As the economy improves, there will be a reduction in the risks related to current high household and mortgage debt, according to the Bank of Canada's just-released December 2014 Financial Systems Review.
The bi-annual report, which focuses specifically on risk factors for the Canadian economy, said that although the risk of an economic shock to Canadian households – such as an economic event causing a recession and sweeping job losses, making mortgage repayments difficult – was "elevated", it was nevertheless at "low risk of materializing".
The bank added that the risk remained rated as elevated because, due to the current high levels of household and mortgage debt, if it were to materialize, "the effect on the economy and financial system could be severe."
It also said that the risk of a sharp rise in interest rates causing a similar shock was rated as "moderate" as its effects could be moderately severe but its probability is low.
The report said, "The Bank continues to expect a constructive evolution of imbalances in the household and housing sectors as the economy improves."
To read the report, click here.
