The vulnerability of Canadian households to negative economic shocks has stabilized, albeit at elevated levels, according to report published Monday by TD Economics.
The report, which looks at the financial vulnerability of Canadian households, finds that households remain stretched. “There is no doubt that households are more vulnerable to a negative shock then they were in 2008/2009,” the TD report says.
However, the situation is not intensifying, the report finds. “Our analysis reveals that after rising sharply in the decade prior, Canadian household financial vulnerability has stabilized since 2011 as households have eased off the debt accelerator and low interest rates have helped keep monthly debt payments manageable. However, financial vulnerability remains at elevated levels nationally,” the TD report says.
In the short term, the situation looks fairly stable. “Looking forward, the combination of only gradually rising interest rates and improving economic growth should helpkeep risks tied to household debt and housing manageable in the near-term,” the TD report concludes. “However, the outlook and risks differ by region.”
Currently, households in British Columbia, Ontario, and Alberta, are ranked as most vulnerable, as these are the provinces with the highest debt-to-income ratios, and the most “froth” in their housing markets. Yet, the report also notes that vulnerability has intensified most in Saskatchewan and Manitoba, as “all measures of indebtednessand debt servicing ability hit record levels in 2015 for the two provinces.”
Looking ahead, commodity-dependent regions “are likely to see a further acceleration in household financial vulnerabilities through the rest of 2016 and 2017, tied to weak economic conditions,” the TD report says.
In contrast, the economic prospects of most other regions “are far brighter”, the TD report notes. “Economies of B.C., Ontario and Quebec should benefit from a lower Canadian dollar and robust U.S.growth over coming quarters. Incomes should continuegrowing at a decent pace, keeping debt manageable for themajority of households across non-commodity dependentCanada.”
However, the downside risks are not insignificant, the TD report warns. “In particular, the risk of a severe home price correction in B.C. and Ontario has risen to a medium probability event given the continued run-up in prices in Toronto and Vancouver,” the TD report says. “Given the stretched valuations and heightened sensitivity tointerest rate movements, our base case forecast calls for amodest unwinding in housing activity in Ontario and B.C.beginning in the second half of 2016. However, the faster home prices rise, the higher the risk of a deeper downturnover the next few years.”