Biggest threats to Canada's economy? Potential housing market correction, market liquidity and cyber-attacks

OSFI identifies 4 risk factors that can significantly impact the Canadian economy

According to the Annual Risk Outlook for 2024-2025, there are four critical concerns that can impact Canada’s economic stability:

1. Real estate-secured lending and mortgage risks: With high housing prices and substantial household debt, the ongoing risk of homeowners struggling to meet mortgage payments could lead to a potential housing market downturn.
2. Wholesale credit risks: Financial institutions face growing uncertainties with the loans they provide to large businesses, which could affect their stability if businesses default.
3. Funding and liquidity risks: Banks need to ensure they have enough cash on hand to meet short-term obligations, especially during economic shocks or financial market disruptions.
4. Integrity, security, and foreign interference: Protecting the financial system from cyber-attacks, fraud and external threats is critical to maintaining trust and stability in the financial sector.

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OSFI offers 5 ways to mitigate these risks in 2024

To minimize the impact of these four risks, OSFI proposed five strategic initiatives:

1. Mortgage underwriting standards: Strengthening mortgage underwriting practices to mitigate housing market risks will be a key focus area for OSFI in 2024.
2. Enhanced supervisory framework: OSFI will implement a more dynamic and responsive supervisory framework to address emerging risks effectively.
3. Strengthen liquidity risk management practices: This includes enhancing the ability of financial institutions to withstand financial shocks by maintaining sufficient high-quality liquid assets. OSFI will also conduct regular stress testing to ensure institutions can meet short-term obligations under various scenarios.
4. Cybersecurity resilience: OSFI will focus on initiatives that will bolster cybersecurity defenses and prioritize appropriate responses for a variety of situations.
5. Climate risk management: OSFI will work with financial institutions to integrate climate risk into their risk management practices and disclosures. In the report, OSFI Superintendent Routledge stressed the importance of collaboration with other regulatory bodies and stakeholders to address these risks, comprehensively. Routledge reiterated that OSFI takes a proactive approach with an aim to continue Canada’s economic resilience and the stability of Canada’s financial system.

What should Canadians do to minimize the impact of these risks?

OSFI regulates financial sectors within the national economy, but that macro approach won’t help you. Instead, consider these 11 practical strategies:

How to minimize mortgage and real estate risks

1. Assess housing affordability: Ensure that mortgage payments are within a comfortable range of household income. A common recommendation is that housing costs should not exceed 30% of gross income.

If required, consider refinancing your mortgage in order to get more favourable rates or terms. A good option is to speak to an independent mortgage broker or start a pre-approval process using an online firm, like Homewise. If you create a Homewise account, you can use their robust suite of calculators and tools, for free.

2. Fixed-rate mortgages: Consider fixed-rate mortgages to protect against interest rate increases.

To find the best rate, see the Money guide on mortgage rates.

Or spend a few minutes completing a pre-approval form from Homewise. In a few minutes you could find out what you would qualify for — and learn that don’t have to pay more for peace of mind.

3. Regular review: Periodically review and reassess your financial situation and mortgage terms to ensure they remain manageable.

How to minimize market fluctuation risks

4. Diversify investments: Avoid concentrating investments in a single sector or company. Diversify across different asset classes to reduce exposure to potential defaults. Good options include holding exchange-traded funds (ETFs) — funds that trade like stock but provide diversification through exposure to a basket of equities.

