High household debt and the heated housing market remain the biggest domestic threats to Canada's financial system, the Bank of Canada said on Thursday, despite tighter mortgage rules introduced by the government in July.
"The most important domestic risk to financial stability in Canada continues to stem from the elevated level of household indebtedness and stretched valuations in some segments of the housing market," the central bank said on Thursday in its semi-annual Financial System Review.
The country's financial system remains robust but the overall risks to the stability of the banking sector are still high, unchanged from June, it said.
Reuters reported that the bank ranked the European debt crisis at the highest of its four levels of risk at "very high" and called the US fiscal cliff a major near-term threat. But the danger from the one trouble spot the bank can potentially address through policy action – household borrowing – was also unchanged from June at "high".
The debt-to disposable income has continued to rise even though credit growth has moderated.
Housing starts remain strong, particularly in the multiple-unit or condo market, and housing prices are 16 per cent higher than the previous peak in August 2008, the bank said.
If the unemployment rate were to rise by three percentage points by early 2014, the proportion of household loans in arrears would rise to 1.2 per cent in early 2015 from about 0.4 per cent in the second quarter of this year, the bank projected.
