OTTAWA -- The Bank of Canada is again flagging Canada's overheated housing market and sky-high household debt as the biggest domestic threats to the economy, while at the same time judging overall risk to financial markets has lessened.
The continued emphasis on debt and housing, despite what the central bank's governing council concedes is improving levels of risk, adds credence to the view governor Stephen Poloz appears set to keep interest rates unchanged until 2015. In its semi-annual review issued Tuesday, the bank said overall risks to Canada's financial system have improved, mostly as a result of a sounder economic and national debt situation in Europe, which has been a key threat since the 2008-09 recession.
It was the first downgrade of its ranking of risk -- from "high" to "elevated" -- in two years, with "very high" being the central bank's worst possible rating.
"First, and most importantly, the euro area has continued to stabilize. As a result, the likelihood of a euro-area financial crisis has diminished," the bank said in giving its reasons for the better outlook.
"Second, long-term interest rates in most advanced economies have increased, helping to improve the financial position of institutional investors with long-duration liabilities, such as pension funds and life insurers," the report said.
But the bank continued to devote a large section of the report to the continuing threat from housing and near-record levels of household debt, which has stubbornly remained about 160 per cent of disposable annual income, despite a slowdown in overall credit.
In particular, it notes while the recent spurt in home sales and accompanying increase in prices are likely a temporary phenomenon, homes in Canada remain overvalued and households vulnerable to a crisis or a sharp rise in interest rates.
Still, consumer credit growth has slowed to the lowest pace in 20 years, and new loans have gone to borrowers with sounder credit scores.
-- The Canadian Press