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Bank of Canada deputy governor Toni Gravelle cautioned that “it’s too early to be definitive” about how well Canadian mortgage holders are faring with the expiry of COVID-19 payment-deferral programs, even as the data show that the heavily indebted household sector has weathered the pandemic remarkably well so far.

In the prepared text of a speech via video conference to Quebec’s Autorité des marchés financiers on Monday, Mr. Gravelle said that even though 60 per cent of debt-payment deferrals granted by lenders expired at the end of September, evidence indicates that “more than 99 per cent” of those borrowers have resumed repayments.

“So far, the risk of a wave of consumer defaults seems low,” he said.

However, Mr. Gravelle said the jury is still out on the mortgage market – which represents the bulk of household debt – as many of the deferrals didn’t end until October.

“We may not have a full picture of how many homeowners have fallen behind on those payments until the end of the year or early 2021.”

Mr. Gravelle’s speech follows the Bank of Canada’s release on Friday of its Financial System Survey, a twice-annual canvassing of financial-industry experts. The survey, which took place in September, showed that respondents remain confident that the financial system can still withstand a “severe shock,” citing the actions of the Bank of Canada and the federal government during the crisis as bolstering that resilience.

Nevertheless, “the survey respondents also think that risks to the system have grown considerably” as a result of the pandemic, Mr. Gravelle said.

Among the key threats cited is the risk of rising household and business defaults, which would have spillover effects on the financial industry. Mr. Gravelle pointed out that government supports have so far done a good job of keeping indebted consumers and business owners afloat.

The household-debt-to-disposable-income ratio – a key yardstick of consumer indebtedness – actually declined to 158 per cent in the second quarter from 175 per cent in the first quarter, as emergency government benefits lifted incomes, while many households used the COVID-19 lockdowns to increase savings and pay down debt.

However, Mr. Gravelle cautioned, “The longer the pandemic constrains jobs and incomes, the greater the risk of financial trouble for highly indebted households, and the greater the risk of defaults that could impair the whole financial system.”

While credit card balances and other consumer debt have declined, total mortgage debt has actually grown – buoyed by the Bank of Canada’s deep cuts to interest rates that have added fuel to housing demand.

“The strong bounceback in many markets also reflects pent-up demand that built up over the containment period, as well as a shift in preferences toward homes with more space. ... To this point, we do not see signs that home prices are rising due to speculation, like we saw in the Greater Toronto and Vancouver areas a few years ago,” Mr. Gravelle said.

“To be clear, low interest rates are necessary to support a broad recovery of economic activity,” he said. “But there is a trade-off: Low interest rates can increase key financial vulnerabilities, making the financial system and economy less resilient to future shocks.”

Mr. Gravelle said business insolvency filings “remain below prepandemic levels,” and demand for business financing has been “relatively subdued” during much of the crisis. However, he cautioned, that could change as the pandemic continues to drag out.

“We expect that an increasing number of businesses will need financing in the coming quarters to get by,” he said.

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