Nova Scotia Journal

Sunday, November 28, 2021

A high in interest rates could have a more significant impact on households

senior Bank of Canada official,

Key Takeaways:

  • According to a senior Bank of Canada official, the number of highly indebted households appears to rise again as government pandemic aid expires.
  • In a speech to the Ontario Securities Commission, deputy governor Paul Beaudry says unprecedented federal aid and restrictions on consumers’ spending helped Canadian households’ finances during the pandemic.

However, he now claims that vulnerabilities associated with high household debt appear to rise again after a brief pause. “We are especially concerned about very heavily indebted households because these are the households that will have a much more difficult time reacting to shocks,” he said on Tuesday.

According to Beaudry, some people were able to repay debts during the pandemic, but there were also new borrowers taking on new debt to buy homes.

According to bank calculations, the share of highly indebted households should exceed the pre-pandemic peak recorded in 2019.

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“We’re seeing increased indebtedness among people again,” he said. Beaudry highlighted a long period of historically low-interest rates as one of the reasons households took on more debt, adding that the economy is likely now more sensitive to any increase in borrowing costs.

The warning about household debt comes as the central bank prepares to raise its key policy rate from 0.25 percent, where it has been since the pandemic began, as early as April.

This year, the Office of the Superintendent of Financial Institutions and the federal government announced plans to tighten the mortgage stress test to ensure buyers could make payments if interest rates rose.

These actions may have prompted some buyers to wait until they had a larger down payment. In contrast, others may have chosen a less expensive home, according to the text of Beaudry’s speech to an Ontario Securities Commission conference. According to Beaudry, the consequences would be felt far beyond investors, who points out that many households’ wealth and access to low-cost credit are linked to the value of their homes.

“None of this is to say that a disaster is on the horizon,” he said in the text of his speech. “However, even if the financial system is not put at risk, a drop in housing prices could have a significant impact on household spending, with implications for employment.”

Source: CTV News

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