The greatest domestic threat to our economy is that Canadians have taken on too much debt as they cashed in on low interest rates to buy homes.
Bank of Canada Governor Mark Carney as recently been quoted that elevated consumer debt levels represent the biggest domestic risk to the financial system. This is why it has been in our favor to keep interest rates low to maintain the economic recovery, but it’s those low rates that are causing consumers to go out and take on more debt.
“Rates are definitely on the rise,” says Kristine McInnes with Vernon’s White House Mortgages. It is predicted that we will start to see a gradual trend upward.
The risk in this gradual trend upward is that the rate increase will shock the housing market and drag down the Canadian economy, says Louis Gagnon, Queen’s University finance professor.
“If we keep going this way and there’s an interest rate shock, the larger the shock the larger the number of homeowners that will be put in a tight spot and have to sell their homes in a market that has become illiquid because other people are doing the same thing,” he said.
McInnes adds, “Some of the bigger impacts to the mortgage market, other than rate, are the heavier qualifications being put on borrowers who are self-employed or without traditional income sources, CMHC guidelines and tightening of qualifying guidelines and low appraised values. That has a much bigger impact on qualification than rate and we are seeing some very concerning changes in those areas.”
However, all that being said, Canada’s banks have been ranked the soundest on the globe by the World Economic Forum in part because they avoided the subprime loans that crippled many U.S. lenders during the financial crisis.
Precautions are being taken and new guidelines are getting put in place to prepare for the future possibility of raising rate increases in mortgages and pressure on home owners. Canada will not be caught with their hand in the cookie jar.