According to the Bank of Canada’s semi-annual Financial System Review, Canada’s financial system is still extremely vulnerable to a correction in the housing market.
As discussed today in the Vancouver Sun, the review showed that even though Canada’s financial system remains robust, there is still a high risk – in fact, Canada is at the second highest risk level of a 4 tier system created by the bank. This level has not changed since last December, but the bank added in that economic conditions in Europe had improved earlier this year, only to fall apart once again.
The central bank assessed the risk of the euro sovereign debt to be at the highest level. This comes as a result of European policymakers being unable to deal with the fiscal crisis and widespread doubt that they are capable of doing so in the future. European policymakers are also trying to deal with balance-of-payment issues and undercapitalized euro-area banks. The Bank of Canada says that if Europe is unable to deal with these concerns in the immediate future, it could have serious implications for the global economy.
Bank of Canada Governor Mark Carney has been trying to create a euro zone banking union; he supported Europe’s move to lend Spain up to 100 billion euros to help resuscitate its banks and take a vital step forward in creating this bank union.
The bank also noted risk from high household debt levels and a potential correction in the housing market had actually gone up since December, caused primarily by over valuations and high levels of activity in the housing market.
Low interest rates since 2008-09 have help to increase risk in the housing market and raise household debt. Canadian policymakers are especially concerned with the condo boom in Toronto, while some reports suggest property prices are cooling in other parts of the country. The bank said measures of housing affordability have not changed since december and suggest this is being caused by overvaluation.
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