Canadians have amassed a $2-trillion mountain of household debt that’s casting a big shadow over the timing of the Bank of Canada’s next interest rate hike, governor Stephen Poloz said in a speech Tuesday in Yellowknife.

To Poloz, the “sheer size” of debt burden also means its associated risks to endure for a while, although he’s optimistic the economy can navigate them.

The debt pile, he said, has been growing for three decades in both absolute terms and when compared to the size of the economy — and about $1.5 trillion of it currently consists of mortgage debt.

The central bank has concerns about the ability of households to keep paying down their high levels of debt when interest rates continue their rise, as is widely expected over the coming months.

“This debt has increasing implications for monetary policy,” he said in his address to the Yellowknife Chamber of Commerce.

Poloz has introduced three rate hikes since last July following an impressive economic run for Canada that began in late 2016.

But the central bank stuck with its benchmark rate of 1.25 per cent last month as it continued its careful process of determining the best juncture for its next hike. The bank’s next announcement is May 30, but many experts only expect Poloz’s next increase to come at July’s meeting.

Poloz said Tuesday that the volume of what Canadians owe is one of the key reasons why the bank has been taking a cautious approach to raising its trend-setting rate. He called it an important vulnerability for individuals and leaves the entire economy exposed to shocks.

“This debt still poses risks to the economy and financial stability, and its sheer size means that its risks will be with us for some time,” Poloz said.

“But there is good reason to think that we can continue to manage these risks successfully. The economic progress we have seen makes us more confident that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed.”

Poloz said debt is a natural consequence of several factors, including the combination of a strong demand for housing and the prolonged period of low interest rates maintained in recent years to stimulate the economy.

The governor also provided detail on issues the bank is examining as it considers the timing of its next rate increase.

If it raises rates too quickly, the bank risks choking off economic growth, falling short of its ideal inflation target of two per cent and could lead to the type of financial stability risk it’s trying to avoid, he said.

But if the governing council lifts the rate too slowly, Poloz said it could intensify inflationary pressures to the point it overshoots the bank’s bull’s-eye. Poloz added that moving too gradually could also entice Canadians to add even more debt and further boost vulnerabilities.

In his speech, he also noted several other areas of concern the bank is monitoring closely as it considers future hikes. They include the economic impacts of stricter mortgage rules, the ongoing uncertainty about U.S. trade policy, the renegotiation of the North American Free Trade Agreement and a number of competitiveness challenges faced by Canadian exporters.

“These forces will not last forever,” Poloz said.

“As they fade, the need for continued monetary stimulus will also diminish and interest rates will naturally move higher.”

The indefatigable ability of Canadians to shoulder an ever increasing mountain of debt is being tested.

The country’s biggest banks began raising key borrowing rates last week, just as the busy season for residential real estate gets underway. In addition, the mortgage market looks set for a particularly heavy year of renewals in an environment where debt-servicing costs are already rising at the fastest pace in a decade.

How well Canadian households can weather the squeeze has become one of the biggest questions for policy makers and will determine whether the economy is headed for a mild, or sharp, slowdown. Bank of Canad Governor Stephen Poloz will address the topic in a speech on Tuesday.

“The economy has never been as levered as it currently is, and the economy is far more interest sensitive than it has been in the past, to a degree that we don’t have certainty over how each interest rate hike is going to affect Canadian consumers,” Frances Donald, senior economist at Manulife Asset Management, said by phone from Toronto. “All we know is it’s going to be painful, but how painful isn’t quite clear.”

The heavy debt burden is one of the reasons the central bank has been reluctant to raise reluctant to raise borrowing costs further, after hiking interest rates three times between July and January. Given the nation’s debt load — as of February, households had a record C$2.1 trillion ($1.6 trillion) of mortgage and non-mortgage debt — Poloz estimates the economy is 50 percent more sensitive to rate hikes than in the past.

Here’s what households are up against:

Mortgage Season

Canada is entering its busy season for real estate, with purchases concentrated in the April to July window. Some 47 percent of existing mortgages need to be refinanced this year versus 25 percent to 35 percent typically, according to Ian Pollick, head of North American rates strategy at Canadian Imperial Bank of Commerce in Toronto.

At the same time, the country’s biggest banks are raising key mortgage rates. Toronto-Dominion kicked it off Thursday, hoisting its five-year fixed mortgage rate 45 basis points to 5.59 percent. Royal Bank followed with its own hikes Friday.

