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Bank of Canada Governor Stephen Poloz speaks with reporters in Ottawa on Jan. 22.

Adrian Wyld/THE CANADIAN PRESS

The Bank of Canada is quantifying the excess in Canada's hot housing market for the first time, estimating that prices may be overvalued by as much as 30 per cent.

The bank's estimate is based on a new model developed by central bank officials in recent months and detailed Wednesday in its twice-yearly report on threats to the Canadian financial system.

The bank said Canadian house prices have been overvalued by at least 10 per cent since 2007 and may now have overshot by anywhere from 10 to 30 per cent, relative to incomes and interest rates. The range is significantly higher than estimates by the International Monetary Fund, which put the figure at 10 per cent, and Canada Mortgage and Housing Corp., which judges there is a "moderate degree of overvaluation."

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That doesn't come as a shock to house hunters in cities such as Toronto and Vancouver, where still-rising values have pushed the average price of detached homes toward the $1-million mark.

Justin Dumitrescu and his family had been looking for a home in Toronto at that price range for years, hoping prices would come down. They finally took the plunge and bought a three-bedroom home.

"We thought we would have an opportunity during the downturn, and we were kind of waiting for the perfect window and then it never happened," said Mr. Dumitrescu, who works in the finance industry. "In this market … you really have to make sacrifices on a lot of things."

Bank of Canada Governor Stephen Poloz acknowledged on Wednesday that "some financial vulnerabilities appear to be edging higher" – most notably frothy house prices and increasingly heavy household debt levels.

Toronto Re/Max Realtor David Batori, who has worked as a Realtor in the Toronto area for 25 years, said it was incredibly challenging for prospective home buyers, who often lose bidding wars to rival buyers ready to pay more. "And then essentially, because they are unable to afford homes in Toronto and they want more space, they are driving demand to the periphery of the city," Mr. Batori said.

In its report, the bank expressed particular concern that high prices are pushing many Canadians to take on too much debt.

Forty per cent of all household debt in the country is now held by borrowers who have a total debt-to-income ratio of more 250 per cent. The Canadian average is 164 per cent, a record high. These heavily indebted households now make up 12 per cent of all borrowers, double their share in 2000.

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But Mr. Poloz pointed out that Canada's financial system is actually at less risk today than it was six months ago to "adverse shocks," such as a housing crash or a spike in interest rates. Overall "stability risk" was deemed to be unchanged from June.

Indeed, a CIBC poll being released Thursday found that 8 out of 10 Canadians are unconcerned about their debts and 85 per cent are taking advantage of low rates to trim their burden.

Mr. Poloz said the central bank still anticipates a "soft landing" in housing, as economic growth and rising incomes gradually catch up to today's high home prices.

And he rejected the suggestion that the bank should hike interest rates to cool the housing market. "We don't see ourselves as targeting housing markets in any way," he told an Ottawa news conference following the release of the report.

Most economists don't expect the central bank to start raising rates until some time next fall.

Mr. Poloz also played down the likelihood that tumbling oil prices would be the trigger for an unwinding of the housing market. Indeed, they are a windfall for some economic drivers. "The price of gas is like a Christmas gift, now," he added.

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The bank's report also pointed to a growing appetite in Canada for subprime and uninsured mortgages, as well as risky auto loans.

"A more worrisome aspect of this trend is that a sizable proportion of new uninsured mortgages are being issued to riskier borrowers," according to the bank's report.

About 35 per cent of new, uninsured, mortgages lent by smaller federally regulated banks since the end of 2012 could be considered "non-prime," the report said. The bank said other less-regulated institutions are also getting into the subprime market, which was famously blamed for helping trigger the financial crisis in the United States in 2008.

The share of mortgages in Canada that are considered subprime – generally considered high-rate loans to riskier borrowers – remains at roughly 5 per cent, compared to a peak of nearly 24 per cent in the United States before the crash.

The report said the main risks to Canada's financial system are the same as in June – the possibility of a housing crash, an interest rate spike, financial stress in Europe and a banking crisis in China.

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