House price gains fuelled by increasingly risky mortgages

The news last week of a further acceleration in house price growth in Toronto and Vancouver in May followed hot on the heels of the warning from Bank of Canada Governor Stephen Poloz that “the potential for a downturn in prices in these markets… is growing.” Looking at the latest surge in household debt which, according to the Bank’s latest Financial System Review, is mainly due to very high loan-to-income mortgages being taken out in Toronto and Vancouver, we are reminded of the (fake) Robert Louis Stevenson quote that “sooner or later everyone sits down to a banquet of consequences.” This is a bubble. A very big bubble. And it is going to end in tears.