The Bank of Canada said record consumer debt loads remain the biggest domestic risk to the financial system and these imbalances will take time to unwind.
Slower credit growth and tighter mortgage regulations have curbed the risks that some families have taken on unaffordable debts, the bank said today in its semi-annual Financial System Review from Ottawa.
“These imbalances, which built up over many years, will take some time to correct,” the bank’s governing council members wrote in the report. “While a gradual unwinding of imbalances is expected, there is a risk of a sharper correction.”
The report is the first published under Governor Stephen Poloz who took the post June 3 as Mark Carney left to head the Bank of England. Poloz told lawmakers last week he is concerned about the risks posed by consumer debts that grew through the housing boom as banks increased mortgage lending. He also said the limits of domestic-demand led growth have become clear.
The overall risk level remained “high,” the bank said, because of dangers posed by Europe’s financial crisis and weak global demand, as well as a prolonged period of low interest rates globally that could lead some investors to take on too much risk.
The bank’s report has four categories of risk: moderate, elevated, high and very high. The risks posed by household debt remained elevated, the report said.
Household debt reached a record 165 percent of disposable income in the fourth quarter, and Finance Minister Jim Flaherty tightened mortgage rules last year to avoid what he called signs of overheated condominium markets in Toronto and Vancouver. Statistics Canada will publish first-quarter debt figures later this month.
The central bank forecast today that the debt to disposable income ratio will stabilize this year. Other signs of “constructive evolution” of household imbalances include slowing housing starts and resales since mid-2012, according to the report.
There are also signs of overbuilding in markets such as condominiums in Toronto that could trigger “an abrupt correction in prices,” the Bank of Canada said today.
“The Bank is working closely with other federal authorities to assess the risks related to household finances and the housing market,” the report said.