Bank of Canada Cites Household Debt, Real-Estate Prices as Top Stability Risks -- Update
Rising Canadian household debt and frothy real-estate markets are the main concerns for financial stability in the country, with conditions exacerbated in the past six months by significant house-price gains in Toronto and the surrounding area, the Bank of Canada said Thursday.
The central bank judges there is a moderate risk of a significant house-price correction in both Toronto and Vancouver, which could lead to limited financial stress, it said in its semiannual Financial System Review.
Overall, the bank's review indicated Canada's financial system is "relatively resilient" compared with other advanced economies, and added there should be no concern of a U.S.-style housing crisis witnessed last decade. Tools introduced in the province of Ontario in April, most notably a tax on foreign house buyers, may already be playing a role in cooling Toronto housing, the bank said.
"The financial system weaknesses and exposures that helped transform a house-price correction into a large and persistent rise in unemployment during the 2007-09 crisis are not present in Canada," the central bank said. It said a risk associated with a prolonged slump in commodity prices has dissipated, and the economy is gradually improving.
The Bank of Canada's semiannual review assesses vulnerabilities in the financial system, and identifies potential risks to financial stability that may not necessarily be triggered. The central bank last published its review in December.
On eight occasions starting in 2008, federal and provincial authorities in Canada have introduced measures to tamp down housing exuberance. But housing has been a crucial growth engine for the country, as TD Bank estimates that 40% of Canadian economic output since 2014 is tied to real estate.
The International Monetary Fund said last week authorities should consider more tax-based measures to discourage housing speculation.
In Canada, the ratio of household debt to after-tax income is nearing 170% in Canada. Borrowing -- the bulk in mortgages and drawdowns on home-equity lines of credit -- has climbed at a roughly 6% pace from a year ago in recent months, or well above wage gains. This can be attributed to "exceptionally strong" annual house-price gains of 32% in the Toronto area as of April, and above 20% in greater Vancouver, the bank said.
In Toronto, price growth "has been too fast for normal market activities, " the central bank said. It said speculation and what it calls "extrapolative expectations" -- or a widespread belief among buyers and investors that house prices will continue to move upward -- are driving the Toronto market. When combined with elevated levels of debt, "this activity can be destabilizing."
Recent data suggest Toronto-area housing activity could be slowing, amid nonrate tools to contain exuberance. Home sales activity in Toronto sank 20% in May, according to the Toronto Real Estate Board.
Write to Paul Vieira at paul.vieira@wsj.com
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June 08, 2017 11:36 ET (15:36 GMT)