“The backdrop of tighter financial conditions, high global inflation and heightened geopolitical tensions has compounded financial system vulnerabilities and heightened risks,” the bank said in its report.
Assessing the persistent vulnerability linked to high levels of household debt has become more complex over the past two years, the central bank explained. Household finances have generally improved, although debt levels have increased.
On average, households have seen their net worth increase by regarding $230,000 in the first two years of the pandemic, driven in large part by rising house prices, but also by a rising stock market and d other earnings.
The bank noted, however, that more and more households are pushing the limits of their finances to buy residential property, and these households in particular may not be able to tap into their home equity in the event of a correction in the price.
The figure on net worth also only goes to the end of 2021 and does not take into account the recent decline in stock and property markets.
The bank argued that the strong growth in house prices during the pandemic had stimulated the economy in the short term, but that in the medium term it might weigh on economic growth.
In its outlook for the first quarter of 2024, the bank noted that trends raised the likelihood of negative growth to 15%, up five percentage points from what it would have been if levels of indebtedness had not changed during the pandemic.
This heightened risk of negative growth comes as central banks raise interest rates to counter the highest inflation in decades.
House prices rose 24% in April compared to the same month a year earlier, and 53% compared to April 2020.
The bank felt that some of these gains may have been driven by people expecting prices to keep rising simply because they have done so in the past, which can lead to disconnect from fundamentals and expose prices to correction risk.
The bank notes that the proportion of investors among homebuyers has increased from 19% in 2019 to 22% in the fourth quarter of 2021, and that they are extracting more and more cash from their existing properties to buy more. .
The resale home market slowed significantly in March and April, but the bank says it’s too early to tell if the slowdown is attributable to purchases being made earlier to secure lower interest rates, or if it is a prelude to a deeper and lasting decline.
The Bank said other financial system vulnerabilities include cyber threats, given the interconnectivity of the financial system and the fragile liquidity of fixed income markets.
The Russian invasion of Ukraine has also complicated the transition to a low-carbon economy and increased the risks of rapid revaluation of assets exposed to climate risks, the bank added.
