• Barbara Singh

High Household Debt A Major Concern For the Bank Of Canada

It is no secret that the housing frenzy that took hold a little over a year ago has caused a ripple effect throughout the housing market in Ontario and is mirrored in housing markets across the country. Many Ontario borrowers and existing homeowners have sprinted to any available property and have routinely put in astonishingly high over-asking offers on property for the better part of the last several months.


What Exactly is Concerning The Chief Financial Regulator?


With bidding wars being so common in todays’ market to the point of being the norm, houses are flying off the market at prices often far above their actual appraised value. With little time to consider long-term investment value because of pressure from up to 10 or more offers (all considerably over the list price) often seen on a single Ontario property.


Signs of the hot property market and housing markets nationally already starting to slightly slow down may cause a cool breeze to drift over the property market which can currently be categorized as in overdrive. The Bank of Canada (BOC) certainly is beginning to think so. With the BOC’s latest report released recently, two worries are cited. Both concerns are directly related to:


  • the high cost of housing,

  • over-asking bids on properties

  • the accumulation of household debt.


According to the BOC report, the average house price nationally has risen to $696,000 which represents a 23% year-over-year increase. With the stability of the national economic markets at the forefront of the BOC’s mind, the current heated housing market has raised some red flags.


The primary concern held by the federal financial regulator boils down to the amount of household debt, specifically mortgage debt that an average household can comfortably take on. Since the beginning of the Pandemic, the BOC cites that the average household debt has risen by 4%.


This trend is set to intensify if buyers remain willing to pay considerably over the appraised value of a given property and take on higher and higher levels of mortgage debt which could result in considerable strain on household finances.


Measures May Be Needed to Put the Brakes on Overleveraging


In an effort to try to cool things down slightly, the country’s financial regulator is set to increase the Stress Test qualifying percentage for uninsured mortgages. The Stress Test, first introduced in 2018 in the attempts by federal regulators to try to slow down a then overheated housing market.


This qualifying percentage is set to increase and take effect as of June 01,2021. Although, this will not affect borrowers (home buyers) with less than 20% down payment.

Borrowers (home owners) that are looking to do a refinance will fall into this new Stress test category.


It is estimated that the new stress test numbers will decrease the buying power for the average buyer by roughly 4% while the numbers introduced in 2018 decreased purchasing power by as much as 20%.


The Takeaway? Don’t Bite Off More Than You Can Chew


Debt ratios in Canadian households are a reflection of the national economy as a whole. If debt levels become too high, the effects of possible foreclosures and defaults will negatively affect the Federal efforts to reboot the economy post-Covid. The Government would like to reduce such risks in its overall effort to get the country back to a healthy economy as life slowly resumes some semblance of normality in the year(s) ahead.


It is incumbent on households to take out mortgages that can be paid back comfortably and to avoid other debt including credit card debts to help smooth the transition as we pull our way out of the prolonged economy.


For any mortgage advice and help with crunching the numbers when deciding on a mortgage financing, or for purchasing, contact me for guidance.




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