Canadian real estate debt raises red flag, but don’t worry

The Bank for International Settlements (BIS), a Switzerland-based research and advisory organization comprised of the 60 central member banks that own it, has flagged Canada for a banking crisis in its latest quarterly review.

In its Early Warning Indicators, BIS flagged Canada flashing red for credit-to-GDP gap (how fast total credit to the private sector changes compared to GDP) and debt-to-service ratio (interest payments and amortizations relative to income), which they say portends a banking crisis.

“Canada, China and Hong Kong SAR stand out,” according to the report, which adds that for Canada and Hong Kong, the indicators are reinforced by property price developments.

The group assigns red or amber warning signs for several criteria; either has reportedly predicted a financial crisis two-thirds of the time according to one source. The group flagged the U.S. in the mid-2000s, prior to its recession in 2008.

Although China raised red flags in the BIS report for its credit-to-GDP gap, its gap was down in the third quarter of 2017 to 16.7% — the difference between its credit-to-GDP ratio and its long-term trend — from its March 2016 peak of 28.9% and its lowest since 2012. The lower numbers suggest “the efficiency of financial intermediation is improving,” according a Standard Charter Plc chief economist in the Financial Post.

Hong Kong, too, has been strengthening its already excellent underwriting standards. Along with its “attentive regulatory supervision,” it means “we are not too concerned, and we have a stable outlook on all of the Hong Kong banks we cover,” Chung Hong-taik, a banking analyst at ratings agency S&P Global told the South China Morning Post.

So, although the situation bears watching, the numbers don’t reflect all market factors. Our stringent mortgage rules helped save us from a similar fate to the U.S. in 2008, and they’ve only become more stringent.

One of the authors of the study said their early warning indicators aren’t perfect, and that although the probability of a financial crisis by their estimation is about 50% once they’re spotted, it can take years. The Canadian sky is hardly falling.

It is a warning to those who are, in spite of all other warnings, still overspending on their mortgages, though. Equifax this week reported collective Canadian household debt at $1.8 trillion, including mortgages, as of the fourth quarter of 2017, up 6% from last year.

While 46% of Canadians reduced their personal debt, 37% added more in higher average amounts; average personal debt is now at $22,837 per person, not including mortgages.

In a statement released Monday, Equifax senior director of decision insights Regina Malina said that in spite of the debt, Canadians generally make their mortgage payments on time, which she attributed to low unemployment and continuing low interest rates, a couple of other pluses that help balance the minus of rampant debt.

So if you’re thinking of buying a new home, the first step is deciding how much you can afford! Some people try to time the market, but the only thing you should be concerning yourself with is if you can afford it right now. If you can’t, build out a schedule and set a goal! If you can afford it, have a clear idea of what you want and start hunting!