Canada’s financial system is resilient, according to the Bank of Canada, but high household debt and imbalances in the housing market remain the country’s biggest vulnerabilities.
In its annual Financial System Review, the central bank said that these vulnerabilities “remain elevated” even though policy measures have started to make an impact.
“The vulnerability related to high household indebtedness has begun to ease. Incomes continue to rise and household credit growth has slowed due to higher interest rates and policy measures aimed at mortgage financing and housing,” the bank said in a statement on Thursday.
“Because of the sheer size of the stock of debt, however, this vulnerability will persist for some time.”
The Bank of Canada has raised interest rates three times since July last year and is expected to make another hike at its policy meeting next month.
Meanwhile, even though house price growth has slowed, led by declines in the Greater Toronto Area, the bank said condominium markets in the Toronto and Vancouver areas remain strong, with “some evidence of speculative activity.”
“Overall, the vulnerability associated with housing market imbalances has shown signs of lessening but remains elevated,” the bank said.
Central bank Governor Stephen Poloz added that policymakers have been closely watching the “two main vulnerabilities” and are encouraged by signs of easing.