The Bank of Canada has reported its Financial System Review and warned that household debt and the housing market have both increased in vulnerability over the last 6 months.
Governor Stephen Poloz said that “the financial system remains resilient, and macroeconomic conditions continue to improve.”
Household debt increases have been driven by mortgage lending especially in Toronto and Vancouver. While the bank says that credit quality has improved in the insured mortgage market, it also says the uninsured mortgage market is increasing with some mortgages showing “risky characteristics.”
For the housing market, Governor Poloz said that macroprudential and housing policy measures are expected to mitigate the risk from rising house prices.
The two main risks highlighted in the review include an externally-generated recession, which would include a sharp decline in home prices along with rising unemployment impeding homeowners’ ability to service their mortgage debt.
If this were to occur, the BoC report says it would have a severe impact, but it says there is “probably a low risk” of this scenario occurring.
The other major risk is house price corrections in Toronto, Vancouver, and their surrounding areas. While this risk has a higher probability, it would have a less severe impact on the economy, the BoC says.