Key vulnerability of household debt highest among younger Canadians: BoC

OTTAWA -- The most-important weak spot in the armour of the country's financial system -- climbing household debt -- is increasingly concentrated among younger Canadians, the Bank of Canada said Tuesday.

See Full Article

In its latest assessment of Canada's financial health, the central bank said the most-indebted borrowers tend to be under 45 years old and usually earn less money, which would put them more at risk of income drops caused by an economic downturn.

The bank's semi-annual financial system review was released as the economy struggles to build momentum after contracting over the first two quarters of 2015. The lack of economic growth early in the year was largely due to the sharp tumble in commodity prices.

The Bank of Canada, which lowered its trend-setting interest rate twice in 2015 to cushion the blow of the resources slump, projects the economy to strengthen with lots of help from improvements in the United States.

In the meantime, Canadian borrowers have helped carry the load for the economy and, as a result, the key vulnerability of household debt has continued to rise.

The bank, however, said that while income growth has failed to keep pace with mounting mortgage credit, the chance of household debt becoming a serious problem remains low and is likely to fade as the economy picks up steam. It added that so far there has been little evidence of significant increases in delinquency rates.

Still, the report contained numbers that show the proportion of households in the shakier position of holding debt higher than 350 per cent of their gross income has doubled to eight per cent since the 2008 financial crisis. The increase is mostly due to the extended era of low interest rates.

Meanwhile, the share of Canada's household debt held by these higher-risk borrowers was close to $400 billion after rising to 21 per cent from the pre-crisis level of 13 per cent. These households also tend to be in British Columbia, Alberta or Ontario.

The likelihood that a household would be unable to make its debt payments following an adverse economic event increases significantly when its debt reaches above 350 per cent of its gross income, the bank said.

"What matters most for assessing debt sustainability ... is determining which households have taken on the most debt and whether they are able to repay it," the bank wrote.

The report also pointed to particular weak spots caused by conditions like soaring house prices and risks such as a severe recession, a spike in unemployment and a prolonged period of low commodity prices.

When it comes to the vulnerability and risks caused by mounting housing prices, Bank of Canada governor Stephen Poloz credited the federal government for its recent decision to tighten mortgage-lending regulations on properties over $500,000 in an effort to cool overheated markets such as Toronto and Vancouver.

"Certain vulnerabilities are still edging higher, but recent changes by Canadian authorities to the rules for mortgage financing will help to mitigate these risks as we move into 2016," Poloz said in a statement that accompanied the financial system review.

"Housing activity should stabilize in line with economic growth, as the driver of growth in the economy switches from household spending to non-resource exports."



Advertisements

Latest Economic News

  • Wireless wars heat up as big telcos top up phone plans with bonus data

    Economic CBC News
    Wireless wars are heating up again with numerous telcos offering smartphone plans topped up with what many Canadians crave — extra data. The standout deals are in Manitoba where Rogers began the battle this week by doubling the data — at no extra cost — for its 10 GB and 15 GB family phone plans. Source
  • Unions representing CP Rail workers issue notice of strike action

    Economic CTV News
    LAVAL, Que. -- The unions representing train operators and signalling workers at Canadian Pacific Railway Ltd. have served the company with notice of a strike action. The Teamsters Canada Rail Conference and the International Brotherhood of Electrical Workers have told CP Rail they will be in a position to strike as of 10 p.m. Source
  • CP Rail union formally serves strike notice

    Economic CBC News
    The strike notice comes a day after the Teamsters Canada Rail Conference rejected the company's latest contract offer. "After workers at CP voted to reject the last contract offers, the company is still refusing to negotiate seriously," the statement said. Source
  • Loonie sinks to two-week low: Is this the start of another big drop?

    Economic CBC News
    The Canadian dollar fell to a two-week low against the U.S. dollar on Friday as lower oil prices and global trade tensions continue to weigh on the currency. The loonie is already down more than three per cent this year and was at 77.11 cents US on Friday. Source
  • What Trump's proposed auto tariff could mean for Canada

    Economic CBC News
    As with many of the trade actions announced by the Trump administration, the possible effects of his proposed Section 232 investigation of vehicle imports are both menacing and unclear. To understand how it might affect Canada, one first has to know how the Trump administration intends to define an "imported car. Source
  • WestJet agrees to 'settlement process' with pilots union

    Economic CBC News
    Anxious air travellers can now rest easy with the threat of a WestJet strike seemingly at an end. On Friday evening, WestJet and the Air Line Pilots Association agreed to a settlement process through the Federal Mediation and Conciliation Service. Source
  • WestJet, pilot's union agree to settlement process with mediator

    Economic CTV News
    CALGARY -- The threat of a strike by WestJet pilots appears to be over. The Calgary-based airline and the union that represents the pilots said Friday they have agreed to a settlement process that will involve a federal mediator. Source
  • Canada's pot industry gets a new supporter: Snoop Dogg

    Economic CTV News
    MONTREAL -- Canada is more advanced than the United States regarding its approach to cannabis, world-famous rapper and weed entrepreneur Snoop Dogg said Friday to a crowd of hundreds at Montreal's C2 technology conference. The entertainer lamented that in the U.S. Source
  • Energy sector weighs on Canadian markets as oil drops below US$70 a barrel

    Economic CBC News
    Canada's main stock index continued to fall Friday as the price for oil moved below US$70 a barrel and further dragged down the important energy sector. "Today, oil is by far the major story," said Macan Nia, a senior investment strategist at Manulife Investments. Source
  • Mercer International to give up TSX listing following loss at NAFTA tribunal

    Economic CBC News
    Mercer International says it intends to voluntarily de-list from the Toronto Stock Exchange on June 11, about three months after it lost a six-year-old NAFTA battle with the Canadian government. The U.S.-based forest products company had mounted a $250-million claim against the Canadian government in early 2012. Source