Housing Risk Tops Bank of Canada Concerns

In the semi-annual Financial System Review (FSR), the Bank of Canada recently released an enhanced framework for gauging the risks to financial stability.

The first such risk relates to housing.

Household debt remains high across the country and although the risk is considered low because most projections do not predict a devastating crash, a sharp short term correction in housing prices could drastically affect Canadians. Advisors and their clients may wish to focus on debt and cash flow management now, in case of such a black swan event.

The second concern pertains to Canada’s links with other nations. We are not insulated from external events in the global economy because of our heavy reliance on economies abroad. This could affect jobs and job creation, and so from a wealth  management point of view, advisors and clients need to always be prepared for unexpected gaps in income. Tax management is important here, too, should severance or signing bonuses become issues, for example.   

The third risk is focused on emerging international markets such as China and India which can affect our economic performance over the long term. On a positive note however, the Bank identified a declining a risk of a collapse in Europe.

The fourth and final concern is a sharp increase in global long-term interest rates. The Bank feels this is certainly a possibility and that it would detrimentally affect the domestic economy.

Planning for the unexpected is an important job of tax and financial advisors, who may wish to note these potential events in their conversations with clients.