HOUSING WORRIES DARKEN BRIGHT OECD FORECAST.

OTTAWA• Canada’ s economy will grow at a faster clip than expected in 2017, a new report says, but an overheated housing market threatens to bulldoze optimism over rosy economic data in recent quarters.

In its interim economic outlook released Wednesday, the Organization for Economic Co-operation and Development raised its estimate for Canadian economic growth in 2017 to 3.2 per cent, up from its earlier estimate of 2.8 per cent — the fastest growing economy among G7 countries countries this year. It left its 2018 estimate unchanged at 2.3 per cent. The report mirrors earlier studies, including from the International Monetary Fund, that suggest Canada is set to beat its developed economy peers this year.

However, the OECD report also points to looming vulnerability in the Canadian housing market that could cause growth to shrink faster than expected in the second half of 2017. Rising housing prices and swelling household debt levels in Canada runs the risk of leading to a market correction that would reverberate throughout the economy, the report warned.

“A sufficiently large shock could even threaten financial stability,” it said.

The OECD report expects rising interest rates to temper the overheated housing market in some of Canada’s largest cities.

Bullish economic data in the first half of 2017 prompted the Bank of Canada to raise its overnight interest rate twice in less than two months, up to one per cent.

“Raising interest rates will reduce overheating in housing markets, which poses economic and financial stability risks and has made housing increasingly unaffordable, especially in Toronto and Vancouver,” the report said.

Commentary on Canada’s economic health has been optimistic, particularly after the posting of 4.5- per- cent annualized growth between April and June.

But some analysts say that key indicators like exports and business investment still suggest Canada’s economy is struggling. In particular, recent one-time investments in Canada’s oil and gas industry, brought on by slightly improved oil prices, could create an inaccurate picture of broader economic health.

Rising housing prices and household debt is central to those worries. In a note Wednesday, credit rating agency Moody’s Investors Service maintained a negative outlook on Canada’s six major banks, citing rising levels of private- sector debt- to- GDP and high debt loads.

“A key vulnerability to Canadian banks is mortgage debt, which has doubled in the last decade while the index of house prices to disposable income has increased 25 per cent over this period,” the agency said.

Most observers expect Canadian growth to slow to around two per cent in the second half of the year, and many expect it could continue to contract in the years following.

That is expected to limit any potential wiggle room for Ottawa, which has expanded the federal deficit to $17.8 billion over the past fiscal year on an ambitious spending mandate focused on innovation, social funding and infrastructure.

In July, the Bank of Canada announced it expects 2.8 per cent growth in 2017, shrinking to two per cent in 2018 and 1.6 per cent in 2019.