New housing finance rules to curb exposure to rising debt levels: Bank of Canada

OTTAWA _ The Bank of Canada is expecting new mortgage rules to help ease a continued rise in household indebtedness that it says has left the country increasingly exposed to an economic shock.

The central bank warns that the still-climbing levels of debt and the growing proportion of highly indebted households in many cities have opened up a larger weak spot in Canada’s financial stability.

In its latest financial system review, the bank says at a national level the proportion of highly indebted borrowers with mortgage-to-income ratios above 450 per cent reached 18 per cent in the third quarter of 2016, up from 13 per cent two years earlier.

The report says high home prices have helped fuel growth in the proportion of these highly indebted borrowers in cities like Toronto, where in the last two years it increased to 49 per cent from 32 per cent, and in Vancouver, where it rose to 39 per cent from 31 per cent.

But the bank is predicting that stricter housing finance rules introduced in recent months by federal, provincial and municipal authorities will help ease household indebtedness and improve the quality of future borrowing.

The new policies appear to have somewhat eased concerns expressed by Bank of Canada governor Stephen Poloz, who warned in June that surging housing prices in the hot markets of Vancouver and Toronto were outpacing local economic fundamentals in those areas like job creation and income growth.

While the bank says the probability of an economic shock materializing remains low, it notes that such an event could have “significant” consequences for the economy and the financial system.