Canadians getting the message on debt load, Carney says

Canadian house prices are now almost five times higher than incomes, the latest illustration of why policy makers are worried about parts of the housing market.

The average price is roughly 4.75 times the average income, Bank of Canada Governor Mark Carney said Tuesday, noting that the historical norm is closer to 3.5.

Speaking to the House of Commons finance committee, he said "valuations are firm" in some cities and segments of housing, such as Toronto's condo market, posing "more downside risk than upside risk."

While "extremely attractive" mortgage rates linked to exceptionally low overall borrowing costs are a key reason, he said, borrowers need to make sure they'll be able to afford any loans once interest rates start rising.

Prices in the biggest housing markets, Toronto and Vancouver, are moving in opposite directions of late, something economists say could keep the overall sector from overheating and, therefore, prevent a nasty drop in prices that ripples across the country. Still, Mr. Carney has indicated he is thinking about when to start raising interest rates, and higher rates will likely mean a housing correction as buying a home becomes less affordable.

Mr. Carney warned again last week that the use of home-equity lines of credit to finance consumption exploded over the past decade as prices rose, suggesting that if valuations were to drop sharply, millions of families would lose the confidence and capacity to keep spending.

On Tuesday, he said Canadians are absorbing his "message of prudence and caution."

The annual growth of household debt – now 153 per cent of disposable income – has slowed in the past two years to around 4 per cent from almost 10 per cent, he told lawmakers. Also, more and more borrowers are taking on fixed-rate mortgages instead of variable-rate loans, leaving them less exposed to fluctuations in interest rates.

Still, he repeated that household debt is the No. 1 domestic risk to the recovery, and reiterated that if the economy continues to improve it "may become appropriate" to lift his benchmark interest rate from 1 per cent, where is has been since September, 2010.

The delicate challenge facing Mr. Carney and other policy makers, however, is to wean Canadians from debt-fuelled purchases without erasing the consumer spending that is being counted on for more than half of economic growth both this year and next, or causing a jarring correction in housing.

"There has to be an element of prudence in balancing the pace of slowing of this phenomena, with the underlying growth of the economy," Mr. Carney told the panel, noting that measures to tighten eligibility requirements for mortgages, and greater scrutiny of applicants for home-equity lines of credit, are helping.

"The combination of measures that have been taken and a clear-eyed perspective of Canadians, which I think they have … will do much to manage the issue."

Still, it's clear the central bank is crunching numbers and assessing just how much any number of scenarios could slow the housing market, consumer spending, or the economy as a whole.

When Liberal MP Scott Brison asked whether the central bank – which has been prolific over the past year in its studies and reports on housing – has explored how overvalued house prices may be, Mr. Carney simply smiled and said, "Not publicly."