The risk of a sharp correction in Canada's housing market and financial stress on households has increased modestly in the last six months because of the weaker economy but new mortgage rules will cool the market, the Bank of Canada said on Thursday.
In its semi-annual Financial System Review, the central bank said that while the probability of a sharp price correction and nationwide financial stress on households is low, its impact would be severe, given rising debt loads and house prices.
"The most important risk remains household financial stress and a sharp correction in house prices, triggered by a large and persistent nationwide rise in unemployment. The likelihood of this risk materializing, however, remains low," the bank said.
The bank also noted the rapid backup in global bond yields, which have led to a rise in mortgage rates, and reiterated the potential for fragility in fixed-income market liquidity as a vulnerability. Still, it said the recent rise in yields has been orderly and reflects changing expectations for growth in the United States.
The overall level of risk to Canada's financial system was largely unchanged from six months previously, the bank said, with recent moves by the government to rein in risky lending helping to ease household vulnerabilities going forward.
"This buildup of vulnerabilities will be mitigated over time by new federal housing finance rules and other housing sector policies, which will dampen activity in the sector and improve the quality of new mortgages," the bank said in a statement.