Newspaper article The Canadian Press

Canada Keeps AAA Rating, but at Risk from Household Debt, House Prices: Moody's

Newspaper article The Canadian Press

Canada Keeps AAA Rating, but at Risk from Household Debt, House Prices: Moody's

Article excerpt

Moody's warns about Canada's household debt

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OTTAWA - Canada is maintaining its triple-A credit rating thanks to a steady economic outlook, but the country also faces potential risks amid mounting household debt and climbing house prices, Moody's Investor Service said.

The U.S. credit rating agency said in a report Monday that Canada earned the top grade through its "relatively solid economic performance," due to its sound banking system, relatively low government debt and a projection to balance the books following a series of deficits.

"After a recession at the time of the global financial crisis, the economy recovered and continues to show positive momentum, supporting improvement in government finance," the Moody's assessment said.

However, the research also zeroed in on possible economic threats.

The report said Canada suffers from high household debt and a "particularly inflated" housing market in some big-city areas. It warned how both continue to rise.

"This combination presents a potential risk to the banks and to the federal government directly, as it guarantees a considerable portion of mortgages," said the report, co-authored by Steve Hess and Dmytro Kulakovskyi.

For years, both the Bank of Canada and the Finance Department have warned Canadians about amassing too much debt.

But both Bank of Canada governor Stephen Poloz and Finance Minister Joe Oliver have downplayed the susceptibility of the Canadian housing market, even though Poloz still views it as the top domestic threat to the economy. Oliver and most analysts have predicted a soft landing for the real-estate market.

Moody's offered a gloomier take on the situation.

"With no signs of a soft landing for the housing market in sight, we believe that this increased vulnerability presents the largest downside risk to our medium-term forecast," the report said.

In the summer, U.S. financial agencies Fitch Ratings and Morningstar issued separate warnings about the Canadian housing market, saying it was overpriced and at risk of a correction.

On Monday, the Moody's report said Canada's expected interest-rate hikes over the coming years will boost the cost of borrowing and apply pressure to housing prices. …

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