The bank of Canada asserts home prices and debts burden are an increasing concern
The bank of Canada says that huge amounts of debts linked to overheated Canadian housing markets have made households more assailable, but Canada’s economy is very flexible and can resist any significant blow to the system.
The semi-annual Financial System Review was published by Canada’s central bank on Thursday; this is a document which highlights some of the main risks that the bank of Canada considers on the economic horizon.
As anticipated, the housing markets and the huge debts associated to it, occupy a significant portion of the document.
#1. Poloz cautions about gigantic mortgages
Since the last evaluation in December, the bank particularly speaks about a rise in uninsured mortgages, and boost in home equity lines of credit.
“Highly indebted households have less flexibility to deal with sudden changes in their income,” said the bank.
“As the number of these households grows, it is more likely that adverse economic shocks to households would significantly affect the economy and the financial system.”
The bank’s interest in the housing market arises mostly from activities in the two markets which usually have a lot of regard: Vancouver and Toronto.
#2. Two big banks raise flags over Toronto housing prices
“Imbalances in the Canadian housing market have also grown since December,” the bank said, “mainly due to an acceleration in prices in Toronto and surrounding areas.”
A portion of the report involves a risk evaluation in which the bank assesses what the effects might be if certain blows to the system were to occur. In the evaluation, the bank tries to induce a scenario under which there is a “significant regional house price correction in Toronto, Vancouver and their surrounding areas.”
Both cities have, by far the most costly real estate markets in Canada, with an excess of $1 million price for in single houses.
#3. Royal LePage says Vancouver may experience a two-digit correction in 2017
Nevertheless, the bank sees a correction in those two markets to be entirely improbable. Housing market specialists usually highlight the awful correction which occurred in the United States, and say it is very likely that something like that happens in Canada. But according to the central bank’s assessment, the two scenarios are quite different.
“The financial system weaknesses and exposures that helped transform a house price correction into a large and persistent rise in unemployment in the United States … are not present in Canada,” the bank said.
Explicitly, the underwriting standards of Canadian mortgages are much bigger, and loans are secured by insurance companies and other government guarantees. The bank also added that Canadian mortgages “are not financed by complex and opaque securitization vehicles”.
