In his final press conference before stepping down next month, Bank of Canada governor Stephen Poloz went out with a bang. Sunny Steve painted a more rosy outlook, suggesting recent concerns are overblown.

“We have to be able to manage the risks around those things, so I’m not going to dismiss dire scenarios”, Poloz said during a media roundtable, conducted online. “But, me personally, I do think on balance what I’m hearing, the flow that I’m hearing, is a little too dire, a little bit overblown.”

It was just a few months ago, Poloz gave the all clear, suggesting the economy was close to “home” as he prepared to sail off into the sunset. Since then, the Bank of Canada has pumped $300B of cash into the financial system, more than tripling their balance sheet during their first foray into Quantitative Easing. Actions speak louder than words.

While Sunny Steve has been relieved of his duties, there is still a lot of cleaning up to do. CMHC boss Evan Siddall notes that 12% of all mortgages are currently in deferral, and that number could rise to 20% by September. Further, due to the outright collapse in economic activity, household debt to GDP ratios are set to ratchet higher in the coming quarters. Prior to the pandemic, Household debt to GDP in Canada idled at 99%, technically well in excess of the 80% threshold in which the Bank for International Settlements has shown that debt intensifies the drag on GDP growth. Unfortunately, those ratios are set to hit 115% in Q2 2020 and reach a staggering 130% in Q3, before ultimately beginning their descent.

These debt levels will not only hinder the economic recovery, but are set to weigh on house prices. CMHC forecasts are calling for a decline in home prices between 9-18% over the coming 12 months as a wave of mortgage deferrals begin to expire in the fall. While CMHC’s forecast on house prices is as good a guess as anyone’s at this stage, their public messaging will certainly put a dent in consumer confidence. After all, If there’s one way I can think of that might drive prices lower, a dire warning from your own government agency which is responsible for the majority of your mortgage market should do it.

CMHC is now considering pushing the minimum 5% downpayment up to 10% as they seek to reduce their risk exposure. Adding, “Our support for homeownership cannot be unlimited. Homeownership is like blood pressure: you can have too much of it.”

They aren’t the only ones though. According to industry analysts, Canada’s six-biggest banks are poised to set aside $8.9 billion for souring loans in the fiscal second quarter — a record amount that will wipe out more than half the industry’s profits. Ultimately, it will be the availability of credit that will determine if these dire forecasts prove to be overblown. Keep an eye on the banks.

Three Things I’m Watching:

1. Consumer prices contracted in April, falling 0.2% year-over-year. It was the first annual contraction since the 2009 recession.

2. Loan loss provisions at Canada’s big banks are estimated to triple from last quarter, as banks brace for bad loans.

3. Bank of Canada balance sheet has more than tripled since the pandemic began.

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