Canada is known for having a very robust banking sector that encourages financial stability within capital markets. Overall Canada’s financial system remains resilient as Banks have increased their provisions for loan losses, some asset managers have prioritized managing liquidity, and some pension funds and insurance companies have reduced their exposure to commercial real estate or written down the value of assets (particularly office – while not all office is bad that is another discussion). However, The Bank of Canada’s Financial Stability Report for 2024 highlights several key issues affecting the financial system. Below Largo discusses these areas of concern in greater detail.
Household Debt – Household debt levels in Canada remain very high, making many Canadians vulnerable to economic shocks. Canada has the highest level of household debt to disposable income of any G7 country. A shock is determined by the extent to which an expectation is met. While there is a strong belief interest rates will come down in 2024, there are varying expectations of by how much, which will definitely affect some households more than others (depending on their belief).
Housing Market – The housing market continues to be a critical area of concern. High home prices and elevated levels of mortgage debt increase the risk of financial instability. Housing is and always has been the largest purchase by a person that involves a significant amount of leverage (debt). Since the financial crisis, we have been in a historically low interest-rate environment, which due to inflation is no longer the case. Again, it boils down to consumer expectation, some may assume aggressive rate cuts, and others more modest. Being more conservative in nature, Largo focuses on mortgage takeout analysis and the potential of rates actually going up further. If you can’t afford to buy a house / property at an interest rate of 50-100bps higher then perhaps you simply can’t afford that home / property. It’s important to not only understand how your income could be affected in the future but also your mortgage payments (this applies to residential and commercial real estate).
Global Economic Conditions – Geopolitical tensions and trade disruptions are more prominent than ever in the world and could significantly impact Canada’s financial stability.
At the end of the day, budgeting for risk and downside protection is just as important, if not more important than forecasting upside. If you are looking to discuss your future debt strategy, please don’t hesitate to reach out.
Source: https://www.bankofcanada.ca/2024/05/financial-stability-report-2024/
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