Cooling Canada's housing market will take time: central bank

Thu Jun 13, 2013 1:19pm EDT
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By Louise Egan and Randall Palmer

OTTAWA (Reuters) - Canada's housing market is stabilizing after the heated conditions of the past several years but progress will be slow, the Bank of Canada said on Thursday as it also warned that record-high household debt levels would persist through this year.

The bank added in a semi-annual report that the risks to the economy posed by debt and the housing market remain unchanged at "elevated", even though the situation appears to have improved over the past six months.

"The level of indebtedness is still elevated, and the bank's stress test simulations suggest that households are vulnerable to adverse economic shocks," the bank said in its Financial System Review.

"These imbalances, which built up over many years, will take some time to correct. While a gradual unwinding of imbalances is expected, there is a risk of a sharper correction," the bank said in the first such report to be published under its new governor, Stephen Poloz.

Canada's post-recession housing boom, fueled by historically low borrowing costs, has long worried the government and the central bank, which fear Canadians won't be able to afford their mortgages when interest rates rise.

The housing market began to cool in mid-2012 after Ottawa tightened mortgage lending rules for the fourth time. Official data on Thursday showed new home prices rose a relatively tame 2 percent in the year to April.

Most economists forecast a soft landing for the housing market, while a few still are sounding the alarm on what they see as pending disaster. <CA/HOMES>

Mazen Issa, economist at BMO Capital Markets, said he agreed with the central bank's view on the trend in housing.   Continued...

Construction workers work on building new homes in Calgary, Alberta, May 31, 2010. REUTERS/Todd Korol