The Bank of Canada is warning of rising household debt and housing prices – again. This familiar theme was echoed in its December 2016 and previously, the June 2016 Financial System Review (FSR), a twice-yearly report that examines and analyzes Canada’s overall macro-financial conditions.
The Bank highlighted elevated levels of Canadian household debt as a key vulnerability in most Canadian cities, but particularly in Calgary, Toronto and Vancouver.
“The most important risk remains household financial stress and a sharp correction in house prices, triggered by a large and persistent nationwide rise in unemployment,” the report outlines. “The likelihood of this risk materializing, however, remains low.”
The Bank released these heat maps to illustrate the evolution of mortgage loan-to-income ratios in Toronto, Vancouver and Calgary over the last three years:
Canada’s overheating housing markets will experience a cooling effect thanks to recent federal housing financing rules and other housing sector policies, “which will dampen activity in the sector and improve the quality of new mortgages,” the Bank reported.
The latest round of mortgage rule changes, which took effect in October 2016, now require high-ratio mortgages to qualify at the Bank’s posted rate – currently 4.64 per cent – to guarantee the ability to make mortgage payments in a more realistic rate environment.
The new rules also require that the Gross Debt Service ratio (total housing costs including mortgage, taxes and heating) not exceed 39 per cent of a borrower’s gross income while the Total Debt Service ratio (housing costs plus all other debt payments) not exceed 44 per cent.
Other policy measures include the new 15-per-cent foreign buyers’ tax and the new vacant home tax, both in Vancouver.
The Bank calculates that 31 per cent of Canada’s high-ratio mortgages issued in the past year would not have qualified under the new rules.
The good news is that the new mortgage rules are expected to have the desired effect of reigning in housing market activity and reducing mortgage debt.
“While the impact of these measures will be concentrated in regions where house prices are the highest relative to income, such as Vancouver, Toronto and Calgary, they will also have important effects at a national level.”