Photo: Bank of Canada/Flickr
The Bank of Canada pinpointed high household debt levels as a key vulnerability to country’s economy and financial system. In their bi-annual Financial System Review (FSR) released Thursday, the central bank stated that if there was a broad decline in employment and income levels, it would lead to a “widespread correction in house prices” as Canadians would find it hard to service their debt load.
Statistics Canada reported credit market debt levels at 163.3 per cent of disposable income for Canadian households during the fourth quarter.
“We judge that the vulnerability associated with household indebtedness is edging higher, and the overall risk to financial stability in Canada is slightly higher than it was at the time of our December FSR,” said Governor Stephen Poloz in the release.
Imbalances in the housing market were another concern outlined in the report as was oil. Declining oil prices have also increased the risk to financial stability within the country which, in turn, has had an impact on housing in oil-producing provinces. The decline has put a damper on incomes and overall economic growth.
Despite the risks associated with the oil shock, the central bank believes oil alone won’t derail the economy given the overall resilience of the system and because the impact would largely be felt in oil-producing provinces.
Altogether, the bank believes “there is a low probability that the risks identified in the FSR will materialize. Policies and regulations are in place to promote the strength and soundness of the Canadian financial system.”