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Interest rates set to keep rising, Bank of Canada sounds alarm on economic risk of high household debt

Ottawa, June 9: With interest rates set to keep rising, the Bank of Canada is sounding the alarm on the risk record high house prices and an increasing number of households with high mortgage debt could have on the Canadian economy.

“In Canada, elevated levels of household debt and high house prices remain two key interconnected vulnerabilities,” the bank said in its annual Financial System Review.

Despite house prices increasing 53% nationally between April 2020 and April 2022, the bank is concerned that recent homebuyers lack the equity in their home to withstand a “significant price correction” and would “face more financial strain when they renew their mortgages at higher rates.”

The bank says many of the recent homebuyers “financially stretched” themselves to purchase a property at record prices due to a “fear of missing out” on the continued increase of house prices across the Canadian housing market.

The bank blamed the massive run-up in house prices on strong demand relative to supply and an increase in the number of investors snapping up properties.

Investors accounted for 22% of property purchases with mortgages in the fourth quarter of 2021, up from 19% in 2019, according to the bank.

Those investors are taking out existing equity in other properties they own to make new purchases, which the bank says “highlights the feedback loop between rapid gains in the house prices and the strong demand for housing that investors generate.”

House prices remain at all-time highs across Canada but the bank warns that it’s too soon to tell if the recent decrease in resale activity and prices are “temporary or is the start of a deeper, lasting decline.”

If investor demand dries up for Canadian housing, the bank warns that would “amplify the downward pressure on prices” and could “lead to an abrupt price correction in the future.”

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