First National Financial LP

Residential Market Commentary - BoC: Financial system is stable

  • First National Financial LP

The Bank of Canada is maintaining its optimistic outlook for the country’s economy – but…

The central bank’s latest Financial System Review says two persistent problems remain and two others are on the rise.

High household debt and imbalances in the housing market continue to represent the greatest threats to the financial system, while the increasing chance of a recession and riskier corporate borrowing are adding to concerns.

The household debt-to-income level in Canada closed-out 2018 at nearly 180%.  That is $1.80 owing for every dollar of disposable income.  Canada’s corporate debt-to-income level now stands at 315%.  A growing amount of that borrowing is being done through the U.S. bond market and being paid in U.S. dollars.  Smaller firms and those with lower credit ratings are turning to the syndicated loan market, which could subject them to the changing whims of investors.

Bank of Canada governor Stephen Poloz is more confident about what is happening in housing.

"New measures have curbed borrowing, reduced speculative behaviour in housing markets and made the financial system more resilient," he said in the report.

"While the fundamentals in the housing sector remain solid overall, and the sector should return to growth later this year, we continue to monitor these vulnerabilities closely."