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analysis

A customer enters a restaurant with help wanted signs on Nov. 17, 2021 in Laval, Que.Ryan Remiorz/The Canadian Press

A deluge of gloomy economic news is dominating headlines, and the prospect of a recession is on every central banker’s radar, but beneath it all an undeniably positive development is hiding in plain sight – one that has an enormous impact on the country’s financial system and housing market.

For all the economic chaos, Canada’s unemployment rate has fallen to a record low.

That this metric is so often overlooked isn’t all that surprising. Humans have a habit of gravitating to bad news and there’s loads of it lately. Inflation is at its highest level in four decades, and central banks in Canada and the United States are hiking interest rates at their fastest clip since 1994. It doesn’t take much to buy the narrative that financial ruin is just around the corner.

Canada adds 40,000 jobs in May, unemployment rate falls to record low

But the unemployment rate matters just as much for general economic health, and employment status is a crucial factor when banks determine if a client should get a loan. “Whether someone has a job or not is probably the most critical variable in most credit models,” said Brett House, an economist who has worked at financial institutions and agencies such as the International Monetary Fund.

With unemployment sitting at 5.1 per cent, its lowest since Statistics Canada has been tracking the metric using its current methodology, credit is still flowing with ease and that keeps the economy humming.

Majority of Canadians do not

have a mortgage

Distribution of households by mortgage characteristics, Q4 2021

Renters:

37%

Owners

without

mortgage:

28%

Fixed

rate:

25%

Variable

payments:

2%

Owners

with

mortgage:

35%

Variable

rate:

10%

Fixed

payments:

8%

All

households

Mortgage

holders

Variable mortgage

holders

the globe and mail, Source: bank of canada

Majority of Canadians do not

have a mortgage

Distribution of households by mortgage characteristics, Q4 2021

Renters:

37%

Owners

without

mortgage:

28%

Fixed

rate:

25%

Variable

payments:

2%

Owners

with

mortgage:

35%

Variable

rate:

10%

Fixed

payments:

8%

All

households

Mortgage

holders

Variable mortgage

holders

the globe and mail, Source: bank of canada

Majority of Canadians do not have a mortgage

Distribution of households by mortgage characteristics, Q4 2021

Renters:

37%

Owners

without

mortgage:

28%

Fixed

rate:

25%

Variable

payments:

2%

Owners

with

mortgage:

35%

Variable

rate:

10%

Fixed

payments:

8%

All

households

Mortgage

holders

Variable mortgage

holders

the globe and mail, Source: bank of canada

As for the housing market, the unemployment rate helps to assess the outlook for all types of accommodations – not just homeownership. Rising mortgage rates tend to dominate discussions about the near future, but only 35 per cent of Canadians have a mortgage, according to the Bank of Canada. And of these, many have already paid down a large chunk of their principal, so their risk to the broader financial system is negligible.

Renters, meanwhile, account for 37 per cent of all accommodations, the largest of any group. Because they don’t have mortgages, they are less affected by rising interest rates, but getting or losing a job will determine if they can make rent. Right now it is fairly easy for Canadians to find work, with the number of job vacancies crossing the one million mark in March, the most on record, according to Statistics Canada.

Of course, the mortgage market can’t be completely discounted as a risk to the financial system. Mortgages comprise the largest block of assets on a bank’s balance sheet and housing crashes can easily seep into the broader economy, causing a recession. Loan losses typically begin accumulating when an asset bubble bursts.

Yet, even here, unemployment is a crucial consideration, according to Bob Dugan, the chief economist at Canada Mortgage and Housing Corporation. Banks monitor the number of mortgages that are in arrears –another way of saying they aren’t being repaid – and historical data show that rising rates aren’t closely correlated with spikes in missed mortgage payments.

“What does drive arrears is when people lose their jobs,” he said.

Mr. Dugan also noted that Canadian mortgages are often full recourse, which means lenders can seize assets if the money isn’t repaid. For this reason, “people tend to default on their mortgages only as last recourse,” Mr. Dugan said, and losing a job is a main driver for getting to this point.

Despite record-low unemployment, investors have been spooked of late and recession fears are weighing on stock prices. Banks are particularly vulnerable in this correction because of fears they will be hit with loan losses.

Until very recently, bank executives weren’t saying much to counter these assumptions. But at the Canadian Imperial Bank of Commerce investor day this month, chief risk officer Shawn Beber stressed that loan delinquency rates continue to fall. “We’re very comfortable with the [loan] growth that we’ve achieved,” he said.

The strength isn’t bank-specific. In its latest financial system review released in May, the Bank of Canada said the share of Canadians falling behind on consumer debt payments is around 2 per cent, which is close to the historical low.

Royal Bank of Canada chief executive Dave McKay, meanwhile, has gone one step farther, stressing that a hot job market serves as an important financial buffer. “Given low unemployment, rising wages and elevated liquidity, we believe the key ingredients are in place to help mitigate any sustained slowdown,” he said on the bank’s quarterly conference call in late May.

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