High household debt still a key risk to Canadian economy: Bank of Canada

The Bank of Canada is once again pointing a finger at mounting household debt as one of the biggest weak spots in the country's economic armour.

OTTAWA — The Bank of Canada is once again pointing a finger at mounting household debt as one of the biggest weak spots in the country’s economic armour.

The central bank released its semi-annual financial system review Wednesday to underscore key vulnerabilities and to warn of looming threats.

However, the report said despite the red flags the economy continued to show signs of a “broadening recovery” and its overall assessment of Canada’s financial stability remains roughly unchanged since the summer.

“We judge that the probability of an adverse shock has eased since our June (financial system review),” Bank of Canada governor Stephen Poloz said in a statement.

“This mitigates our observation that some financial vulnerabilities appear to be edging higher.”

In addition to rising consumer debt, the review warned of the potentially overvalued housing market, increased risk taking in financial markets and emerging threats, such as weakening commodity prices and the plunging price of oil.

The bank also laid out possible pitfalls that threaten Canada’s position, such as a sudden rise in long-term interest rates, increased financial stress in Europe and China, and a sharp correction in house prices. It reiterated, however, its expectation that Canada’s housing market will have a soft landing.

The Bank of Canada suggested the housing market may be overvalued by 10 to 30 per cent.

Earlier this month, Poloz maintained its trend-setting interest rate at one per cent, where it has been since September 2010.

The low rate has encouraged Canadians to accumulate piles of debt since the recession as a way to help stimulate the battered economy. Most economists and analysts don’t expect the rate to budge until at least the middle of next year.

In the meantime, Canadians will continue to take advantage of cheap credit.

The bank’s report cautioned that Canada’s household debt-to-income ratio is near a record high, conditions that may have been partly fuelled by stiff competition among lenders.

The situation, it said, may have encouraged some Canadians to borrow too much and led financial entities to lend to riskier clients.

The review said 12 per cent of Canadian households as “highly indebted.” The bank said this percentage has been steady in recent years, but is nearly double the level in 2000.

It also said these households carry about 40 per cent of the country’s overall consumer debt load.

Young homeowners, the bank added, have become even more vulnerable to negative shocks to income and to higher interest rates.

“Among the current generation of young households, those who own homes carry more mortgage debt relative to income than previous generations did at the same age,” the review said.

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