New mortgage stress tests are pushing some borrowers from the big banks to alternative lenders charging higher rates.

“That’s an unfortunate outcome of the stress test,” Will Dunning, an economic consultant who specializes in the housing market, said by phone from Toronto. “In that sense, the stress test is not reducing risk. It’s increasing risk.”

Cost of Debt

The vise is tightening. According to Statistics Canada, total payments on debt made by Canadian households rose 6.7 percent in the fourth quarter from a year earlier, and the interest-paid component climbed 9.2 percent. Those were the biggest gains since the financial crisis. A moving average of quarter-over-quarter changes shows a similar pattern, with the 1.62 percent increase in the latest period the fastest since 2008.

Debt payments now represent about 14 percent of household disposable income, the highest share in three years. Donald expects the debt-service ratio to continue moving higher over the coming quarters.

“The world spends a lot of time talking about the level of Canadian debt being extremely elevated, but what matters most is not the level of debt that Canadians hold, but the cost of carrying that debt,” the Manulife economist said. “Canadians are going to start to feel the pinch.”

Cracks Appearing

There are already signs of strain. The roll rate — the percentage of credit card users who “roll” from early stage delinquencies to 60-89 day delinquencies — reached the highest since 2008 for one credit card program, while delinquencies for another were above the 10-year average, according to Royal Bank of Canada credit analyst Vivek Selot.

While the level of mortgage arrears is still low by historical standards, a rising debt service ratio could signal that’s about to change.

Retail Sales

Canada’s economy led the Group of Seven in growth last year, mostly because of the willingness of the country’s consumers to spend money. But growth is expected to slow this year. Gross domestic product unexpectedly shrank in January. Data for February is due Tuesday.

The nation’s retailers have already had a tough few months. Retail sales in February were still 1.8 percent below 2017 peak levels. In volume terms, the input used to calculate gross domestic product data, first-quarter retail sales probably posted the biggest quarterly drop since the 2008-09 recession.

The low unemployment rate and decent economic growth will help the economy withstand higher rates, though risks are increasing.

“You have some capacity in the economy to absorb this, but the fact that rates are going up isn’t positive for consumers, because it’s making credit more expensive,” Bloomberg Intelligence analyst Paul Gulberg said Friday by phone. “That’s the but.”

Canada’s mortgage growth has fallen to the lowest in nearly two decades as interest rates rise and after new mortgage rules took effect at the start of the year.

Total residential mortgage credit grew just 0.3 percent on average over the last three months, the slowest since 2001, Bank of Canada data show. That’s down from 0.47 percent at the end of 2017, and about half the average 0.57 percent pace over the past twenty years. Outstanding residential mortgage loans in Canada now total C$1.53 trillion ($1.19 trillion), the data show.

Borrowing costs are rising for the first time in almost a decade, and recent rule changes are making it tougher to get a mortgage. Just how sensitive consumers — and the economy — will be to higher rates has become a key question for policy makers, with Canadians now holding a record C$1.70 in debt for every dollar of disposable income.

Dominique Lapointe, an economist at the University of Ottawa’s Institute of Fiscal Studies and Democracy sees slowing credit growth as a potential headwind for Canada’s economy, at least in the short run. “In the near term, it’s bad for growth. In the longer-run, when it leads to deleveraging, it’s good for financial stability. What matters is the speed of deceleration, or contraction, in credit,” Lapointe said in an email.

Bank of Canada governor Stephen Poloz will be speaking later this afternoon on the subject of household indebtedness.

Canada’s housing market remains a large risk for the seventh consecutive quarter according to the latest report from the CMHC.

Its Housing Market Assessment for the three months to the end of March 2018 highlights evidence of overvaluation and price acceleration, especially in Toronto, Vancouver, Victoria, and Hamilton.

“Our market assessment continues to show a high degree of vulnerability at the overall national level due to moderate levels of price acceleration and overvaluation existing together” warns chief economist Bob Duggan. “Regionally, there’s a fair amount of variation, as we continue to see a high degree of vulnerability in major centres in Ontario and British Columbia while Prairie and Atlantic markets range from moderate to low.”

Vancouver has seen overall affordability weaken amid rising prices in the sub-$1m market, coupled with increasing mortgage costs. CMHC says the city’s housing market is highly vulnerable.

