Households who bought their homes in the past year will suffer the most from rising interest rates and a price correction in the housing market, the Bank of Canada estimates.
Posted at 8:45am
Updated at 11:47 am
Household debt is the biggest vulnerability in Canada’s economy, the central bank stressed in its financial system report released on Thursday. “It’s not new, we talk about it a lot, but these vulnerabilities have been exacerbated by the pandemic,” Gov. Tiff Macklem said at a news conference from Ottawa.
Those new to home ownership are at even greater risk if the economy slows and unemployment rises, according to the central bank. They paid an average of 50% more for their homes than before the pandemic and took out large loans, mostly at variable rates and with longer payback periods.
“Many have taken out larger mortgages given the high cost of housing relative to their income,” the central bank said. Although non-mortgage borrowing has declined, “households as a whole have increased their liabilities, with the increase in mortgage debt more than offsetting the decrease in consumer debt.”
In fact, according to the Bank of Canada, the proportion of heavily indebted households is now higher than before the pandemic and at an all-time high.
While interest rates have started to rise, the most indebted households are having to cut spending to pay off their mortgage debt and are particularly vulnerable in the event of a loss of income, “particularly when it comes on top of a fall in house prices,” the report said .
The 2022 edition of the Financial System Report identifies more weaknesses in Canada’s economy that increase the risk of a recession. “The probability of negative growth in the first quarter of 2024 is almost double given the current environment of vulnerabilities,” the central bank said.
The risks of cyberattacks, which can be found among other vulnerabilities in Canada’s economy, have increased with the Russian invasion of Ukraine, according to the bank. “The increasing frequency and sophistication of state-sponsored cyberattacks increases the risk that a successful attack on Canada will significantly disrupt the country’s financial system.”
Climate risk is one of the vulnerabilities identified by the Bank of Canada, such as: B. Cryptocurrencies, the popularity of which poses an increased risk to the financial system. Cryptoassets “are becoming increasingly integrated into the traditional financial system, increasing the risk that shocks to the markets for these products will resonate systemwide,” the monetary authorities estimate.