The Bank of Canada says that’s a very real possibility. In its Financial System Review today, the Bank warns there’s a growing risk many Canadians could lose their homes if the financial crisis worsens further.
With household balance sheets under pressure from weak equity markets, softening house prices, slowing income growth, and a record-high debt-to-income ratio, a severe economic downturn could result in a substantial increase in default rates on household debt
The fact is foreclosures are already on the rise. As I wrote in this story a couple of issues ago, the number of foreclosure filings in B.C. is up 50 per cent over last year, with signs of similar troubles in Calgary and Toronto. With thousands of homeowners already living on the edge, the deteriorating economy and sudden rise in unemployment could make it harder for them to hold onto their homes.
That’s bad enough. It’s what happens next that has some economists extra worried. In Canada most mortgages are insured by either CMHC, the government-owned crown corporation, or smaller private insurers, who are ultimately on the hook if homeowners default. That means a rise in foreclosures won’t lead to a financial meltdown among the banks in Canada as it did in the U.S. But several analysts and real estate professionals I spoke with for my story were seriously concerned that CMHC has not set aside enough capital to cover the losses if default rates spike.
So the question becomes not just, will foreclosures hit Canadian homeowners, but will they hit Canadian taxpayers too?