The most important domestic risk to financial stability in Canada continues to stem from the elevated level of household indebtedness and stretched valuations in some segments of the housing market. These fragilities could themselves trigger financial stress or significantly amplify the adverse
effects of other shocks on the financial system.
In the past six months, the growth of household credit has continued to moderate, although credit still increased at a faster pace than disposable income. As a result, the aggregate debt-to-disposable-income ratio has risen further. The Bank’s stress-test simulations continue to suggest that households are vulnerable to adverse economic shocks. In the housing market, sales of existing homes have declined, owing in part to changes in mortgage insurance rules, and the growth in house prices has slowed. However, the ongoing strong rates of construction, particularly of multipleunit dwellings in some regions, have increased concerns about future stock imbalances. In this context, there are two dimensions to this risk: on the one hand, a rebound in housing-market momentum may cause a further buildup of imbalances, while on the other hand, the current moderation in the housing market may turn into a more severe correction.
Overall, the Governing Council judges that the risks associated with high levels of household debt and housing market imbalances are elevated and broadly unchanged since June.
Data for the second quarter show that the household debt-to-disposableincome ratio increased by another 1 1/2 percentage points to 163 per cent,26 while the aggregate credit-to-GDP gap remained high (Chart 15).
The latest monthly data on total household credit published by the Bank show that the 3-month annualized growth rate has slowed from 5.5 per cent at the time of the June FSR to about 4 per cent in October (Chart 16), owing to a moderation in the growth of mortgage credit and continued low
growth in consumer credit. While the underlying trend may be somewhat higher than the recent growth rate, the new information shows a continuation of the downward tendency since 2010. The trend decrease in credit growth reflects a number of factors, including the pulling forward of housing activity to earlier periods because of greater affordability, as well as the cumulative effects of changes to mortgage insurance rules (Box 2) and the tightening of mortgage underwriting guidelines.
Looking ahead, the Bank expects the underlying trend in credit growth to moderate further, since housing activity is projected to move back in line with demographic demand. This view is consistent with the debt-to-disposable-income ratio stabilizing over the next couple of years.
In terms of loan performance, mortgage and consumer loans in arrears
declined in the second quarter of 2012, although they remain above precrisis
levels (Chart 17).
effects of other shocks on the financial system.
In the past six months, the growth of household credit has continued to moderate, although credit still increased at a faster pace than disposable income. As a result, the aggregate debt-to-disposable-income ratio has risen further. The Bank’s stress-test simulations continue to suggest that households are vulnerable to adverse economic shocks. In the housing market, sales of existing homes have declined, owing in part to changes in mortgage insurance rules, and the growth in house prices has slowed. However, the ongoing strong rates of construction, particularly of multipleunit dwellings in some regions, have increased concerns about future stock imbalances. In this context, there are two dimensions to this risk: on the one hand, a rebound in housing-market momentum may cause a further buildup of imbalances, while on the other hand, the current moderation in the housing market may turn into a more severe correction.
Overall, the Governing Council judges that the risks associated with high levels of household debt and housing market imbalances are elevated and broadly unchanged since June.
Household indebtedness continues to rise
Revised National Balance Sheet Accounts (NBSA) data from Statistics Canada show higher household indebtedness in recent years—as measured by the debt-to-disposable-income ratio—than in the previous series. For the reasons outlined in Box 1, this information suggests that vulnerabilities in the household sector are marginally higher than estimated earlier.Data for the second quarter show that the household debt-to-disposableincome ratio increased by another 1 1/2 percentage points to 163 per cent,26 while the aggregate credit-to-GDP gap remained high (Chart 15).
The latest monthly data on total household credit published by the Bank show that the 3-month annualized growth rate has slowed from 5.5 per cent at the time of the June FSR to about 4 per cent in October (Chart 16), owing to a moderation in the growth of mortgage credit and continued low
growth in consumer credit. While the underlying trend may be somewhat higher than the recent growth rate, the new information shows a continuation of the downward tendency since 2010. The trend decrease in credit growth reflects a number of factors, including the pulling forward of housing activity to earlier periods because of greater affordability, as well as the cumulative effects of changes to mortgage insurance rules (Box 2) and the tightening of mortgage underwriting guidelines.
Looking ahead, the Bank expects the underlying trend in credit growth to moderate further, since housing activity is projected to move back in line with demographic demand. This view is consistent with the debt-to-disposable-income ratio stabilizing over the next couple of years.
In terms of loan performance, mortgage and consumer loans in arrears
declined in the second quarter of 2012, although they remain above precrisis
levels (Chart 17).
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