The Bank of Canada says home prices could be overvalued by as much as 30%, but it continues to believe the market is headed for a soft landing.
The overall risks to Canada’s economy from external factors, such as higher U.S. interest rates, slower growth in China or renewed problems in the euro-zone, are lower than they were six months ago, the bank said Wednesday in its twice-yearly Financial System Review.
At the same time, Canada’s economy shows signs of strength, including higher non-energy exports and pockets of new job creation, in response to stronger U.S. growth and a falling Canadian dollar, the bank said.
The recent decline in oil prices is a concern, the bank also said, though it’s too early to tell how much of an impact it will have on the economy.
For now, lower prices at the pumps are "a Christmas gift" to consumers, Governor Stephen Poloz said at a press conference in Ottawa, noting they will help push down Canada’s inflation rate.
Generally, lower oil prices are good for global economic growth, Poloz added.
However, since Canada is an oil-exporting nation, lower prices will initially put a dent in its growth rate, Poloz also said. The price of crude is now down by a third, which could shave a third of a percentage point off Canada’s economic growth next year, he said.
"We were predicting growth in the 2% to 2.5% area. It’s still in that zone," he said.
Oil prices have been falling on lower global demand and increased supply. West Texas Intermediate crude plunged 4.5% to settle at $60.94 U.S. a barrel on Wednesday, while Brent fell below $65 U.S. for the first time since 2009.
In the meantime, high consumer debt loads and imbalances in the housing market remain a concern, the Bank of Canada said.
The bank is also concerned about the growth of higher-risk loans, including auto loans and sub-prime mortgages.
The greatest risk comes from the inability of stretched households to service their debt should they face a sharp decline in their incomes or a sharp rise in interest rates, which could trigger a correction in house prices, the bank warned.
The probability of this happening is low, but if it did, the effect on the economy would be severe, the bank also said.
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