The Bank of Canada has renewed its warning that debt-laden Canadians could face a “significant shock” if housing prices fall.
With the ratio of household debt to income reaching 153%, fanned by low interest rates, there are concerns that some consumers could soon be at the breaking point.
“Households are a central component of Canada’s economy and, hence, its financial stability. Although Canada has weathered the global turmoil relatively well, the robustness of domestics household finances remains an important determinant of the country’s economic and financial well-being,” the bank said Thursday in a series of special reports.
The Bank of Canada Review focuses on household debt and changes in the value of Canadian’s “single-most important asset” — their homes.
While there has been a steady rise in the ratio of household debt to personal disposable income, house prices have been steadily increasing since 2000, the review says.
“These facts are interrelated, since rising house prices can facilitate the accumulation of debt. Households could, therefore, experience a significant shock if house prices were to reverse,” it said.
“The evidence indicates that a significant share of borrowed funds from home-equity extraction was used to finance consumption and home renovation in Canada from 1999 to 2010. Such indebtedness constitutes an important source of risk to household spending, since it makes households more vulnerable to a potential decline in house prices.”
No doubt that Canadians have been extracting more equity from their homes over the years. These graphs are from the Bank of Canada report. Highly recommend reading the report if one has the time.
Click here to read it.