2023-05-19 07:46:06
Rising borrowing costs mean that more households could face financial pressures in the coming years, while a drop in property prices has reduced homeowners’ equity, it said. Thursday the central bank in its annual report.
The bank explained that many Canadians had less financial flexibility after stretching their budgets to enter the real estate market by taking out large mortgages with long amortization periods.
Canadians will face payment increases of 20 to 40 per cent when renewing their mortgage by 2026, according to the Bank of Canada. Analysis with economist and senator Clément Gignac.
Longer amortization reduces monthly payments and debt servicing costs, but prolongs period of household vulnerability as home equity accumulates more slowly
underlined the central bank.
The specter of a recession
A global recession that drives property prices further down could lead to more loan defaults. If these defaults were to occur on a large scale among uninsured mortgages with negative equity, this could translate into substantial credit losses for Canadian lenders.
Even though most [des ménages] show resilience in the face of rising debt servicing costs, first signs of financial stress are beginning to be seen
says the report.
High debt service costs and low levels of home equity make households more vulnerable to default in the event of a decline in income. A deep recession that would be accompanied by high unemployment could lead to more defaults and therefore credit losses for lenders. Rising credit losses typically cause banks to restrict the credit they extend to households and businesses, which can amplify a recession.
While around a third of mortgages saw their payments increase from February 2022, just ahead of the Bank of Canada’s recent rate hike campaign, almost all borrowers are expected to face higher payments by now. 2026.
Mortgage payments could climb up to 40% in three years for those with variable rate mortgages with fixed payments, while those with fixed rate mortgages could see their payments increase by 20% to 25% compared to at 2022 levels.
Consequences of recent banking crises
Meanwhile, recent banking crises in the United States and Switzerland have revealed vulnerabilities in the current high interest rate environment, the Bank of Canada said in its report.
While the impact on Canada of recent strains in the global banking sector has been limited, the central bank noted that counter runs at Silicon Valley Bank and Signature Bank in the United States earlier this year showed how quickly things could deteriorate.
The U.S. bank failures underscored the need for Canadian institutions to be more vigilant as they adjust to higher interest rates, he added, noting that the country’s banks remain robust, but they are not immune to what is happening elsewhere in the world
.
Mass withdrawals from these institutions have happened quickly compared to what we have seen in the past, which shows that social media and digital banking can accelerate such movements.
the bank said.
Recent events remind us that tensions can quickly emerge when business models are not robust enough to cope with rising interest rates or asset price volatility.
Tighten loan conditions
The central bank has indicated that if the cost of wholesale funding for major Canadian banks were to rise significantly due to global financial stress, it could cause Canadian institutions to tighten their lending conditions.
The Bank of Canada, which raised its key interest rate from 0.25% in March 2022 to 4.50% in January, explained that adjustments to higher interest rates could also exacerbate stresses such as fragile liquidity in fixed income markets.
Financial stress is also increasing among small businesses. About half of small and medium-sized businesses that received government support during the pandemic said in a Statistics Canada survey that it would be difficult for them to repay those funds by the end of this year.
The central bank says financial stability could also be threatened by a potential major cyberattack, especially in the context of geopolitical conflicts like the Russian invasion of Ukraine, and by more frequent extreme weather events associated with climate change.
She also monitors the growth of crypto-assets and their interconnections with the financial system, but noted that they do not yet pose a systemic threat due to the relatively small size of these markets compared to the wider financial sector.
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