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The housing sector is the key point of vulnerability for Canada’s otherwise stabilizing economy, the Bank of Canada (BoC) has warned, noting that the consequences of a correction in housing prices would likely be huge.

Steep housing price rises in cities like Toronto, Quebec, Winnipeg and Hamilton were singled out as risks by the recent half-yearly BoC's Financial System Review.   "Our analysis shows that household imbalances remain the most important vulnerability and could amplify the impact of external shocks," said BoC governor Stephen Poloz in a statement accompanying the review.  

Lower mortgage interest rates have caused households to take on bigger mortgages, putting them at risk in case of rate rises, or unemployment, the bank noted. 

“Many smaller entities, including some mortgage investment corporations and smaller credit unions, cater specifically to borrowers who do not qualify for insured mortgages. These may include low-income individuals, recent immigrants, rural residents whose income tends to be more volatile.”

The bank, however, doesn’t see any immediate threat of a price-correction. 

“The probability of this risk is low given signs that the housing market is still headed for a soft landing, but the impact on the economy and financial system would be severe should it materialize.”

Apart from housing, another risk is financial stress emanating from China and other emerging-market economies. The BoC sees a sharp increase in global long term interest rates as another risk to Canada’s economy.

This article was republished with permission from Global Property Guide.