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Whether you are a teacher, student, medical professional, or just coping with the COVID-19 crisis in your daily life, there are many reports on how the pandemic happened Increase our anxiety.
The latest report by the Bank of Canada on Canada’s financial fragility did not attempt to aggravate our troubles. Its purpose was to help us avoid some major incidents. At a press conference on Thursday, the bank’s president Tiff Macklem (Tiff Macklem), of course, outlined what was not wrong, but if we are not cautious, we may be wrong.
McCrem told reporters: “The biggest domestic vulnerability is the vulnerability related to housing market imbalances and excessive household debt.” “These are not new things, but they have intensified.”
The governor of the Bank of Canada has many things that can make him wake up at night. The report is not only about housing.
Markrum also worried that Canadian companies may have become accustomed to borrowing cheaply in the bond market, and that this situation may end without any alternatives. He worried that investors failed to explain the impact of climate change on asset prices. He is worried about cybercrime. In addition, the Canadian dollar is rising and how it hurts exports.
Serious damage, not just damage to the borrower
But the biggest concern this time is real estate. The message conveyed is clear, even if it is sometimes conveyed in the central bank’s speech. If people do not stop raising housing prices, Canadians are already burdened with mortgage debt, and unexpected changes in the market may cause serious damage not only to “over-expanded” borrowers with large loans, but also to the entire economy.
This is why the first and biggest risk outlined by the bank in the report is “a substantial decline in household income and house prices” caused by external trigger events. It is difficult to determine what form this trigger event can take. Markham once mentioned “risk repricing”. Such events could lead to a sudden rise in global interest rates, stock market crashes or weak global trade. Maybe even the collapse of Bitcoin.
As shown in the chart below, once the Bank of Canada is triggered, the already high debt may have a cyclical effect, which will push down house prices, reduce income and spread throughout the economy.
When asked if he caused the inflated house prices by making interest rates too low, McCrem warned: “Interest rates have been low, and at some point, interest rates will rise.”
Although he believes that this week’s high inflation rate is temporary, he made it clear that if the inflation rate cannot fall on its own, the bank is still committed to reducing it to the 2% level. This may mean higher interest rates.
The tough stress test is coming
Although the Office of the Supervision of Financial Institutions (OSFI), not the Bank of Canada, imposed a “stress test” to limit the amount people can borrow, the two institutions work closely together.
Soon after Macomb’s press conference, OFSI launched Own press release Confirmed that from June 1st, the agency will begin to develop a plan to make it more difficult to obtain loans. The borrower will have to prove that his income pays at least 5.25% interest, even if the interest rate offered by the borrower is much lower.
This plan does not satisfy everyone, including Marklem’s statement that many young families send him letters every week saying that they have been squeezed out of the housing market.
However, if the current housing boom leads to what the Bank of Canada report calls “future price adjustments”, they may be even more disappointed, which may lead to the above-mentioned vicious circle.
Despite his warning, McCallum was not completely depressed. He pointed out that in the face of widespread COVID-19 restrictions and lockdowns, the Canadian economy has proven itself resilient.
The central bank told reporters’ online gathering: “The loopholes don’t have to cause serious problems.” “Some people will fix them themselves before bad things happen.”
However, in the face of so many risks, including the health of the Canadian real estate market and all the jobs it supports, simply pursuing the best goals is indeed far from enough.
McCrem said: “The lesson of history is that if left unchecked, loopholes can lead to disaster.”
When asked what he could do besides raising interest rates to slow the real estate market, Maclin did not mention what he did yesterday: He can try to scare us.
Follow Don Pittis on Twitter @don_pittis
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