The Canadian financial system has withstood the shock of the pandemic but it must now deal with several vulnerabilities, warns the Bank of Canada in its review of the financial system 2022, published on Thursday. The growing number of Canadians with large mortgage debt, high global inflation and geopolitical tensions are among the risks.
The sharp rise in house prices over the past 12 months has generated significant gains for some Canadians, “but those who started home ownership in the last year would be more vulnerable in the event of a significant correction in prices “, warns the Bank of Canada in its report.
In the event of a global recession that could impact the income of Canadians, their ability to service their debts would be significantly compromised – especially for those who put themselves in a precarious financial situation to buy a property. .
According to the Bank of Canada, more Canadians “have taken out large mortgages relative to their income and have opted for loans with variable rates and longer amortization periods” in the past two years.
“Faced with job loss, households that devote a large part of their income to repaying their loans could find it difficult to continue to service their debts without substantially reducing their consumption,” warns the Bank.
In addition, considering the possibility of a significant decline in housing prices, “the reduction in household equity would further limit the ability of some to use secured sources of borrowing, such as home equity lines of credit or refinancing mortgage,” the report noted.
Fighting inflation, in the midst of war
The Bank of Canada, like the rest of the world’s central banks, is also continuing its efforts to tame inflation – although strained by ongoing supply chain disruptions and Russia’s war in Ukraine that affect the prices of consumer products.
Central banks face “a delicate balancing act” as they must “reduce inflation while protecting post-pandemic recovery and overall financial stability”, the report said.
“Failure to strike the right balance between these competing objectives could lead to a further repricing of global risk premia and a marked tightening of global financial conditions and possibly trigger the materialization of risks associated with high leverage. ‘indebtedness’, it says
The Russian invasion of Ukraine is also forcing states to make choices between their energy security and their climate transition plans. “As global prices for energy commodities are much higher now than they were before the invasion, valuations of carbon-intensive assets look further away from where they will need to be in a future economy. low emissions. »
Further details will follow.