Victoria has little evidence of overbuilding despite an upward trend of completed and unsold units. Prices are higher than local incomes in many cases though, providing strong evidence of overvaluation.

Montreal has low vulnerability although CMHC says price growth is picking up.

Calgary, Edmonton, Saskatoon and Regina are all showing signs of overbuilding, with high levels of new and unsold homes and high rental vacancy rates.

Winnipeg and Atlantic Canada show low vulnerability.

“We continue to see a high degree of vulnerability in the Hamilton housing market due to price acceleration and overvaluation. It’s important to note, however, that overvaluation is easing as house prices are moving further into line disposable incomes, population growth and employment,” commented Anthony Passarelli, Senior Analyst, Hamilton.

OTTAWA — For the Bank of Canada these days, it’s all about timing.

The central bank stuck with its benchmark interest rate of 1.25 per cent Wednesday as it continued along a careful process of determining the appropriate juncture for its next hike.

“Governing council has agreed that, over time, the economy would appear to be warranting higher interest rates — our uncertainty is about how much and at what pace,” governor Stephen Poloz told a news conference that followed his latest rate announcement.

“For us, the case is clear — interest rates are very low considering that the economy is pretty well at capacity, inflation’s at two per cent.

The latest rate decision comes at a time of moderating growth following a strong 2017. Inflation is also running close to its ideal target and wage growth has strengthened with a tightening labour force.

Poloz, however, said that despite the recent improvements, the economy’s still unable to continue running at full tilt without the stimulative power of lower rates, at least for a little longer.

He listed four downward forces still weighing on the economy — all of which have come under close scrutiny by a central bank that has been describing itself as data dependent.

Two of these sources of uncertainty — inflation and wage growth — were highlighted as areas showing particular progress.

On inflation, Poloz said recent readings have been “very reassuring” with both the headline and core rates near its two per cent bull’s-eye.

Wage growth, he said, has increased significantly over the last 18 months to reach the three per cent range, although the bank noted the measure remains below what would be expected if the economy no longer had slack in its labour force.

The bank will also continue to watch two other areas of uncertainty: the economy’s sensitivity to higher interest rates and how well it builds capacity through business investment.

On capacity building, Poloz said he believes Canada now has a little more room to expand further, beyond what the bank sees as the economy’s potential growth — and all without driving up inflation.

When it comes to the impact of higher rates, Poloz said even with the inflated debt loads of Canadian households, recent data has shown moderation in credit growth.

Poloz reiterated Wednesday the bank would remain cautious when it comes to future increases.

Following the rate announcement, many experts stuck with their calls that the bank will introduce its next hike in July.

Poloz has raised rates three times since last summer following an impressive economic run for Canada that began in late 2016, but his last hike came in January.

Throughout this period, the bank has also kept a close watch on the evolution of external risks.

Exports and business investment in Canada have been held back by competitiveness challenges and trade-policy uncertainties, which include escalating geopolitical conflicts that risk damaging global expansion, the bank said.

It laid out estimates on the growth impacts on Canada due to tax reforms in the United States, which are expected to lure more investment south of the border. Due to these investment challenges, it predicts Canada’s gross domestic product to be 0.2 per cent lower by the end of 2020.

Exports are also expected to take a hit from trade uncertainties and reduced investment. The bank projects that Canada’s GDP will be 0.3 per cent lower by the end of 2020 due to the negative impacts on exports.

Fiscal stimulus introduced in recent provincial budgets is expected to help offset these effects by adding about 0.4 per cent to Canada’s real GDP by the end of 2020.

On Wednesday, the bank also posted new economic forecasts with the release of its latest monetary policy report.

For 2018, it’s now predicting two per cent growth, as measured by real gross domestic product, compared to its 2.2 per cent prediction in January.

That rate represents a drop from the three per cent growth in 2017. The bank had been anticipating such moderation.

However, the bank also raised its growth projection for 2019 to 2.1 per cent, up from its previous prediction of 1.6 per cent. It expects growth to ease to 1.8 per cent in 2020.

For the first three months of 2018, the bank is predicting growth of about 1.3 per cent — considerably lower than its January projection of 2.5 per cent.

The effects of sluggish exports and the housing markets’ responses to stricter mortgage rules played a big role in the disappointing numbers, the bank said.

It’s now predicting, however, the economy will rebound in the second quarter with 2.5 per cent growth, in part because of rising foreign demand.

A recent study elucidated how badly homeowners got burned when Toronto’s housing market plunged about a year ago.

