Bank of Canada warns about huge mortgages, growing housing debt

Nearly a third of recent Canadian homebuyers with so-called high-ratio mortgages wouldn't qualify for their loans under new rules recently implemented by the federal government.

That was one of the findings of a wide-ranging report from the Bank of Canada on Thursday looking at the biggest risks facing the financial system.

Known as the Financial System Review, the twice-a-year report from the central bank singled out a familiar theme that poses a risk to the economy: high debt levels related to inflated house prices.

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In the past year, Ottawa has moved repeatedly to address high housing debt. As part of new mortgage rules, for instance, the government now requires that borrowers have their finances stress tested to gauge their ability to pay back mortgages in the event of a rise in borrowing rates. The new rules also stipulate that the total cost of a mortgage payment plus property tax and utilities must not take up more than 39 per cent of a borrower's gross income.

Despite those moves, the bank says it has noticed an increase in the number of homebuyers who are borrowing more money than they can pay back, based on their income. A borrower would be considered a "high-ratio" mortgagee if he or she has less than 20 per cent in equity, and considered especially vulnerable if the total value of a loan is at least 450 per cent of annual income. 

The bank calculates that almost half of new high-ratio borrowers in Toronto are above that threshold, and 39 per cent are in Vancouver. In Toronto's case, such monster mortgages are spreading to nearby cities like Oshawa and Hamilton too.

"In these cities," the bank said, "the proportion of high-ratio mortgages with ... ratios exceeding 450 per cent has more than doubled over the past three years, from around 10 per cent to roughly 25 per cent."

Across the country, the bank says, nearly a third of people who took on high-ratio mortgagees in the past year wouldn't qualify for their loans under the new rules. 

"All else being equal, about 31 per cent of high-ratio mortgages issued nationally during that period would not have qualified."

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The report comes the same day as a report from the Canadian Real Estate Association shows that the average house price has risen another seven per cent in the past year, up to $489,591 in November.

The central bank noted that means house prices are now "just under six times average household income, their highest recorded level."

The good news on the housing front, however, is that the central bank thinks the new rules will eventually achieve the goal of bringing down debt levels.

"The policy measures introduced by the federal government in the autumn will, over time, have a constructive effect on the number of highly indebted households," the bank said. It also warned that "self-reinforcing price expectations may also be supporting price increases" in the major housing markets of Toronto and Vancouver.