Central bank voices concerns

RISING DEBT, SIZZLING HOUSING MARKETS LEAVE CANADA MORE VULNERABLE: BOC

The country’s financial system has become increasingly exposed to economic shocks amid the continued rise of household debt and still-scorching housing prices in major markets, the Bank of Canada said Thursday.

But even as the central bank warned the country’s most significant weak spots have widened, governor Stephen Poloz offered words aimed at reassuring Canadians.

He said the financial system remains sturdy in the context of brightening economic conditions.

“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,” Poloz told reporters.

“It means that the resilience is rising in the background, even if the vulnerabilities are also rising in the foreground.”

The bank’s assessment was rolled into its bi-annual review, which explored and identified the key vulnerabilities and risks surrounding the stability of the financial system.

Poloz often uses a tree as a metaphor for the economy with vulnerabilities represented by cracks in the tree and risks akin to gusts of wind that could knock it down.

The two mostconcerning fissures highlighted by the bank Thursday are also intertwined.

The report said the growth in mortgage lending in Toronto and Vancouver has largely fuelled an increase in Canada’s overall household indebtedness since the bank’s last review six months ago.

“Highly indebted households have less flexibility to deal with sudden changes in their income,” the bank’s report said.

“As the number of these households grows, it is more likely that adverse economic shocks to households would significantly affect the economy and the financial system.”

The bank has been issuing warnings about the steady climb of household debt in Canada for years.

Poloz, however, said Thursday that the numbers are mostly creeping up as some people with little or no debt enter the housing market for the first time.

“Debt is rising because people want to own a home — it’s not really that complicated,” Poloz said.

“Those are signs of a solid economy, a good economy and Mother Nature does this.”

The bank’s report was released with recent indicators showing that Canada’s economy has been building momentum for months.

It also comes, however, as concerns about the Canadian real estate market — domestically and from abroad — continue to pile up.