Bank of Canada says house prices have increased debt, but risks well-managed

by REP31 Aug 2015
By The Canadian Press

Rising home prices have increased household debt levels, but steps taken by regulators to tighten mortgage lending rules have helped manage the associated risks, according to the Bank of Canada.
In a speech in Kingston, Ont., deputy governor Lawrence Schembri said demographic forces as well as lower interest rates in the wake of the financial crisis have helped drive house prices.
"The resulting strength in the housing market has increased household imbalances, but the risks stemming from these vulnerabilities have been well managed by complementary macroprudential policies," he said.
The government has moved several times in recent years to tighten mortgage lending rules, including reducing the maximum amortization period for insured mortgages from 40 years to 25 years as well as changing the qualifying rules.
"Recent evidence suggests that these measures have resulted in higher average credit scores, which have improved the quality of mortgage borrowing," Schembri told the Canadian Association for Business Economics.
He added that the trend rate of growth in mortgage credit is below where it was before the financial crisis.
Home prices have been rising at faster rates than income in Canada and other comparable countries for about 20 years. The increase has been driven by demographics as well as lower interest rates and changes in mortgage financing. Constraints on supply, especially in urban areas, have also played a role.
"In Vancouver, bounded on three sides by water with coastal mountains as a backdrop, condo development has dominated housing starts since the early 1990s," Schembri said.
"We are now seeing a similar shift to condos in Montreal and Toronto."
The central bank cut its key interest rate by a quarter of a percentage point to 0.5 per cent in July in a bid to boost the economy, hit hard by the plunge in oil prices. The move pushed down variable rate mortgages tied to the prime rate offered by the big banks.
The Bank of Canada said in its monetary policy report at the time it expected a "constructive evolution in the housing market, with housing activity expected to moderate over 2015 before stabilizing through 2016 and 2017."
In the central bank's financial system review in June, it said the steep drop in oil prices left Canada vulnerable to any significant event that would lead to widespread job losses and falling incomes.
It also noted Canada's country's climbing level of household debt and overvalued real estate market as key vulnerabilities.
Canada Mortgage and Housing Corp. said Monday it insured $534 billion worth of mortgages in the second quarter, down $9 billion from the end of last year.
Its overall arrears rate was 0.34 per cent at June 30, while claims paid for the quarter totalled $88 million, up $1 million from a year ago.



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