Bank of Canada On Rising Debt & House Prices

The Bank of Canada released a special report entitled, “Household Finances and Financial Stability,” which examines two interrelated facts: the steady increase in Canadian household indebtedness in recent decades, and the upward trend in real house prices in Canada since 2000. Rising house prices could lead to the accumulation of debt, and abrupt movements in either factor can influence the financial health of households, which are a central part of Canada’s economy.

The entire report is here

Below is the breakdown on some key research

Medium-Term Fluctuations in Canadian House Prices
Bank of Canada Review Article by Brian Peterson, Yi Zheng

Summary: This article draws on theory and empirical evidence to examine a number of factors behind movements in Canadian house prices. It begins with an overview of the movements in house prices in Canada, using regional data to highlight factors that influence prices over the long run. It then turns to the central theme, that there are medium-run movements in prices not accounted for by long-run factors. Drawing on recent Bank of Canada research, the article discusses several factors behind these medium-run movements, including interest rates, expected price appreciation and market liquidity.

Household Borrowing and Spending in Canada
Bank of Canada Review Article by Jeannine Bailliu, Katya Kartashova, Césaire Meh

Summary: Understanding how much of the increased debt load of Canadian households has been used to finance household spending on consumption and home renovation is important for the conduct of monetary policy. In this article, the authors use a comprehensive data set that provides information on the uses of debt by Canadian households. They first present some facts regarding the evolution of Canadian household debt over the period from 1999 to 2010, emphasizing the increased importance of debt flows that are secured by housing. They then explore how Canadian households have used their borrowed funds over the same period, and assess the role of these borrowed funds in financing total consumption and spending on home renovation. Finally, they examine the possible effects of a decline in house prices on consumption when housing equity is used as collateral against household indebtedness.

What Explains Trends in Household Debt in Canada?
Bank of Canada Review Article by Allan Crawford, Umar Faruqui

Summary: Similar to the experiences in many other countries, household indebtedness in Canada has exhibited an upward trend over the past 30 years. Both mortgage and non-mortgage (consumer) credit have contributed to this development. In this article, the authors use microdata to highlight the main factors underlying the strong trend increase since the late 1990s. Favourable housing affordability, owing to factors such as income growth and low interest rates, has supported significant increases in home-ownership rates and mortgage debt. Much of the rise in consumer credit has been facilitated by higher housing values (used as collateral for loans) and financial innovation that makes it easier for households to access this credit.

Related news article:

Globe & Mail: Bank of Canada issues fresh warning on debt

2 responses to “Bank of Canada On Rising Debt & House Prices

  1. Given the low interest rates, the house price is hard to decline but up.

  2. Hi Dan, I don’t think it is as simple relationship as that. Given the importantce of exports to the Canadian economy, interests are kept low to keep our exporters competitive in international markets. Given the race to the bottom on various international currencies, this trend of low interest rates will not reverse anytime soon. But interest rates are only one variable that dictate affordability and hence prices. Unemployment rate and level of income are very important determinants of what happens to prices as well as access to credit.
    If interest rates, unemployment rate, and incomes stay steady, mortgage tightening alone can influence the level of housing prices. If, as widely reported, the finance minister restricts amortization to 25 years from 30 years, affordability will be impacted. The feds may also increase downpayment requirements, further shutting out a certain percentage of first time buyers.
    Those scenarios don’t even account for risks of European contagion to our economy, maybe not directly but via Chinese slowdown given their reliance on their European export markets. The world is tightly interconnected and complex so a set of variables moving in tandem will determine the overall health of our economy – and that, I think, is very difficult to determine. We may get lucky once again or we may not.

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