Household debt worrisome, says Bank of Canada president

The governor of the Bank of Canada spoke about Canada's high household debt on Tuesday during an event hosted by the Yellowknife Chamber of Commerce.

Stephen S. Poloz said Canadian households owe more than $2 trillion, and mortgages account for about $1.5 trillion of this debt.

Household debt, which has been on the rise for about three decades, has been a “growing preoccupation” for Canada's central bank for a number of years, said Poloz.

“That is because high debt levels can make us vulnerable to negative events – individuals and the entire economy.”

Poloz said high household debt also makes the economy more sensitive to the impacts of higher interest rates.

“The average Canadian owes about $1.70 for every dollar of income he or she earns per year, after taxes,” he said.

Poloz said this ratio breaks the Canadian record.

“We know that a portion of Canadian households are carrying large debts, and the concern will become larger for them as interest rates rise,” he said.

However, added Poloz, “the economic progress we have seen makes us more confident that higher interest rates will be warranted over time.”

The current interest rate is still relatively low at 1.25 per cent.

Poloz said the Bank of Canada aims to eventually bring the interest rate up to a place where it is considered “neutral”: where it will “neither stimulate nor cool the economy.”

The national bank's current estimate for Canada's neutral rate is between 2.5 and 3.5 per cent.

Lower interest rates have made it possible for buyers to purchase more expensive homes, said Poloz, and Canadians are increasingly relying on mortgages.

“Aspiring to own a home is part of our culture,” he said.

However, the desire to own a home combined with the high house prices is a recipe for higher levels of debt.

Zoocasa's 2018 Housing Trends survey reports that 84 per cent of millennials consider home ownership an important milestone despite high housing prices and the likelihood of rising interest rates.

When he was a prospective homeowner in the early 80s, said Poloz, he too wondered if he would ever be able to afford a home, because interest rates were so high at the time.

“In the end it turned out fine,” he said during a press conference following his speech.

“With our eye on the long term, we should expect the same here.”

Poloz said it's important not to forget that economies are still dealing with the traumas of the 2008 financial crisis and the 2014 collapse in oil prices.

“Those have given rise to really significant adjustments, long-term adjustments in our economy, and it's been a struggle for a large share of young folks to break into the system,” he said.

Still, the Poloz is confident that the economic climate, particularly for young people, is improving.

Though the governor of the Bank of Canada does not typically zoom in on provinces and territories, or examine the distinctions between them, Poloz was able to speak in broad terms about the future of the Northwest Territories.

This week the Conference Board of Canada called the territory's economic outlook “grim” with the passing of peak diamond production last year and the looming closure of the three operating diamond mines by 2035.

Poloz is more optimistic about NWT's economic future.

He said mining is a cyclical sector that relies on “big, once-in-a-while decisions” about investments, and there could be companies exploring or contemplating investments right now that are not on the Conference Board of Canada's radar.

In an interview with Yellowknifer, Poloz said the technology for analyzing geology is constantly improving and “chances are, we're going to find something more, something else worth exploiting.”

Poloz also said the economic benefits of tourism in the North should not be underestimated, especially tourism driven by retirees.

The baby boomers are entering retirement, he said, and many are keen on travel.

“They're always planning their next trip somewhere, and they spend meaningful amounts of time out in Canada and the world,” said Poloz.

He called the trend “retirement tourism.”

“That's a really important market,” he said.

Poloz's visit to NWT was the first by a Bank of Canada governor since the previous governor, Mark Carney, made a trip to Yellowknife in 2009.