So far, so good is the message from Bank of Canada (BoC) Governor Tiff Macklem Thursday as Canadian borrowers resume loan payments deferred during the pandemic.
Still, the BOC will watch closely to see how well households and businesses cope with expiring loan deferrals and will also monitor whether excessive debt is building up in the housing market given low interest rates, Macklem said.
“We will also watch for signs that housing markets are being driven higher by speculation that prices will keep rising,” Macklem said in remarks for delivery to the Global Risk Institute.
“And we will watch whether people buying houses are taking on outsized debt relative to their income,” he said.
“We are not back to the frothy housing markets we saw in 2016, and we expect the bounce-back in housing to dampen. But if too many Canadian households start to become dangerously over-leveraged, policymakers have several macroprudential tools they can use.”
Macklem noted that Canadian financial firms have allowed about 800,000 households to delay payments on mortgages and have allowed deferrals on other loans.
“But the six-month payment deferral period is ending for most borrowers, and the next few months will be crucial,” he said.
“To this point, the resumption of payments has been going quite well. Of the mortgages whose deferrals have expired, the vast majority have returned to regular payments. Only a few have received a second deferral, and even fewer have become delinquent. Obviously, this is an issue we will continue to watch closely.”
Canada’s financial system continues to act as a shock absorber during the pandemic, but the BoC is watching to see what impact potential credit losses will have on credit availability, Macklem said.
“Given the bank’s system-wide perspective, we will continue to assess the risk that credit losses could become large enough and eat far enough into capital that banks need to tighten credit conditions. If this happens, our banking system would go from being a tailwind that supports recovery to being a headwind. At present, this risk appears to be well-managed.”