The report, published by Move Smartly, determined that hundreds of homeowners lost an average of $140,000 because of closing defaults, and according to John Pasalis of Realosophy, that totaled $121mln in lost market value.

“It tells you how rapid the decline was,” Pasalis told the Globe and Mail. “It tells you how quickly markets turn.”

Closing defaults often result in litigation, but that becomes even trickier when the purchaser who reneges on the transaction lives in another country.

“One client sold to a buyer from Iran, who was buying as a non-resident, and decided he’s not closing on the deal, and then what’s the recourse of the client—you’re going to sue someone in Iran?” said Mortgage Outlet’s Principal Broker Shawn Stillman. “Some people will simply not close because they don’t want to buy something that’s worth $200,000.”

On preconstruction purchases, Stillman recommends to all his clients that they take the on-site mortgage broker’s preapproval. While the terms might not be favourable, it mitigates the chances of defaulting on closing.

“One thing we always recommend people do is the builders always offer a preapproval for a set amount of time and we tell them to take it,” he said. “It’s something we can’t offer in the mortgage world. There’s always a mortgage broker from a major bank on site that usually does financing that will preapprove you for a few years. It’s a terrible rate but I always tell clients, ‘You don’t know what the future holds,’ and to always take that preapproval because that would be the worst case scenario.”

Unfortunately, through no fault of their own, sellers end up being the real losers. Because they sell their home on condition and buy another to move into only for their buyer to back out, they’re stuck between a rock and a hard place.

“Unfortunately, it’s not anybody else’s responsibility to help [the defaulting buyer] get out of that hole,” said Stillman. “When things went up in value, builders weren’t saying ‘You have to pay me 20% more, or a $100,000 more.’ Same thing when prices go down. It’s nobody’s responsibility but theirs to close the deal.”

Canada’s banking industry is facing increased competition from growth in the fintech sector as mortgage demand weakens according to a new report.

The Conference Board of Canada says that despite these challenges, banks will manage to increase their pre-tax profits to more than $95 billion in 2018 and will see output grow by an average of 2.6% annually through 2022.

“The impact of financial technology firms on the industry is growing, and to date this has been primarily beneficial to the industry. Productivity continues to increase considerably and has been a key driver behind its successful financial performance,” said Michael Burt, Director, Industrial Economic Trends, The Conference Board of Canada.

The banking sector has responded to fintech disruption by expanding their own digital offerings, but the other challenge they face will be hard to mitigate.

The report says that demand for mortgages will drop “considerably” as interest rates rise and more stringent mortgage regulations weigh. This, along with lower demand for other consumer loans will weigh on banks’ profitability.

Statistics Canada announced this morning that employment increased by a stronger-than-expected 32,300 in March, driven by full-time job gains. The unemployment rate was unchanged at a four-decade low of 5.8% indicating that the economy is at or near full employment.

In the first quarter of 2018, employment edged down (-40,000 or -0.2%) reflecting a decrease in January. On a longer-term basis, jobs have been on an uptrend since the second half of 2016 despite a price-induced weakening in the oil sector. Over the past year, total employment rose by nearly 300,000 (+1.6%), driven by a surge in full-time work and a net decline in part-time jobs–all excellent news for the economy. Over the same period, total hours worked grew by 2.2%.

Employment rose in Quebec and Saskatchewan, while there was little change in the rest of the country. As the table below shows, British Columbia continues to post the lowest jobless rate in Canada at a stable 4.7% followed by Ontario at 5.5%. Quebec is third with an unemployment rate only slightly above the level in Ontario, its best relative performance in many years. The jobless rate at 5.8% in Saskatchewan edged up last month as it did in Manitoba. Alberta saw a sharp improvement as the jobless rate fell from 6.7% to 6.3% continuing the trend of recent months. Atlantic Canada continued to post the highest proportion of unemployed people. While the unemployment rate edged down in Nova Scotia and New Brunswick, it rose in Prince Edward Island and Newfoundland and Labrador.

From an industry perspective, job gains were led by the construction sector (+18,300), representing more than half of the employment growth last month. This was the most robust performance for construction jobs since February of 2016. Compared with 12 months earlier, employment in this sector grew by 54,000 (+3.8%), mostly resulting from gains in the second half of last year. There were also gains in public administration and agriculture. The number of public sector employees rose, while the number in the private sector and those self-employed held steady. The number of people working in finance, insurance, real estate and leasing ticked down slightly last month while it declined -0.4% on a year-over-year basis. Manufacturing was a drag on the economy, with the sector losing 8,300 jobs in March, possibly reflecting NAFTA uncertainty.

