Canada would be on the brink of a financial crisis.
why ? In particular, due to high household debt and rising real estate prices.
That’s not what I’m saying: That’s what the Bank of Canada is proposing after the institution’s Governor Tiff Macklem’s press conference on the review of Canada’s financial system.
“If the economy slows significantly and unemployment rises significantly, this combination of elevated debt and strong house prices could amplify the slowdown. A loss of income would likely force heavily indebted households to cut spending significantly to continue making mortgage payments. In addition, a major correction in house prices would reduce household wealth and access to credit, particularly among the most indebted households. If many households find themselves in this situation, it could have far-reaching implications for the economy and the financial system,” Macklem said.
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Especially if you are one of the highly indebted households after paying the maximum amount to purchase a property. You may find it difficult to pay off your debts.
Why ? Mortgage costs have skyrocketed and this upward trend is likely to continue for a long time.
The rise in mortgage rates follows the sharp increase in the Bank of Canada’s interest rate. While the interest rate was just 0.25% at the beginning of the year, the key interest rate is currently 1.50%. The Bank of Canada suggests it needs to go to 3% to fight its battle against high inflation.
Households heavily indebted by taking out mortgages close to 2% will find it difficult to renew their mortgages at 5% or possibly more if the upward trend in interest rates continues. This could lead to redemptions and fire sales. It should come as no surprise that the housing market is entering a severe correction in some overheated markets in several major metropolitan areas.
Should such a shock occur, it would be clear that the entire Canadian economy would suffer and the Canadian financial system would lose its feathers.
Screenshot taken from YouTube
During a news conference yesterday in Ottawa, Bank of Canada Governor Tiff Macklem outlined the top threats facing the country’s economy, including household and corporate debt glut.
The over-indebtedness of numerous companies as a result of the pandemic is also a concern for our economy and our financial system.
Rising interest rates make them even more vulnerable. Many will have difficulty paying off their debts.
The situation is also problematic for companies that finance themselves via the bond market, since borrowing costs have obviously skyrocketed after the Bank of Canada’s interest rate hike.
In addition, following Vladimir Putin’s invasion of Ukraine, the Bank of Canada is concerned about the risk of a cyberattack on Canadian banks due to anti-Russian measures taken in Canada.
The surge in cryptocurrency buying in Canada is also one of the financial vulnerabilities to watch.
Are we in danger of falling into a deep and prolonged recession?
Risks are mounting, but the Bank of Canada doesn’t expect that. For the moment of course.