House price ‘ shock’ possible for owners
OTTAWA — 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 per cent, fanned by low interest rates, there are concerns 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 wellbeing,” the bank said Thursday in a series of 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 said.
“These facts are inter- related, 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 a significant share of borrowed funds from home- equity extraction was used to finance consumption and home renovation in Canada from 1999- 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.”
The Bank of Canada has left its key interest at a near- record low of one per cent since September 2010.
Lower borrowing costs were intended to encourage spending and investment by consumers and business as the economy climbed out of the 2008- 09 recession.
Central bank governor Mark Carney, along with Finance Minister Jim Flaherty, have urged consumers not to borrow above a sustainable level.
Flaherty said Thursday “people need to be wise in how they look at things.”
“Interest rates are going to go up,” he said. “They have nowhere to go but up. So people need to ensure that they can afford higher mortgage interest, for example.
“It isn’t necessarily for everyone to have most expensive house they could buy, maxing out the 10- year mortgage they can get from a financial institution.”