Vulnerability to high debt has eased: central bank

The Bank of Canada is flagging the steady climb of household debt and still-hot housing markets as the financial system’s top vulnerabilities — but it’s also seeing some early signs of improvement.

In a report Tuesday, the bank said there’s some evidence Canada’s exposure to these persistent trouble spots has begun to ease, thanks to healthy job creation, tightening housing policies and higher mortgages rates.

The assessment is part of the bank’s semi-annual review, which explores key vulnerabilities and risks surrounding the stability of the financial system. It describes vulnerabilities as pre-existing conditions that could amplify or propagate economic shocks.

“Overall risks to the Canadian financial system remain elevated. Some preliminary signs of improvement, however, are emerging,” the bank said in its latest financial system review.

“Better economic conditions and several new policy measures support prospects for additional progress.”

The report said indebtedness, especially the number of highly indebted households, remains high. Household debt relative to income has reached historically lofty levels and continues to grow, the bank said.

But it noted there’s already some green shoots that suggest stricter lending rules have started to reduce the country’s exposure to hefty debtloads.

When asked about the Bank of Canada’s slightly more-optimistic tone compared to its last review in June, governor Stephen Poloz told reporters the most important thing to remember is that the vulnerabilities remain elevated.