The steady climb in housing prices over the past decade has
made it easier for Canadians to borrow against the value of their homes,
leaving many families vulnerable to "a significant shock" if prices were to
snap back, the Bank of Canada is warning.
Governor Mark Carney and his policy team have long pointed
to record levels of household debt as the chief domestic risk to the financial
system and the wider economy, urging borrowers to resist the lure of ultra-low
mortgages unless they can afford them once rates inch up.
In a series of research papers published Thursday, the
central bank shows much of the growth in debt has come from a surge in
home-equity lines of credit, which allow homeowners to finance renovations and
other spending at reasonable rates. While this may be a predictable result of a
long stretch of low borrowing costs, the central bank warned that it means a
swift reversal in home prices could have a "relatively large impact" on
"A fall in house prices decreases the value of collateral
held by households, leading to a deterioration in the state of household
balance sheets," the central bank said, noting that many families "could
therefore experience a significant shock if house prices were to reverse."
The research papers do not include policy prescriptions, but
they underscore concerns about the ability of some consumers to keep spending
at a time when Mr. Carney and his officials are counting on domestic purchases
to power the economy amid slower demand for exports.
In one paper, the central bank says loans backed by homes
made up almost 50 per cent of all consumer credit last year, compared with 11
per cent in 1995. In another, a simulation indicates a 10-per-cent drop in home
prices could translate into a 1-per-cent decline in consumption.
Mr. Carney, whose next interest rate decision is on March 8,
has shown increasing discomfort with the effects of his low borrowing costs on
some households' spending, but the shaky economic climate has kept him from
Finance Minister Jim Flaherty, meanwhile, said on Thursday
in Toronto that authorities are keeping an eye on the hot condominium market in
some cities, and urged borrowers to resist buying "the most expensive house
they can possibly buy." At the same time, he said he is encouraged by "some
moderation of late" in Canadians' borrowing.
The central bank noted in its research that while income and
population growth account for some of the gains in house prices over the past
30 years, more recently other variables have played roles, such as low mortgage
rates and unrealistic expectations that prices will keep rising.
Also, the bank published data showing that younger Canadians
are more debt-strapped than Canadians of the same age were just over a decade
earlier: In 2010, the mean after-inflation debt load of a typical household led
by people aged 31-35 was $120,000, up from $75,000 in 1999.
"Given the increase in household indebtedness, the exposure
of households and the financial system to fluctuations in house prices has
increased markedly," the bank said.
Still, the bank was careful to add that Canada's housing
market has not yet shown signs of "the excesses seen in other countries," such
as the United States, where the subprime mortgage market imploded in 2008,
triggering the global financial crisis.
Most economists say that while Canadian home prices are
poised to stabilize, a backward correction or outright crash does not appear
"The idea [of the research papers] is if there is a negative
hit to home prices, let's say a U.S.-style shock and decline, then that would
have a significant negative impact on the economy, and for households," said
David Onyett-Jeffries, an economist with Royal Bank of Canada. "However, they
don't necessarily view that such a shock in housing is likely to occur."