The number of heavily indebted Canadian households appears to be on the rise again as pandemic aid from governments ends, a Bank of Canada deputy governor noted on Tuesday.
In a speech at a conference hosted by the Ontario Securities Commission, Deputy Governor Paul Beaudry noted that unprecedented federal aid and restrictions limiting consumer spending have helped bolster Canadian household finances during the pandemic.
But now financial vulnerabilities related to high household debt appear to be intensifying after a slight hiatus, he said.
“We are particularly worried about highly indebted households, because these are households that will have a much harder time reacting to shocks,” he said on Tuesday.
Some people were able to repay their debts during the pandemic, said Beaudry, but others were also becoming new borrowers who took on new debt to buy homes.
According to the deputy governor, the share of heavily indebted households is expected to exceed its 2019 peak by the end of the year.
“We are seeing this increase in people’s debt again,” he said.
This increase in debt is explained in particular by the fact that interest rates were historically low during the pandemic, which convinced households to take on more debt, said the deputy governor. As a result, he warns, the economy is now likely to be more sensitive to any increase in borrowing costs.
The central bank could decide to increase its key interest rate as early as April, from its low of 0.25%, where it has been since the start of the first weeks of the pandemic.
The Office of the Superintendent of Financial Institutions and the federal government earlier this year announced plans to tighten mortgage stress tests that buyers have to go through to see if they are able to settle their payments in the event of a loss. rising interest rates.
These actions may have encouraged some buyers to wait until they have accumulated a larger down payment and others to buy a home at a lower price, said Beaudry in the text of his speech.
But any moderation in house prices seems to be reversing, in large part because of the very large number of buyers and insufficient supply to meet demand, he continued.
An analysis from the bank suggests that many Canadians are buying buildings as investors, which is also fueling price increases, added Mr. Beaudry.
If so, expectations of future price increases could materialize, at least for a while, increasing the likelihood of a market correction, he said.
The resulting damage would extend far beyond investors, added Beaudry, noting that many households’ wealth and access to low-cost credit are tied to the value of their homes.
“It does not mean that a calamity is looming on the horizon,” he said in the text of his speech.
“Nonetheless, even without putting the financial system at risk, a drop in house prices could have a big impact on household spending as well as on employment.”