Canada's housing vulnerabilities increase; financial system remains resilient: report

Vulnerabilities in the housing sector have edged higher, while the overall level of risk to Canada's financial system has remained roughly unchanged since June, the Bank of Canada said in its Financial System Review (FSR) released on Tuesday.

The bank identified two key vulnerabilities related to the Canadian household sector: the elevated level of household indebtedness, and imbalances in the housing market. A third vulnerability relates to uncertain market liquidity in fixed-income markets.

Nonetheless, the bank said that the Canadian financial system is resilient and that the global financial system has been made safer through the implementation of recent reforms, most notably larger capital and liquidity buffers at major financial institutions.

"Certain vulnerabilities are still edging higher, but recent changes by Canadian authorities to the rules for mortgage financing will help to mitigate these risks as we move into 2016," the bank said.

Meanwhile, the bank noted that household vulnerabilities could be exacerbated by a severe recession that is accompanied by a widespread and prolonged rise in unemployment. This could reduce the ability of households to service their debt and cause serious and broad-based declines in house prices.

The drop in commodity prices in 2015 has reduced Canadian incomes and wealth, but to date there is no evidence of a significant increase in loan delinquency rates, it said.

The other key risks are a sudden increase in global risk premiums which would lead to higher borrowing rates; stress emanating from China and other emerging-market economies; and prolonged weakness in commodity prices, the bank said.

The review, published twice a year, is intended to raise early awareness of vulnerabilities and potential triggers that could turn them into a risk to the Canadian financial system. It focuses on downside risks and is not a prediction of the most likely outcomes. Endit