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Last week the Bank of Canada (BoC) issued its latest Financial System Review, giving us the Bank’s assessment of the “the main vulnerabilities and risks to the stability of the financial system”.
In this latest report, the BoC highlighted “the elevated level of household indebtedness and imbalances in some regional housing markets”, specifically Vancouver and Toronto. The Bank cautioned that “rapidly rising house prices and strong mortgage credit growth are increasing the share of highly indebted households” and warned that “it is unlikely that economic fundamentals will justify continued strong price increases.” The Bank cautioned that prospective buyers in Vancouver and Toronto “should not extrapolate recent real estate performance into the future when contemplating a transaction.”
Not much to argue with there. Purchasers are having to take on more and more mortgage debt as homes in Vancouver in Toronto become more expensive, and the resulting higher debt levels make households more vulnerable to financial shocks. Also, the continued rise in house prices increases the risk that purchasers will base their decision to buy on unrealistic assumptions about the potential for additional gains.
Despite these concerns, the BoC gave no indication that it plans to raise interest rates to try to reign in the rise in household debt levels or to help cool regional housing markets. Instead, the Bank is hoping that the federal government will consider making more changes to its residential mortgage-lending regulations, which can be more specifically targeted at the areas of concern.
Federal Finance Minister Bill Morneau recently confirmed that the government is doing a “deep dive” on the issue, so more regulatory changes can be expected. The key question now is “what changes will our federal government actually make?”