shown in by new homes in Beckwith, Ont., just outside Ottawa, on Wednesday, Jan. 11, 2018. THE CANADIAN PRESS/Sean Kilpatrick
Thompson-Okanagan population grew despite COVID-19: report

The Chartered Professional Accountants of BC said there are 8,462 new residents in the region

Aerial view of a wildfire at 16 Mile, 11 kilometres northwest of Cache Creek, that started on the afternoon of June 15. (Photo credit: BC Wildfire Service)
BC Wildfire service tackling blaze at 16 Mile

Two hectare wildfire started on the afternoon of June 15 and is listed as out of control

Ashcroft hospital emergency closed sign, 2016. Photo credit: Barbara Roden
Ashcroft Hospital emergency department closed this weekend

Closure due to unexpected limited physician availabiliy, says Interior Health

Residents line up outside the Vernon Recreation Complex for their COVID-19 vaccine Saturday, June 5. (Jennifer Smith - Morning Star)
No appointments necessary for first dose COVID-19 vaccine: Interior Health

People can just show up at clinics, register on the spot and get the shot

Heidi Roy of the Cariboo Jade Shop in Cache Creek with the 3,000 jade boulder, which is now on secure display inside the shop. (Photo credit: Barbara Roden)
Massive jade boulder returns to Cache Creek store six months after daring heist

The 3,000-pound boulder was stolen on Dec. 19, 2020 and found abandoned in the bush a week later

People watch a car burn during a riot following game 7 of the NHL Stanley Cup final in downtown Vancouver, B.C., in this June 15, 2011 photo. THE CANADIAN PRESS/Geoff Howe
10 years ago: Where were you during the 2011 Vancouver Stanley Cup Riots?

Smashed-in storefronts, looting, garbage can fires and overturned cars some of the damage remembered today

(Black Press Media file)
Dirty money: Canadian currency the most germ-filled in the world, survey suggests

Canadian plastic currency was found to contain 209 bacterial cultures

(pixabay file shot)
B.C. ombudsperson labels youth confinement in jail ‘unsafe,’ calls for changes

Review states a maximum of 22 hours for youth, aged 12 from to 17, to be placed in solitary

Eleonore Alamillo-Laberge, 6, reads a book in Ottawa on Monday, June 12, 2017. THE CANADIAN PRESS/Sean Kilpatrick
Parents will need to fight ‘COVID learning slump’ over summer: B.C. literacy experts

Parents who play an active role in educating their children this summer can reverse the slump by nearly 80%, says Janet Mort

Kelowna General Hospital. (File photo)
COVID-19 outbreak at Kelowna General Hospital declared over

Three people tested positive for the virus — two patients and one staff — one of whom died

The border crossing on Highway 11 in Abbotsford heading south (file)
Western premiers call for clarity, timelines on international travel, reopening rules

Trudeau has called Thursday meeting, premiers say they expect to leave that meeting with a plan

The B.C. government’s vaccine booking website is busy processing second-dose appointments, with more than 76 per cent of adults having received a first dose. THE CANADIAN PRESS/Jonathan Hayward
B.C.’s COVID-19 infections, hospitalizations stable for Tuesday

108 new confirmed cases, 139 in hospital, 39 in intensive care

A worker, at left, tends to a customer at a cosmetics shop amid the COVID-19 pandemic Thursday, May 20, 2021, in Los Angeles. (AP Photo/Marcio Jose Sanchez)
Half of cosmetics sold in Canada, U.S. contain toxic chemicals: study

Researchers found that 56% of foundations and eye products contain high levels of fluorine

Most Read