However, stretched valuations and some signs of overbuilding would expose the financial system to a sharp correction in house prices – which is a risk we’ve identified. The second is the elevated level of indebtedness among Canadian households. This leaves households vulnerable to an unemployment shock or a sharp rise in interest rates. The third vulnerability is our exposure to sizable potential external shocks.
An example is the significance of global commodity prices to our economy and financial system. The risks are viewed in the context of these vulnerabilities. The most important domestic risk is, as mentioned, a sharp correction in house prices. The probability of this risk materializing is low, given the expected strengthening of the global and Canadian economic recoveries.