Bank of Canada warns European crisis could have substantial impact on Canada

OTTAWA – The Bank of Canada continues to warn that the high level of household debt and overvalued real estate in this country have left the economy vulnerable if a financial shock erupts in Europe.

The country’s central bank says Canadian households generally have too much of their net worth tied to real estate values, which it says are overvalued.

It notes segments of the housing market that have a persistent oversupply — such as condos in Toronto — face a higher risk of a price correction.

Using a hypothetical stress test, the bank says a three per cent increase in unemployment — about the same as occurred in the recent recession — would almost triple the proportion of indebted households that would go into arrears.

The current rate is currently about half a per cent and could rise to 1.3 per cent under that scenario.

The Bank of Canada is careful to point out it isn’t predicting a global crisis like the one in 2008 but suggests such a failure could not be contained to Europe.

The findings are contained in the central bank’s latest financial system review.

The Bank of Canada concludes that the risk of a European financial meltdown that ripples around the world have returned to the elevated levels of last December.