Canada housing market-1 Photo:  Bruce Guenter/Flickr

Soaring consumer debt and the country’s housing market continue to pose the biggest threats to Canada’s financial stability, the Bank of Canada said Tuesday. (Tweet this)

“In Canada, the high level of household indebtedness and imbalances in some segments of the housing market make Canadians vulnerable to an adverse macroeconomic shock and a sharp correction in the housing market,” the central bank said in its Financial System Review.

The bank believes the recent uptick in housing activity is temporary, and says credit growth has slowed while house prices continue to be overvalued.

“Stretched housing valuations and the elevated number of units under construction could also lead to a sharp correction in the housing market,” the bank warns, before going on to single out Toronto’s condo market, which it says is oversupplied.

“If the upcoming supply of units is not absorbed by demand as units are completed over the next few years, there is a risk of a correction in prices and construction activity.”

So the question remains: is Canada’s housing market in for a hard or soft landing? A few weeks back, Bank of Canada governor Stephen Poloz came down on the soft side, saying the real estate market is not in a bubble and a sudden, sharp correction to house prices is unlikely. Tuesday’s report echos that sentiment.

“The overall moderating trend is expected to resume in due course. As long-term interest rates normalize with the strengthening global economy, the risk will diminish over time,” the report reads.

But despite concerns around consumer debt and the housing market, the Bank of Canada actually downgraded the overall risk to Canada’s financial stability from “high” to “elevated.” The improvement was credited in large part to the gradual recovery of Europe’s financial systems. It was the first time the bank eased its overall risk level since it began producing the semi-annual report two years ago.

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