UPDATE 2-Debt, housing drive up household vulnerabilities: Bank of Canada | Reuters

(Recasts; adds comments from news conference)

By Andrea Hopkins and Leah Schnurr

OTTAWA, June 8 Bank of Canada Governor Stephen
Poloz said on Thursday he is comforted by recent signs of
economic strength even as the central bank warned that rising
consumer debt levels and an unbalanced housing market have
raised household vulnerabilities.

Pointing to Canada’s two largest housing markets, Toronto
and Vancouver, where prices have more than doubled in recent
years, Poloz said the longer prices rise unsustainably, the more
he becomes concerned about a correction.

In its semi-annual Financial System Review, the central bank
laid out heightened concerns about Canada’s long housing boom
and consumer debt binge, saying that rapid acceleration in home
prices combined with record levels of household debt pose a risk
to Canada’s financial system.

But the bank said Canada’s mortgage market is different than
the one that existed in the United States prior to the housing
crash, and Poloz pointed to signs of economic strength that have
finally emerged in Canada’s economy.

“At this stage, I’m just comforted by the fact that the
economy is showing better dynamics and that does go into this
equation of financial risk as a positive. It means that the
resilience is rising in the background, even if the
vulnerabilities are also rising in the foreground,” Poloz told a
news conference.

Economists said the upbeat tone on the economy could suggest
the bank was inching towards an eventual interest rate increase.
The Bank of Canada cut rates twice in 2015 to stimulate the
economy amid an oil price slump, but the cheap borrowing costs
have helped fuel the housing boom and consumer debt.

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The bank is “accepting the economy is doing a little bit
better right now and taking that maybe half a step further” in
believing their forecast for economic growth will come to pass,
said Benjamin Reitzes, senior economist at BMO Capital Markets.

Still, the bank warned that the share of uninsured mortgages
is growing and some are showing riskier characteristics,
including longer amortizations and the use of secondary loans
and credit as buyers stretch to get into the expensive market.

It also said the greater use of home equity lines of credit
could be contributing to vulnerabilities, echoing concerns
raised by a consumer agency on Wednesday.

Rapid price gains in Toronto suggest the market has entered
a phase in which these “extrapolative expectations” are becoming
more pervasive and speculative buying is taking place, the bank
said in the report.
(Reporting by Andrea Hopkins and Leah Schnurr; editing by
Meredith Mazzilli and Diane Craft)