Bank Of Canada Warns Homeowners Of Rising Interest Rates

Bank of Canada Governor Tiff Macklem said recent gains in home prices are not sustainable and warned homeowners against taking on too much mortgage debt because interest rates will rise eventually.

At a press conference to discuss financial stability, Macklem said some households have taken on "significantly" more debt, with many carrying very large mortgages relative to income. Borrowers and lenders need to understand that interest rates won’t always be at historic lows, and homeowners shouldn’t count on rising values, he said.

"It is important to understand that the recent rapid increases in home prices are not normal," Macklem told reporters. "Counting on ever higher house prices to build home equity that can be used to refinance mortgages in the future is a bad idea."

The comments come on the heels of one of the biggest upswings in Canadian housing ever, with prices climbing more than 30% over the past year in many markets.

In its "Financial System Review" report, the Ottawa-based central bank said debt vulnerabilities are intensifying amid a surge in housing prices that’s being driven in part by speculative activity.

There are signs people are buying houses with the expectation prices will continue to rise, which creates unsustainable dynamics. Taking on larger mortgages, meanwhile, puts households in a precarious situation should the economy take a downturn, said Macklem.

Separately, Canada’s banking regulator formalized a proposal to make it more difficult for home buyers to secure financing. Under the new qualification rules, which go into effect on June 1, buyers will have to show that they can afford a minimum interest rate of 5.25%.