Good options for ETFs that offer a balanced mix between fixed income and equities include:

• iShares Core Balanced ETF Portfolio (TSX:XBAL): This ETF is designed to provide a balanced exposure to a mix of equity and fixed income securities, offering diversification across Canadian, US, and international markets, as well as bonds.
• Vanguard Balanced ETF Portfolio (TSX:VBAL): This ETF aims to provide a balanced portfolio by investing in a mix of equity and fixed income securities, including Canadian, US, and international stocks, as well as bonds.
• BMO Balanced ETF Portfolio (TSX:ZBAL): This ETF seeks to provide a balanced investment solution by investing in a diversified mix of Canadian, US, and international equities, along with fixed income securities.
• Horizons Balanced TRI ETF Portfolio (TSX:HBAL): This ETF offers a balanced exposure by investing in a mix of equity and fixed income securities, including Canadian, US, and international stocks, as well as bonds.
• RBC Global Asset Management Balanced ETF (TSX:RBAL): This ETF aims to provide a balanced portfolio by investing in a diversified mix of Canadian, US, and international equities, as well as fixed income securities.

These ETFs offer a convenient way for Canadian investors to access a diversified portfolio with exposure to both equity and fixed income securities, all while keeping costs low. Like stocks, investors will need an online trading account. Good options include:

• CIBC Investor’s Edge: Pay $6.95 or less per online stock or ETF trade, plus you can open and fund a variety of accounts including a cash account, TFSA, RRSP and other registered accounts.
• Wealthsimple Trading: Pay $0 commission on stock trades and just 1.5% FX fees on USD trades for accounts with less than $100,000.
• Questrade: Pay $4.95 to $9.95 per stock trade. Buy ETFs commission free. Transfer funds from another brokerage account for free plus pay no annual fees on RRSP and TFSA accounts.

5. Stay informed: Keep abreast of economic trends and potential risks in the sectors where you have investments or business dealings.

How to minimize funding and liquidity risks

6. Keep cash reserves (why an emergency fund is critical): Maintain sufficient liquid assets, such as cash or easily accessible savings, to cover short-term needs and emergencies.

There is a general rule of thumb that says we should all maintain an emergency fund equivalent to at least three to six months of living expenses. This fund should be able to cover mortgage payments or rent, along with other cost-of-living expenses, in case of unexpected financial difficulties.

Be sure to keep your emergency savings safe by avoiding products that introduce market risks, but keep them easily accessible so they’re available when you need them. A great option is to keep your emergency fund in a high-interest savings account, such as:

• EQ Bank
• KOHO Easy: Another good digital-only option is Koho's Easy account
• Simplii Financial
• Scotiabank's MomentumPLUS Savings Account
• Neo Financial

7. Avoid over-leveraging and reduce debt: Work on reducing high-interest debt to improve overall liquidity and financial flexibility. A good start is to avoid borrowing the maximum amount offered by lenders. Aim for a lower debt-to-income ratio.

If you need to reduce your overall debt, consider a strategy that helps reduce how much interest you pay on this debt. This will help free up money that can be used to pay down what you owe faster and further eliminate the cost of carrying debt. Good options include:

Consolidation loan: Read more about reducing the cost of your debt and getting debt-free faster with the Money guide to consolidation loans.

Mortgage refinance: A mortgage refinance may mean paying a penalty up front to break your current mortgage, but the newer rate — and the potential to consolidate high cost debt into a lower rate — can help you manage your finances. Just be sure you have a solid plan for repayment.

Low-interest credit card: Using a low-interest credit card can help you reduce the interest charged on the money you owe, help you get out of debt faster while building your credit score. Good low-interest credit card options include:

• American Express Essential card
• MBNA True Line Mastercard
• MBNA True Line Gold Mastercard
• Scotiabank Platinum American Express Card
• Scotiabank Value Visa

How to minimize security and foreign interference

8. Cybersecurity practices: Use strong, unique passwords for financial accounts and enable two-factor authentication. Regularly update software and be cautious of phishing scams.

9. Monitor accounts: Regularly monitor bank and credit card statements for unauthorized transactions and report any suspicious activity immediately.

10. Identity protection: Be cautious with personal information. Shred sensitive documents and be wary of sharing personal details online or over the phone.

11. Education: Stay informed about common cyber threats and security practices to better protect yourself from fraud and cyber-attacks.

Bottom line

By taking these proactive steps, Canadians can better protect themselves and their financial well-being from the various risks present in the financial landscape.