Sky-high Vancouver housing market a source of worry, says Bank of Canada
Peter O’Neil | Vancouver Sun
OTTAWA — Bank of Canada Governor Stephen Poloz has identified the sky-high housing prices in Vancouver and Toronto, and the heavy debt loads taken on by buyers in those two cities, as key risks to the Canadian financial system.
Poloz, in his twice-a-year assessment of vulnerable parts of the Canadian system that includes banks and insurance companies, said economic fundamentals in the two cities won’t likely support continued strong price increases.
It is therefore “unlikely” the current pace of price increases in Toronto and Vancouver will be sustained.
“This suggests that prospective homebuyers and their lenders should not extrapolate recent real estate performance into the future when contemplating a transaction,” he said in a statement.
The report warned, however, that sharp recent price rises in the two cities “raises the possibility that prices may be supported by self-reinforcing expectations, making them more sensitive to an adverse shock to housing demand.”
The high prices and household debt in the two cities could result in “shocks throughout the financial system” if a major event, like a severe recession and resulting spike in unemployment, leads to a “broad-based” correction in house prices.
But the central bank cautioned against an over-reaction to its warning.
“The probability (of a severe recession) remains low as the economy continues to grow, supported by continued expansion in the United States, and accommodative monetary policy and fiscal stimulus in Canada.”
Poloz described the Canadian financial system as one that is “resilient and functioning effectively,” and said the overall level of risk hasn’t changed since the last report in December.
Among other key risks cited in the report was the possibility of a sudden sharp rise in interest rates, and the potential for economic weakness in China driving down commodity prices, and therefore hurting Canada’s economy.
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