OTTAWA, (Reuters) - The vulnerabilities created by Canada’s high household debt and hot housing market remain elevated but should ease over time amid improving economic conditions and tighter mortgage rules, the Bank of Canada said on Tuesday.
In a more upbeat assessment of the risks facing Canada’s financial system than six months ago, the central bank said continued demand and limited supply should support house price growth in Toronto and Vancouver, but higher interest rates and tighter rules will likely weigh on activity.
The closely watched report noted an improving labor market, especially employment growth, and said a moderate increase in mortgage rates would be “significant but manageable” for most borrowers. Canada’s household debt hit record levels as buyers stretched to get into a roaring housing market.
“Our financial system continues to be resilient, and is being bolstered by stronger growth and job creation, but we need to continue to watch financial vulnerabilities closely,” Governor Stephen Poloz said in a statement.
Suggesting the first steps in the right direction have been taken to lessen the vulnerabilities posed by debt and housing market imbalances, the bank said stricter guidelines for low-ratio mortgages - which take effect in January - should mitigate risks over time.
Reporting by Andrea Hopkins and Leah Schnurr