The Bank of Canada says the possibility of a sharp correction in real estate prices has increased rapidly in for markets like Vancouver and Toronto, in its in its biannual Financial System Review.

But the Bank says, “While household vulnerabilities have moved higher, the ongoing economic recovery in Canada means the overall risk [of a correction] remains the same.”

It lists two main vulnerabilities related to Canadian households: the elevated level of household indebtedness and imbalances in some regional housing markets—a third vulnerability is the fragility of fixed-income market liquidity, which impacts investors.

Read: Despite “housing crisis,” Canada lacks national strategy: UN

Regarding regional housing differences, BoC explains, “Job losses have increased financial stress for some highly indebted households in the regions most affected by low commodity prices.”

However, in the Greater Vancouver and Toronto areas, “rapidly rising house prices and strong mortgage credit growth are increasing the share of highly indebted households. In these two markets, it is unlikely that economic fundamentals will justify continued strong price increases.”

Read: Toronto’s real estate market gets even hotter

As a result, says BoC Governor Stephen Poloz, prospective homebuyers and their lenders in Toronto and Vancouver shouldn’t expect current housing prices to persist and should look at more than recent real estate performance when considering home purchases.

The Bank’s review also reiterates the risks of: a sharp increase in long-term interest rates; stress from emerging markets like Chin; and prolonged weakness in commodity prices.

When it comes to real estate, the report says foreign demand is one reason for price growth in Vancouver and Toronto. But it adds that it’s currently difficult to measure the impact of foreign investment.


It’s time for a ‘flipping tax’ on foreign investors

China is buying Canada: Inside the real estate frenzy

Canadians struggling to pay bills as housing costs rise