* BoC says household debt, housing market still pose risks
* Bank says imbalances will be slow to unwind
* Says euro zone crisis the No. 1 risk to financial system
* Canadian shadow banking merits closer monitoring
By Louise Egan and Randall Palmer
OTTAWA, June 13 Canada's housing market is
stabilizing after the heated conditions of the past several
years but progress will be slow, the Bank of Canada said on
Thursday as it also warned that record-high household debt
levels would persist through this year.
The bank added in a semi-annual report that the risks to the
economy posed by debt and the housing market remain unchanged at
"elevated", even though the situation appears to have improved
over the past six months.
"The level of indebtedness is still elevated, and the bank's
stress test simulations suggest that households are vulnerable
to adverse economic shocks," the bank said in its Financial
"These imbalances, which built up over many years, will take
some time to correct. While a gradual unwinding of imbalances is
expected, there is a risk of a sharper correction," the bank
said in the first such report to be published under its new
governor, Stephen Poloz.
Canada's post-recession housing boom, fueled by historically
low borrowing costs, has long worried the government and the
central bank, which fear Canadians won't be able to afford their
mortgages when interest rates rise.
The housing market began to cool in mid-2012 after Ottawa
tightened mortgage lending rules for the fourth time. Official
data on Thursday showed new home prices rose a relatively tame 2
percent in the year to April.
Most economists forecast a soft landing for the housing
market, while a few still are sounding the alarm on what they
see as pending disaster.
Mazen Issa, economist at BMO Capital Markets, said he agreed
with the central bank's view on the trend in housing.
"Some of the work we have done suggests that the impact of
tighter mortgage regulations is only transitory; nonetheless, we
see the housing market as stabilizing over the balance of the
year and construction activity growing more in line with
demographic fundamentals," he said in a note to clients.
The Bank of Canada report said overall risks to the Canadian
financial system have diminished but still remain "high", the
same risk classification it designated six months ago.
The highest risk level of "very high" was reserved for the
euro-area crisis, although the bank said that was down slightly
due to the policies of the European Central Bank.
The No. 1 domestic risk comes from household finances and
the housing market.
Since the bank's last assessment in December, household debt
accumulation has slowed, housing resale activity and starts have
moderated, and prices have stopped rising in most major cities.
However, the bank pointed to stretched housing valuations in
some areas and signs of overbuilding in the condo market. The
imbalances "will take some time to correct" and should unwind
gradually, it said, though there is a risk of a sharper
The household debt-to-income ratio will likely remain near
the current record high 165 percent this year, the bank
The report also contained an analysis of Canada's small
shadow banking sector, which will come under closer scrutiny as
new financial regulations come into force.
Some areas warrant focused monitoring, the bank said,
including the strong growth in securitization of insured
The shadow banking sector, which includes financial
intermediation activities done by hedge funds and private
capital funds, has been growing since the financial crisis of
the last decade and stood at $67 trillion worldwide last year,
according to the Financial Stability Board, the global task
force for financial reform.
The FSB is expected to make proposals on how to regulate
this area of the financial sector before the G20 autumn summit
in Russia, where the issue will be debated.