OTTAWA—Housing sector risks have worsened, but the good news is the overall risk level to Canada’s financial system is roughly unchanged in the last six months, according to the Bank of Canada’s semiannual financial system review (FSR) released on Tues. Dec. 15.
The FSR is not meant to predict or project what might happen; instead it is an evaluation of the threats to Canada’s financial system. It discusses potential triggers that could turn vulnerabilities in the financial system, like high household indebtedness, into full-blown risks.
The biggest risk to the financial system is a severe recession, which leads to widespread job losses affecting people’s ability to pay their mortgages. This would then lead to a broad decline in house prices. As in June’s FSR, this risk would have a very high impact on the financial system, but chances are low that it happens. The two vulnerabilities at play here are the elevated levels of homeowners’ indebtedness and the rapid growth in home prices in Toronto and Vancouver.
While these vulnerabilities have gotten worse, the economy overall is seeing better days than it did in the first half of the year. Therefore, the likelihood of a trigger event—a recession—is lower.
