This article exists as part of the online archive for HuffPost Canada, which closed in 2021.

Risk Of A Canadian Debt Crisis Has Come Down. A Lot.

There's something to be said for a calmer pace of borrowing.

Has Canada's economy dodged a bullet?

The measures policymakers have put in place to cool down household borrowing appear to have had at least one positive effect: The risk of a debt crisis in Canada has come down significantly over the past year.

The Geneva-based Bank for International Settlements (BIS), a sort of "central bank of central banks," tracks countries' exposure to a banking crisis through a measure known as the credit-to-GDP gap.

Watch: Tips for growing savings on a low income. Story continues below.

When the amount of private-sector debt rises above its long-term trend, an economy is considered to be at heightened risk. The BIS considers 10 per cent to be the "critical threshold" above which a banking crisis could happen in short order.

As recently as a few years ago, Canada was well above that threshold, with the credit-to-GDP gap peaking around 16 per cent. For several years, the country ranked as one of the top three or four places most at risk of a debt crisis.

But in the latest data, Canada's gap dropped to 4.7 per cent, and the country has fallen to ninth place among the places most exposed to a debt crisis. Canadian debt levels are returning to their long-term trends.

However, the BoC has disputed the BIS's calculations of Canada's debt-to-GDP ratio. It argues that the BIS numbers make Canada's debt risk look worse than it is by including the debt of Crown corporations.

The BoC says Crown corporations' debt is secured by the government, so it should not be considered part of the country's private sector debt.

Either way, the slowdown in borrowing has a flipside: A much slower housing market. Canadian household debt growth is at its lowest level since 1983, and the number of mortgages on lenders' books recently shrank for the first time ever.

With home sales at their lowest level in decades in Vancouver, falling house prices on the Prairies and uncertainty about the direction of Toronto's housing market, many in the industry are calling for the mortgage stress test to be loosened or repealed.

The stress test requires borrowers to qualify for a mortgage at a rate that is about 2 percentage points higher than the one they're being offered. Experts estimated that when the stress test came into force for insured mortgages at the start of 2018, it reduced the maximum amount someone could borrow for a mortgage by about 20 per cent.

There is speculation in the industry that this spring's federal budget will include new measures to make life easier for homebuyers, possibly a loosening of mortgage rules or an extension of mortgage amortizations to 30 years both of which are on the real estate industry's wish list

But policymakers so far have stuck to their guns. The Bank of Canada (BoC) argued last fall that mortgage lending in Canada has become less risky thanks to the tougher borrowing environment.

"The number of new highly indebted borrowers has fallen, and overall mortgage activity has slowed significantly," a BoC research paper said.

"Tighter policies around mortgage qualification and higher interest rates are having a direct effect on the quality and quantity of credit."

Suggest a correction
This article exists as part of the online archive for HuffPost Canada. Certain site features have been disabled. If you have questions or concerns, please check our FAQ or contact