Should we expect a wave of consumer default in Canada?

Due to massive policy measures from the central bank and the federal government, Canada avoided financial system crash, although still a cautious approach is necessary, says the Bank of Canada Deputy Governor Toni Gravelle.

According to him, there are only few signs of overwhelming financial strain, while a possibility of a wave of consumer defaults is quite low. He says almost all of the households with expired debt deferrals have resumed their scheduled payments, and government measures keep supporting businesses in many sectors.

“We’ve been warning for a long time that a recession may lead to stress across the financial system,” -Gravelle noted. “However, this risk has not materialized.”

In his recent speech, Gravelle creates an optimistic picture of Canadian consumers and companies recovering from the unprecedented shock, despite high debt levels. He adds that the BoC’s response helped to avoid the worst effects of the crisis, although Gravelle believes the pandemic is still a significant a source of a strong financial system risk.

The deputy governor doesn’t think Canada’s real estate market is overheating, as the latest prices increase was caused by a high demand and a change in preferences towards larger properties.

“So far, we can’t see the signs that housing prices are growing pushed by speculation, like we’ve seen it in the greater Toronto and Vancouver areas a few years ago,” – he noted. Nevertheless, he believes we should be quite cautious when it comes to some markets, e.g. a condo sector.

In Gravelle’s opinion, it’s too early to celebrate, as many mortgage deferrals only ended in October. It means we won’t see the full effects until the end of 2020 or even early 2021.

He was less optimistic concerning the forecast for business, which may need more financing soon in order to recover. That’s one of the reasons why the BoC is ready to keep supporting the financial system, despite closing some programs.

“We believe there will be more businesses in need of financing in the coming quarters,” – he noted. “We’ll conduct simulations using firm-level data to quantify this, and we’ll release the results over the next couple of months.”