References Over the past year, the Federal Reserve has been raising short-term interest rates.
For most Canadians debt is a fact of life, at least at some point. Borrowing can help someone get a higher education, or buy a new car, or purchase a home.
Simply put, debt is a tool that allows people to smooth out their spending throughout their life. Mortgages make up almost three-quarters of this debt.
While debt is indispensable for our modern way of life, it has been a growing preoccupation for the Bank of Canada for several years now.
That is because high debt levels can make us vulnerable to negative events—individuals as well the entire economy. There are two ways to look at this.
This means analyzing how our banks would manage a serious economic recession with high unemployment and increasing debt defaults. But the Bank is also focused on the vulnerability of our economy to rising interest rates, given high household debt. There is little doubt that the economy is more sensitive to higher interest rates today than it was in the past, and that global and domestic interest rates are on the rise.
So, today I want to talk about household debt in Canada—the dynamics that led to its buildup, how big a problem it is for Canadians now, and how we can manage the risks in the years ahead. How did we get here? Two trillion dollars of debt is a big number.
Let us try to put some context around it. A common way to measure household debt is to compare it with the amount of disposable income people have. That ratio is a Canadian record, and up from about per cent 20 years ago.
Although this ratio is on the high side, other economies such as Sweden, Norway and Australia have even more household debt relative to disposable income. This international comparison reveals some common factors.
Like Canada, the countries I just mentioned have all seen decades of steadily rising house prices. They all have high rates of homeownership and deep, well-developed mortgage markets. Like Canada, mortgages in Australia are typically amortized over 25 to 30 years. In Norway and Sweden, you can find mortgages where the homeowner is only making interest payments, and the principal is passed on from one generation to the next.
Aspiring to own a home is part of our culture. It is also a way to build wealth for the future, as house prices have tended to rise faster than incomes.
He found many factors working on both supply and demand to push prices up. On the supply side, Canada is a highly urbanized country, and many of our cities have land-use constraints that limit supply, such as green belts and other zoning restrictions.
Geography, in the form of mountains and water, also helps to limit supply and support prices. In terms of demand, several factors have reinforced an extended trend toward higher prices. These include demographics and a long period of low long-term interest rates. But the point I want to stress here is that when you combine a strong desire for homeownership with rising house prices, you will naturally find increasing levels of debt.
Monetary policy, demand and house prices The connection between low interest rates, rising house prices and increasing debt levels is worth considering in more detail. The goal of our monetary policy is to deliver low and predictable inflation by keeping supply and demand in the economy in balance.
If inflation is too low, we can lower our key policy interest rate and expect to stimulate demand for goods and services. When we raise interest rates, we expect to cool demand.
You would expect, then, that relatively low interest rates would lead to strong demand for housing.At per cent, Calgary still has the second-highest unemployment rate among Canadian cities.
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