The Bank of Canada's angst about a possible housing crash is now focused on a swelling bulge of younger homeowners with large mortgage debts and stagnant incomes.
There are roughly 720,000 Canadian households with debts equal to more than 3 1/2 times what they earn every year, the central bank said Tuesday in its semi-annual overview of the financial system.
The share of such indebted households with debts totalling more than 350 per cent of their annual income held has doubled to 8 per cent from 4 per cent since before the 2008-09 financial crisis.
And 40 per cent of all household debt in Canada is now in the hands of households with a debt ratio of more than 250 per cent, up from 28 per cent before 2008. Twenty-one per cent, or a total of $400-billion in debt, is held by Canadians with debt ratios of more than 350 per cent.
The bank said these highly indebted borrowers are at the greatest risk of defaulting on their loans because they tend to be younger, earn less money and live in the provinces where house prices have climbed the most in recent years: Ontario, British Columbia and Alberta.
"There are pockets where the [housing] vulnerabilities are dominant," Bank of Canada Governor Stephen Poloz told reporters.
The central bank said the overall risk to Canada's financial system remains unchanged from six months ago, in spite of growing vulnerabilities that include rising indebtedness and the prolonged slump in the price of oil and other commodities. Mr. Poloz is still predicting an orderly unwinding of the country's housing market.
And yet a housing crash, triggered by a severe recession and a spike in unemployment, remains the most important risk to Canada's financial system, according to the bank.
New data show how uneven the housing market has become across the country – booming in some spots, tumbling in others. The Canadian Real Estate Association reported Tuesday that resale housing activity had its second-best year on record with scorching hot markets in the Toronto and Vancouver areas more than offsetting a nearly 30-per-cent plunge in sales in Calgary in November.
National existing-housing sales activity is now expected to end the year up 5 per cent, to 504,000 houses, CREA said in a year-end forecast. The upward revision reflects unexpected strength in the Toronto and Vancouver regions, which now make up a third of the country's housing sales.
Sales are on track to end the year up 21.4 per cent in British Columbia, CREA reported, mirroring an expected 21.4-per-cent drop in sales in Alberta.
The national average resale price reached $456,186, up an annualized 10.2 per cent in November, with virtually all of that growth coming from Toronto and Vancouver. Stripping out Ontario and B.C., the average national house price has fallen nearly 5 per cent over the past year, CREA said.
A crash in Toronto and Vancouver would have national consequences because they account for a third of housing wealth and roughly the same share of mortgage debt, the Bank of Canada warned.
"Recent exacerbation of housing sector imbalances has become increasingly limited to a small number of areas," according to the bank's financial system review. "A rapid correction in one or both of these markets would have a large direct effect on the Canadian economy and the financial sector."
Rising housing prices have exacerbated the country's household debt imbalance. The share of households with debts topping 350 per cent of their incomes – the bank's threshold for "highly indebted" – reached 13.6 per cent in B.C. last year, nearly 11 per cent in Alberta and 8.5 per cent in Ontario.
The bank has previously estimated that Canadian house prices may be overvalued by anywhere from 10 per cent to 30 per cent. But that calculation was removed from this latest report. Mr. Poloz said it has "less and less relevance," given that the problem is confined primarily to just two cities, where there is strong employment and population growth, significant foreign buying and limits on new house construction.
And he said Canada's housing market is much healthier now than the U.S. market was before it crashed in 2006.
"There are no similarities to what we saw back then," Mr. Poloz insisted. "That's because we have a much stronger [mortgage] underwriting culture and because of the changes that were made along the way."
He applauded the new Liberal government in Ottawa for taking steps to curb excessive borrowing. "Recent changes by Canadian authorities will help to mitigate the risks as we move into 2016."
On Friday, the government unveiled what Finance Minister Bill Morneau has called "targeted" measures to address "pockets of risk" in the housing market, including a plan to increase the minimum down payment for government-insured mortgages on houses worth between $500,000 and $1-million, starting in February.
But the Canadian Real Estate Association warned the changes would reverberate far beyond Ottawa's target markets of Toronto and Vancouver, causing what CREA economist Gregory Klump called "unintended collateral damage" to housing markets in the oil patch.
CREA said it expects housing sales to spike in the short-term before Ottawa's new down payment rules kick in on Feb. 16, but that extended pain in the oil patch will eventually catch up to the housing market. Nationally, it predicted resale prices will increase just 1.4 per cent next year, while they are likely to fall another 2.5 per cent in Alberta.
The bank acknowledged that Canadians are piling on mortgage debt faster that their incomes. Statistics Canada reported Monday that household debt hit another record high in the third quarter, with debts reaching 163.7 per cent of incomes, up from 162.7 per cent in the previous quarter.
The bank also concluded that while prolonged low commodity prices would have a "significant adverse effect on certain industries and regional economies," the overall stresses to the financial system would be "manageable."
The report pointed out that direct loans by the Big Six banks to the oil and gas sector represent 2 per cent of total lending; loans to the mining sector account for another 1 per cent. But loans to oil-producing regions are much higher, at 13 per cent of total lending, or $320-billion.