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Mortgage arrears rate could spike to double what it was in 2009, Bank of Canada says

Emergency measures to deal with the economic impact of the COVID-19 pandemic are showing encouraging signs of working, but Canada's economy is still facing an uncertain future, the Bank of Canada says.

Central bank says number of people falling behind on mortgages could almost quadruple

Carolyn Wilkins and Stephen Poloz will explain the bank's views on Canada's economy at a press conference on Thursday morning. (Blair Gable/Reuters)

Emergency measures to deal with the economic impact of the COVID-19 pandemic are showing encouraging signs of working, but Canada's economy is still facing an uncertain future, the Bank of Canada says.

Like other policymakers, Canada's central bank has spent the last two months making a flurry of policy decisions to ease the flow of credit, including slashing its target interest rate and embarking on an unprecedented bond-buying program.

The report suggests these measures have helped ease liquidity strains and provide easy access to short-term credit for companies and households.

"We entered this global health crisis with a strong economy and resilient financial system," outgoing governor Stephen Poloz said. "This will support the recovery. But we know that debt levels are going to rise, so the right combination of economic policies will be important, too."

Defaults are coming

One of the issues on the bank's radar will be the number of people having trouble staying on top of their mortgages.

The bank said that if no new policies had been implemented in response to the unprecedented economic impact of COVID-19, the mortgage arrears rate may have risen to 2.1 per cent of all loans by the end of this year. That means more than one out of every 50 homeowners would be at least three months behind on their payments — almost 10 times the number that were before the COVID-19 crisis.

As it stands, because of some of the policies put in place, the bank says that under the current worst case scenario, the mortgage arrears rate will spike to about 0.8 per cent and remain on a much flatter curve that doesn't peak until next year, once payment deferral plans offered by the big banks at the outset of this crisis are set to expire.

Currently, the mortgage arrears rate is at slightly more than 0.2 per cent. If the rate peaks to 0.8 per cent, that would be roughly twice as high as its highest point during the financial crisis of 2009. 

The bank did caution that those forecasts are assuming the worst case scenario for its stress-test modelling, and far more optimistic scenarios could play out.

"The unprecedented nature of the pandemic .. makes the uncertainty around the results exceptionally high," the bank said.

We already know about record-setting job losses during the pandemic, but the bank gave some new data regarding just how many people are finding it hard to make ends meet.

By its calculations, the bank says about one out of every five home-owning households in Canada doesn't currently have enough money to cover two months' worth of expenses, and almost one third don't have enough to cover four months' worth.

Even despite the financial support programs, such as wage subsidies, implemented by the federal government, "some households are likely to fall behind on their loan payments," the bank said. "This typically appears first in missed credit card and auto loan payments and later in mortgage payments."

Watch | Deputy governor Carolyn Wilkins on the outlook for Canada's housing market:

Bank of Canada's Deputy Governor Carolyn Wilkins says once COVID-19 measures are lifted the housing market should "spring back to life," but adds it's uncertain when that will be. 1:52

That's not just a problem for homeowners, either, Toronto-Dominion Bank economist Brian DePratto says.

"Renters are not immune, as they are more likely to work in industries most affected by COVID-19," he said. "The longer the income shock, the greater the risk of increased consumer insolvencies.

"Broad-based income support measures can only last so long, making the gradual economic reopening crucial to the health of the Canadian economy's financial underpinnings."

With files from The Canadian Press