Canada's housing market is stabilising after the heated conditions of the past several years, but progress will be slow, the Bank of Canada said, as it also warned that record-high household debt levels would persist this year.
In a semi-annual report, the bank also said the risks to the economy posed by debt and the housing market remain unchanged at "elevated" levels, even though the situation appears to have improved over the past six months.
"The level of indebtedness is still elevated, and the bank's stress-test simulations suggest that households are vulnerable to adverse economic shocks," the bank said in its "Financial System Review" report.
"These imbalances, which have been built up over many years, will take some time to correct. While a gradual unwinding of imbalances is expected, there is a risk of a sharper correction," the bank said in the first such report to be published under its new governor, Stephen Poloz.
Canada's post-recession housing boom, fuelled by historically low borrowing costs, has long worried the government and the central bank, which fear Canadians will not be able to afford their mortgages when interest rates rise.
The housing market began to cool in mid-2012 after Ottawa tightened mortgage lending rules for the fourth time. Official data on Thursday showed new-home prices rose a relatively tame 2 per cent in the year to April.
Most economists forecast a soft landing for the housing market, while a few still are sounding the alarm on what they see as pending disaster.
Mazen Issa, economist at BMO Capital Markets, said he agreed with the central bank's view on the trend in housing.
"Some of the work we have done suggests that the impact of tighter mortgage regulations is only transitory; nonetheless, we see the housing market as stabilising over the balance of the year and construction activity growing more in line with demographic fundamentals," he said in a note to clients.
The Bank of Canada report said overall risks to the Canadian financial system had diminished, but still remain "high", the same risk classification it designated six months ago. The top risk level of "very high" was reserved for the euro-zone crisis, although the bank said that was down slightly due to the policies of the European Central Bank.
The No1 domestic risk comes from household finances and the housing market.