The Bank of Canada published on Wednesday its latest installment of its financial system review, a twice-a-year report on issues the bank is watching closely.
In it, the bank, which is responsible for influencing interest rates and managing other high-level monetary matters to keep the financial system and broader economy stable, reveals it is somewhat worried.
While the economy appears to finally be shaking off years of sluggishness, there are a few “vulnerabilities” that threaten to send it reeling, should they get “triggered” into full-blown problems.
Specifically, Governor Stephen Poloz and other central bankers see three risks hanging over the system and by extension, the economy: sky-high consumer debt levels; a still-hot housing market; and investors making riskier bets in stocks and other financial markets.
On that first item, the bank notes ultra-low interest rates are at the heart of consumers’ voracious appetite in recent years to pile on debt – which remains at record levels, and is ticking higher.
The bank’s report said more than one in eight households, or 12 per cent, something amounting to excessive debts. Those households – which account for a whopping 40 per cent of all household debt – could well be challenged to get their obligations under control when interest rates rise.
But banks and other lenders were also singled out. “Strong competition among financial entities is promoting riskier borrowing by some households,” the bank’s Financial System Review report said.
Housing risks edge higher
Alongside debt levels, “imbalances” within the real estate market are edging higher, the bank said. Those imbalances refer to home prices moving further out of sync with average income growth.
Most economists and market watchers have been calling for moderating prices nationally for the past year or more, but big gains in big markets – notably Vancouver, Toronto and Calgary – have defied those expectations. Prices across many other markets have cooled, however.
‘A soft landing in the housing market has not yet materialized’
The Bank of Canada’s latest analysis suggests national home prices could be overvalued by anywhere between 10 and 30 per cent and prices are growing more so thanks in part to persistently lower mortgage rates, which are encouraging bigger loans.
“Imbalances in the housing market are edging higher, with a pickup in both resale activity and in the growth of house prices,” the bank said. “A soft landing in the housing market has not yet materialized, in part because mortgage rates have declined further over the past year.”
Stock markets in Toronto, New York and elsewhere have hit record highs this year, encouraging investors to join the wave.
The bull market’s momentum has been helped along though by huge stimulus measures by the U.S. Fed and other central banks, which have pumped trillions into financial markets to help spur higher economic growth.
“Exceptional monetary stimulus continues to create incentives for increased risk taking in financial markets, both globally and in Canada,” the Bank of Canada report said.
“Although anecdotal evidence suggests that highly leveraged positions remain limited in domestic markets, greater risk taking could increase volatility in times of market stress.”
These “vulnerabilities” could be exposed by a “trigger” the bank said, “which could then cause a risk to materialize.”
Oil prices continued to side on Tuesday, sending shares on the Toronto Stock Exchange lower by another 300 points, or 2.3 per cent. Poloz said a press conference crude’s fast decline this fall was “in the zone” of what the bank has forecast.
Despite the near-term negatives for Alberta and other oil-producing regions in the country, lower oil prices will actually boost global economic growth, providing a lift to Canada’s prospects in the process.
While lower crude prices will pare domestic growth, Poloz said he still sees an economy on the mend. “We believe the economy is gathering strength.”