A Bank of Canada economist says the current economic recovery could be different than the recovery from the financial crisis of 2008.
Bank of Canada Director of Financial Stability Mikael Khan said that while the employment rate has fallen due to the pandemic, house prices are recovering and keeping homeowners from filing for insolvency.
Khan said breaks from mortgage payments have bought home owners some time to get back to work amid the COVID-19 pandemic and economic downturn.
91裸聊视频淭he fact that these deferrals have been available is really, really important,91裸聊视频� said Khan. 91裸聊视频淯ltimately what matters most when it comes to defaults is people having a job, having their incomes. What the deferrals are doing is they91裸聊视频檙e essentially buying time for that process to unfold.91裸聊视频�
Khan, who spoke at the Move Smartly Toronto Real Estate Summit on Monday, has been studying mortgage defaults. He compared the COVID-19 pandemic to a natural disaster, such as the 2016 wildfires in Fort McMurray, Alta., which also involved a mortgage deferral recovery plan.
Bank of Canada research found that while the wildfires caused a bigger spike in employment insurance filings than the 2008 recession, the EI trend reversed much faster after the fires than in 2008.
The 2008 conditions set off a lengthy recession due to 91裸聊视频渁n underlying fragility in the global financial system,91裸聊视频� the research suggested. But the wildfires, like the COVID-19 pandemic, were a sudden shock.
91裸聊视频淥ne thing that91裸聊视频檚 always very important when you91裸聊视频檙e facing a large negative shock is the initial conditions,91裸聊视频� said Khan.
91裸聊视频淚n Fort McMurray, when the wildfires hit, that91裸聊视频檚 an area that had already been struggling for some time with the decline in oil prices that had occurred about a year or so prior, so financial stress was quite high 91裸聊视频� Now, at the national level, what we91裸聊视频檝e been concerned about for many, many years is the high level of household debt. That91裸聊视频檚 the number one pre-existing condition that was there when the pandemic struck.91裸聊视频�
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While there are some parallels, the rebuilding process from a pandemic remains more uncertain compared to a wildfire, the research said. Khan cited increased savings rates as an example of a fundamental shift with potential to affect how quickly the economy recovers from COVID-19.
Over the past few months, some have warned that it could lead to a deferral cliff once benefits 91裸聊视频攕uch as Canada Emergency Response Benefit and mortgage deferrals 91裸聊视频� run out.
91裸聊视频淲hen it comes to bumpiness in the recovery 91裸聊视频� . this question that has been in the background of most of our discussions is, 91裸聊视频楾o what extent will we see defaults or insolvencies?91裸聊视频�91裸聊视频� said Khan. 91裸聊视频淚 think it91裸聊视频檚 reasonable to expect some sort of increase. What we91裸聊视频檇 be concerned about, there, is a very large-scale increase.91裸聊视频�
Khan said that when a mortgage is in default, it can be caused by a 91裸聊视频渄ual trigger91裸聊视频� of both unemployment and large decline in house prices. Home prices in many areas have recovered since the start of the pandemic, Khan said. The job market91裸聊视频檚 recovery will be key to determining the impact of mortgage deferrals, said Bank of Canada research cited by Khan.
Softening population growth from immigration could start to weaken house prices in the future. But for now, Khan said, it wouldn91裸聊视频檛 make sense for homeowners with healthy home equity to file for insolvency.
91裸聊视频淓ven in cases where a homeowner simply can91裸聊视频檛 make their mortgage payments anymore 91裸聊视频� as long as they have equity in their homes and the housing market is relatively stable 91裸聊视频� there91裸聊视频檚 always the option to simply sell without kind of resorting to those sorts of measures,91裸聊视频� said Khan.
The Canadian Press
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