Posted by genieSABRE on Feb 28, 2012
Problems With Household Debt:

Problems With Household Debt:

Bank Of Canada Warns Home Equity Loans

Pose Threat To Financial Security


Source: The Canadian Press
Publish: Feb 29, 2012

OTTAWA – Canadians are becoming increasingly vulnerable to a housing correction, exposing them to a perfect storm of high debt and falling assets, the Bank of Canada warns.

In a book of four research papers released Thursday, the central bank suggests many Canadians have constructed their finances on a house of cards, with ever rising home values the key and vulnerable support.

The bank economists point out that home prices have risen sharply in the past dozen or so years along with debt, as households needed both bigger mortgages to buy homes and used equity from higher home values to finance other purchases.

“These facts are interrelated, since rising house prices can facilitate the accumulation of debt,” the report notes. “Households therefore experience a significant shock if house prices were to reverse.”

It adds that falling home prices could have a “relatively large impact on consumption” as equity disappears and the ability of householders to borrow is diminished.

It calculates that a 10 per cent drop in home prices could generate a one per cent decline in consumption, which would slow economic growth.

TD Bank chief economist Craig Alexander  said “I worry more about the economy. I worry that if you have a drop in home prices and you wind up with consumers struggling to de-leverage, it will lead to an economic contraction.”

The bank does not suggest a U.S.-style housing collapse for Canada is in the offing, nor does Alexander. A big part of the problem south of the border was due to easy credit conditions, something Canadian banks have avoided.

The bank’s economists are clearly concerned that debt to household equity has risen as well even as home prices have soared.

Part of that is well grounded on growing incomes, it says, but part is also due to super-low interest rates and unrealistic expectations that home values will keep rising.

One paper issued by the central bank suggested that home prices have been influenced not only by low mortgage rates but also on expectations that values will keep rising. History shows that’s a bad bet, the paper states.

The Bank of Canada also notes that increasing debt levels have made Canadians more vulnerable to bankruptcies and insolvencies. Since 2000, about 100,000 Canadians a year have filed for insolvency or bankruptcy, triple the number in the 1980s.

But the bank points out that in most cases, these were not homeowners. The vast majority are renters and the unemployed who have taken on too much in the way of credit card debt and bank loans.


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Jack Layton on Household Debt

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