The Bank of Canada is concerned about household debt and house prices

In the latest edition of its Financial System Review, the central bank indicated that these two interrelated factors increase the risk of a slowdown for economic growth, as rising interest rates, aimed at countering inflation, increase the likelihood. that households will be forced to reduce their consumption to pay off their debt.

Tighter financial conditions, high global inflation and higher geopolitical tensions have added to the weaknesses in the financial system and increased risks.the bank said in its report.

Assessing the ongoing vulnerability associated with high levels of household debt has become more complicated over the past two years, the central bank explained. Household finances have generally improved, although debt levels have risen.

On average, households saw their net worth increase by approximately $ 230,000 in the first two years of the pandemic, pushed in large part by rising house prices, but also by rising stock market and other incomes.

The bank has noticed, however, that more and more households are pushing the limits of their finances to buy residential property, and these households in particular may not be able to tap into their home equity in the event of a correction. at the price.

The net worth value goes up only at the end of 2021 and does not take into account the recent decline in stock and property markets.

Negative growth

The bank argued that strong growth in house prices during the pandemic stimulated the economy in the short term, but in the medium term it could weigh on economic growth.

In its outlook for the first quarter of 2024, the bank noted that trends have raised the likelihood of negative growth to 15%, up five percentage points from what it would have been if indebtedness levels had not changed during pandemic.

The increased risk of negative growth comes as central banks raise interest rates to counter the highest inflation in decades.

Home prices rose 24% in April compared to the same month last year, and 53% compared to April 2020.

The bank felt that some of these gains could have been driven by people expecting prices to continue to rise simply because they did before, which could lead to disconnecting the basics and exposing prices to correction risk.

The bank said the proportion of investors to home buyers has risen from 19% in 2019 to 22% in the fourth quarter of 2021, and that they are taking more and more money from their current owners. property to buy more. .

Home market resale slowed sharply in March and April, but the bank said it was too early to say whether the slowdown was related to purchases made earlier to secure lower interest rates, or if it is a prelude to a deeper and more lasting decline.

The Bank said other vulnerabilities in the financial system include cyber threats, due to the interconnectedness of the financial system and the fragile liquidity of fixed income markets.

Russia’s invasion of Ukraine has also complicated the transition to a low-carbon economy and increased the risks of rapid re-evaluation of assets exposed to climate risks, the bank added.