Another piece of good news for Canadians is that annual wage gains averaged a sizeable 3.2% in the first quarter of this year, the most substantial quarterly rise since 2015.

The March jobs report reaffirms that the Canadian economy is very close to full employment with little slack left following Canada’s strong economic performance last year. “Normal” levels of monthly job growth are about 15,000 to 20,000.

Wages have been showing signs of strength in recent months as labour markets have tightened. Annual pay increases accelerated to 3.3% in March from 3.1% in February.

The Bank of Canada has much to weigh at its policy meeting on April 18. Growing optimism that a preliminary NAFTA deal is within reach has not yet triggered expectations for faster Bank of Canada interest rate hikes, particularly with rising U.S.-China trade tensions. Investors now wager there is about a 20% chance of an interest rate hike at the April 18 meeting, based on swaps trading, down from 40% two weeks ago. A BoC interest rate rise is not fully priced in until July.

Even if a tentative NAFTA deal is signed, the central bank would likely wait to see concrete increases in Canadian exports, business investment and inflationary pressure before moving again after three rate increases since last July. The February trade figures released this week were disappointing, particularly for non-energy exports. Railway delays led to a record drop in food exports. Canada has reported trade deficits since January 2017, amplifying concerns about a decline in competitiveness.

Before its April confab, the Bank will also analyze its own survey of business executives released this Monday to see how executives have responded to trade uncertainty and tight labour markets. The Bank of Canada’s business outlook indicators have been on a steady uptrend since the lows reached in 2015 and are hovering at some of the highest postings in the past 17 years. It will be interesting to see if enlarged global trade tensions have dampened business optimism in Canada.

The housing measures set out in the Quebec provincial budget have been given the thumbs up by a local real estate board.

The Greater Montreal Real Estate Board says that all of the real estate and housing measures tabled by the finance minister are positive, especially those relating to homeownership.

Among the province’s proposals are a non-refundable tax credit for eligible first-time buyers which when combined with the federal tax credit could mean $1,376 in tax relief after buying their first home.

First-timers will also be able to take advantage of a tax deduction of $5,000 to help defray the costs of incidental expenses not covered by a mortgage, such as inspection fees, property transfer taxes, notary fees and moving expenses.

For those renovating their home, the RenoVert refundable tax credit will be extended, providing assistance equivalent to 20% of eligible renovation costs above $2,500.

The government has also pledged to invest $103.9 million in affordable housing.

Foreign buyers of real estate in Quebec are putting “marginal” pressure on prices while still accounting for a tiny sliver of the market relative to Vancouver and Toronto, according to new data released by the French-speaking province.

Non-Canadian residents generated 1,307 property transactions in Quebec last year, representing 1 percent of all deals, finance ministry documents show. That’s little changed from 2008, when they made up 0.8 percent of the total. Foreigners mostly purchased high-end properties, averaging C$559,000 ($434,343) apiece, the finance ministry said Tuesday.

U.S.-based buyers made up the biggest share of foreign acquirers with 32 percent of all transactions. French buyers were next with 20 percent, followed by Chinese nationals at 16 percent. That’s a marked contrast from 2006, when Chinese residents accounted for just 1.3 percent of all foreign home transactions in Quebec.

Quebec recently began tracking and releasing data on the country of residence of home buyers following a decision by Ontario and British Columbia to impose taxes on foreign buyers.

“When we look at average prices in the Montreal area, compared to other places in Canada, they are still relatively affordable,” Quebec Finance Minister Carlos Leitao said Tuesday in Quebec City. “I don’t think we are at all in the same type of position as our neighbors in Toronto or Vancouver. There is no need, in our view, to consider any sort of more intense measures.”

Last year’s land-registry data — compiled by JLR Solutions Foncieres — show foreign buyers bought single-family homes that were twice as expensive on average as those acquired by Quebec residents, the finance ministry said. Co-ownership properties acquired by foreigners were 40 percent more expensive than those bought by Quebeckers, the ministry also said.

Foreigners accounted for just 1.4 percent of housing deals in Montreal last year, compared with 3.2 percent in Toronto and 3.5 percent in Vancouver, according to budget documents.