Financial System Review: Housing the Critical Focus

On June 13, the Bank of Canada released its Financial System Review (FSR)[1]. The major risks to the Canadian economy remain the uncertain global economic condition. However, the largest domestic source of risk to the stability of the Canadian Financial system is identified as the housing market.

Observations of the situation in the United States quickly reminds Canadians of how vulnerable this sector can be. Thankfully, the Bank feels confident enough to state that, generally, developments in this sector since the last FSR in December, have been positive and consistent with the Bank’s projections.

After plummeting from historically high levels, resale activity has leveled off and house prices have stopped rising in most major urban markets.

Although the trend continues to moderate, high levels of household indebtedness continue to plague many Canadians and additional measures may have to be implemented in order to mitigate risk. Measures that have proved successful thus far are the tightening of mortgage insurance rules and enhanced mortgage underwriting guidelines.

The condo market in urban areas such as Toronto presents a risk in the next 12-30 months, as many new developments will be completed in that time. If the demand does not match the supply for these completed units, the Bank warns that an abrupt correction in prices and residential construction activity may occur.