The risks posed by an overheated housing market and high household debt levels have increased in recent months, according to a new research note from Bank of Canada staff.

The report noted that imbalances in the housing market and risks tied to household debt levels represented financial vulnerabilities at the start of the crisis. And, those vulnerabilities “had the potential to amplify the devastating economic impacts of the pandemic and create additional stress across the Canadian financial system.”

Yet those negative consequences were prevented, largely due to unprecedented fiscal policy action and debt payment deferrals, the report said.

Now, the robust housing market is helping to drive the economic recovery.

“But it may also be intensifying housing market imbalances and household indebtedness,” the report warned. In particular, the research finds that both house price growth and mortgage indebtedness have risen in recent months, which “generally suggests these vulnerabilities have increased.”

Household debt has risen by almost 3.5% since the onset of the pandemic, the report said, with mortgage debt rising and consumer debt declining.

“Compared with a typical recession, the pandemic has had a very different impact on housing demand,” the report noted.

“The upper end of the income distribution—where the majority of homebuyers are found—has seen little disruption during the pandemic. This, combined with record-low mortgage rates, has resulted in relatively strong demand despite the broader economic downturn and a decline in population growth,” it added.

For example, data on the ratio of sales to new listings “suggests that the housing market is exceptionally tight,” the report said, adding that national housing price growth during the pandemic has been running at about three times the pre-pandemic rate.

Additionally, housing preferences have “shifted markedly” during the pandemic, with demand shifting away from condos in favour of single-family homes. The rise of remote working is also driving higher demand for rural and suburban areas.

“At present, it is difficult to gauge how long these shifts in preferences will last after the pandemic recedes,” the report said.

The Bank of Canada indicated that it “will continue to monitor these developments closely and will provide further updates in the next Financial System Review,” slated for May.