The vulnerabilities associated with high household debt and imbalances in the housing market have declined modestly, but continued vigilance is still necessary, according to the latest Financial System Review released by the Bank of Canada (BoC) on Thursday.
Concerning household indebtedness, the stress tests have improved the quality of new mortgage lending. As a result, the share of new mortgages going to highly indebted households (those that owe more than 450% of their income) has dropped significantly.
“The combination of the revised mortgage guidelines and past increases in interest rates [has] helped to slow the pace of household borrowing and stabilize the overall household debt-to-income ratio in Canada,” BoC Governor Stephen Poloz said.
These are encouraging signs, Poloz said, but there are reasons to remain vigilant. The total amount of debt carried by Canadian households is still large, and a large share of this debt is with highly indebted households. Also, the decline in global bond yields since the beginning of the year has lowered mortgage rates, which would likely boost household borrowing again.
“The bank is also closely monitoring the risk that stricter mortgage guidelines are shifting consumers away from federally regulated institutions and toward private lenders and credit unions, some of which are not following the federal guidelines,” Poloz said.
Regarding imbalances in the housing market, BoC continues to follow three housing stories in the country: the previously frothy Toronto and Vancouver markets, the Alberta and Saskatchewan markets that are still adjusting to lower oil prices, and the other markets that are functioning normally.
“The housing market as a whole continues to benefit from solid fundamentals, including population growth and strong job creation,” Poloz said.
After slowing sharply since 2017, Toronto appears to be stabilizing, while resales and prices continue to fall in Vancouver, Poloz said. However, prices in both markets remain 40% to 60% higher than they were four years ago, suggesting that housing imbalances remain an important macro-financial vulnerability.