On June 9th, the Bank of Canada released its 2022 Review of the Canadian Financial System. This annual report provides an overview of the financial vulnerabilities and the risks in the Canadian economy. The report is particularly comprehensive, but some points are of a particular importance to the real estate market:
Providing some continuation of trends dating back to 2014 (with a hiatus in 2020 due to the shock of the pandemic), two key vulnerabilities remained at the forefront of the Bank’s concerns: high household debt and the residential real estate market’s imbalance.
The Bank notes that housing prices increased by more than 50 per cent on average across the country during the pandemic. It also notes that these increases are likely to have been driven by expectations of future increases as well as investors’ demand for residential real estate.
The review focuses on the fact that a growing share of Canadian households have placed themselves in a precarious position to purchase a home. An increase in the share of low loan-to-value mortgages has been observed in recent years, with this trend accelerating in 2021.
Bank estimates suggest that the share of highly indebted households (debt-to-income ratio over 350 per cent) is likely to exceed the pre-pandemic peaks of 2021. The interest rate hikes that have already been triggered therefore create greater vulnerabilities for households.
Despite a downturn that began in 2022, the real estate market remains tight across the country, with housing prices in most of Canada’s major cities (Vancouver, Hamilton, Toronto, Ottawa, and Montreal) currently showing signs of exuberance.
The analysis argues that the combination of high housing prices and high household debt raises the risks of a decline in GDP over the medium term.