June 8, 2017 / 2:49 PM / a year ago

UPDATE 2-Debt, housing drive up household vulnerabilities: Bank of Canada

By Andrea Hopkins and Leah Schnurr

OTTAWA, June 8 (Reuters) - Bank of Canada Governor Stephen Poloz said on Thursday he is comforted by recent signs of economic strength even as the central bank warned that rising consumer debt levels and an unbalanced housing market have raised household vulnerabilities.

Pointing to Canada’s two largest housing markets, Toronto and Vancouver, where prices have more than doubled in recent years, Poloz said the longer prices rise unsustainably, the more he becomes concerned about a correction.

In its semi-annual Financial System Review, the central bank laid out heightened concerns about Canada’s long housing boom and consumer debt binge, saying that rapid acceleration in home prices combined with record levels of household debt pose a risk to Canada’s financial system.

But the bank said Canada’s mortgage market is different than the one that existed in the United States prior to the housing crash, and Poloz pointed to signs of economic strength that have finally emerged in Canada’s economy.

“At this stage, I’m just comforted by the fact that the economy is showing better dynamics and that does go into this equation of financial risk as a positive. It means that the resilience is rising in the background, even if the vulnerabilities are also rising in the foreground,” Poloz told a news conference.

Economists said the upbeat tone on the economy could suggest the bank was inching towards an eventual interest rate increase. The Bank of Canada cut rates twice in 2015 to stimulate the economy amid an oil price slump, but the cheap borrowing costs have helped fuel the housing boom and consumer debt.

The bank is “accepting the economy is doing a little bit better right now and taking that maybe half a step further” in believing their forecast for economic growth will come to pass, said Benjamin Reitzes, senior economist at BMO Capital Markets.

Still, the bank warned that the share of uninsured mortgages is growing and some are showing riskier characteristics, including longer amortizations and the use of secondary loans and credit as buyers stretch to get into the expensive market.

It also said the greater use of home equity lines of credit could be contributing to vulnerabilities, echoing concerns raised by a consumer agency on Wednesday.

Rapid price gains in Toronto suggest the market has entered a phase in which these “extrapolative expectations” are becoming more pervasive and speculative buying is taking place, the bank said in the report. (Reporting by Andrea Hopkins and Leah Schnurr; editing by Meredith Mazzilli and Diane Craft)

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