The BoC’s Coté On Risk & Household Debt

The BoC’s Coté On Risk & Household Debt

 From Canadian Mortgage Trends

Since the credit crisis, the Bank of Canada has stepped up efforts to quantify the risk lurking in our financial system.

Deputy Bank Governor Agathe Côté spoke about this Tuesday. 

She explained how the BoC models risks and provided the following factoids on Canadians’ debt exposure.

She said:

“…While record-low interest rates in recent years have contributed to a relatively low aggregate household debt-service ratio, the share of Canadian households that are considered most vulnerable - those with a (total) debt service ratio equal to or higher than 40% - has climbed to above-average levels, as has the proportion of debt held by these vulnerable households.”
(The proportion of indebted households with debt-service ratio ≥ 40% was just about 6% on Dec. 31, 2011. Just for perspective, the maximum allowable debt ratio on a standard mortgage application is 44%.)
If interest rates were to rise to 4.25% by mid-2015, then:

• the share of highly indebted households would rise from slightly above 6% in 2011 to roughly 10% by 2016

• the proportion of debt held by these households would rise from 11.5% to about 20% over the same period.

“…Household loans in arrears would more than double under a severe labour market shock similar to that observed in the recession of the early 1990s.”
(That said, double the latest 0.34% arrears rate would still be far less than the modern-day high of 1.02%. The BoC also admits that its models don’t assume that distressed households will sell their homes to avoid default—a realistic option for indebted families with marketable homes and sufficient equity.)
Research shows that combining real estate prices and the credit-to-GDP gap (i.e., the difference between private sector credit and its long-term trend) provides “among the most reliable indicators of financial stress.”


Read More Here:

I'm So Happy ... I Could Just Cry!

Canadians optimistic about becoming debt-free


http://www.mortgagebrokernews.ca/news/breaking-news/canadians-optimistic-about-becoming-debtfree/123824/

With household debt still a hot topic amongst economists, a new poll finds that most Canadians believe they can be debt-free by 2017 – which includes their mortgages.
The poll, conducted by Leger Marketing for Bank of Montreal showed that 54 per cent expect to be debt-free in five years. It also revealed that the average household debt load (including mortgage, credit card, line of credit and loan debt) is $112,329. One-quarter (26 per cent) of those who carry debt say that their debt load exceeds $100,000.
According to data from Statistics Canada, residential mortgages, typically considered 'good debt' as it is tied to household assets, accounts for 63 per cent of household liabilities, while consumer credit makes up approximately 28 per cent. The average monthly debt payment is $1,138.49.
The report also showed that while most Canadians (70 per cent) say that they can afford to pay down their debt by paying more than minimum payments, one-third (30 per cent) appear to be treading water by paying only the minimum amounts.
According to the report, men are particularly likely to carry large amounts of debt, with 30 per cent indicating that they owe more than $100,000 compared to 22 per cent of women. Men are also particularly optimistic about their ability to pay down debt, with 20 per cent saying that they will do so in the next year compared to 14 per cent of women. Those between the ages of 35 and 44 also tend to be the most heavily burdened with debt, with 43 per cent saying they carry more than $100,000 in debt.
"While debt is a part of life for the majority of Canadians, it doesn't have to be a permanent fixture," said Su McVey, VP, BMO Bank of Montreal. "While interest rates have likely kept debt loads manageable for many households, that picture may be poised to change in the coming year."
The dangers of household debt have been repeatedly reinforced by the Bank of Canada and the Federal Government as levels have hit record highs. However, the latest numbers show that Canadian households seem to be getting the message.
"After the lengthy run-up of the past decade, it's encouraging that many Canadians are planning to rein in their debt, as interest rates won't stay low forever," said Sal Guatieri, senior economist, BMO Capital Markets. "Household credit growth has slowed to five per cent in April from a nine per cent clip over the past 10 years."
Canadian Debt Picture by Province
BC                   $157,784
AB                  $144,178
MB/SK            $116,019
ON                  $109,279
QC                  $85,903
ATL                $92,231