The Bank of Canada has issued a stark warning regarding the stability of the financial system, urging Canadians to prepare for potential fallout. In a recent address, Governor Tiff Macklem highlighted mounting concerns about housing affordability and the potential increase in capital gains tax rates, which have placed significant stress on the financial system.
During the launch of the central bank’s annual Financial Stability Report on May 9, Governor Macklem emphasized potential catalysts that could lead to substantial disruptions within the financial system. The report pointed to rising mortgages and credit card debts as major areas of concern. With interest rates at a 23-year peak, the bank is closely monitoring the ability of both institutions and households to manage their debts.
One of the key issues highlighted is the impact of higher rates on Canadian mortgages, most of which have a five-year term. The report warned of the financial strain households may face upon renewing their mortgages at higher rates. Additionally, renters and those with significant credit card and auto loan debts are experiencing increased financial stress. The proportion of borrowers without mortgages carrying high credit card balances has risen to 23%, indicating a higher likelihood of missed payments in the future.
The report also noted that elevated debt-servicing costs are limiting financial flexibility for households and businesses, making them more vulnerable to economic downturns. By the end of 2023, over one-third of new mortgages had a debt service ratio exceeding 25%, double the proportion seen in 2019.
Governor Macklem hinted at potential interest rate cuts last week but did not provide a specific timeline. The report cautioned that sudden changes in rate expectations or economic prospects could lead to significant price corrections, emphasizing that inflated asset values might not accurately reflect economic risks.
The Bank of Canada urged Canadians to remain vigilant and prepare for potential financial challenges, highlighting the importance of maintaining financial stability in the face of economic uncertainties.