BoC sounds the alarm over market imbalance – sort of

While the Bank of Canada said it’s worried about a potentially overvalued housing market, the country is not about to host the kind of crash that plagued many cities in the United States.

In its biannual Financial System Review, the BoC said Canada’s housing market could be overvalued by 10 to 30 per cent, but said we’re not currently seeing the kind of spike in housing prices that preceded corrections in the early 1980s and early 1990s.

“Highly-indebted households would have [difficulty] servicing their debt if they were to face a sharp decline in their incomes or a sharp rise in interest rates,” said Governor Stephen Poloz in a press release.

“This situation raises the risk that a shock to the economy could trigger a correction in house prices. The probability of this risk materializing is low, but if it did occur, the effect on the economy would be severe.”

For now, the national economy – and by extension, the housing market – is benefiting from rising immigration and the continued strengthening of the U.S. economy. House prices are still rising, mainly due to still-low mortgage rates.

“The further decline in mortgage rates over 2014 has supported housing activity,” the BoC said in its report. “Sales of existing homes have picked up noticeably from the weather-related weakness at the beginning of the year and now exceed their 10-year average. Housing starts have been broadly in-line with demographic demand.

“None of those conditions is present today,” added Poloz. “The rise in house prices has been much more gradual and, in the context of a broadening recovery, the unwinding of household imbalances should be gradual as well. 

“That is why we continue to expect a soft landing in the housing market, but it is conditional on continued strengthening in the economy.”