OTTAWA (Reuters) – Soaring consumer debt and a robust housing market pose an “elevated” risk to Canada’s financial stability, but the overall level of danger has fallen from six months ago, the Bank of Canada said on Tuesday.

“In Canada, the high level of household debt and imbalances in the housing sector are the most significant domestic vulnerabilities to address,” the central bank said in its semi-annual Financial System Review.

These risks could make Canadians vulnerable to an adverse macroeconomic shock and a sharp correction in the housing market, it said.

The bank cut its overall level of risk to the country’s financial system to “elevated” from “high”, citing among other factors continuing stabilization in the euro zone and the start of a modest recovery in that region. Despite the brighter outlook for Europe, it remains the biggest threat to Canada, the bank said.

Tuesday’s report marked the first time the bank has eased its overall risk level since it began classifying risk in this way in December 2011.

The overall level of risk could fall further with continued progress on banking sector reform and other reforms in the euro area. That said, the level could increase if the current low interest rate environment in advanced economies persists longer than anticipated, it added.

The bank listed risky financial investments in a prolonged period of low interest rates as a “moderate” risk and added financial vulnerabilities in emerging markets as another moderate threat.

Canada’s housing market has been a source of concern for policymakers and economists since a property boom helped fuel the economy’s rebound from the 2008-09 recession.   Continued…