Home-Equity Extraction Up, Savings Down

In the April 2012 Monetary Policy Report released today, the Bank of Canada has found that “the extraction of housing equity through borrowing has increased substantially over the past decade” while savings rates are at historic lows.

In Q4 2011, the personal savings rate in Canada was 3.4% which was close to its average level of the past 10 years, but much lower than it was previously in Canada.

As the chart below shows, since 1961 the savings rate has averaged about 9%, or if we were to  exclude the period of high and variable inflation from ~1975-1985, the savings rate still averaged roughly 6.5%

Source: Bank of Canada (click to enlarge image)

The Bank of Canada has found that while savings are at lows, the extraction of housing equity through borrowing “has increased substantially over the past decade, accounting for a large share of the increase in household debt and contributing importantly to consumption.”

The warning in all this?

Home equity extracted through additional borrowing cannot fund higher consumption indefinitely. Once the proportion of homeowners that access higher housing wealth through Helocs reaches its peak, the personal savings rate can be expected to rise. This implies a lower level of consumption relative to income. With less equity in their homes, households would also be more exposed to a decline in house prices, which could further dampen consumption.

Source: Bank of Canada (click to enlarge image)

One response to “Home-Equity Extraction Up, Savings Down

  1. Below is a key quote from Bank of Canada Governor Mark Carney’s press conference in Ottawa:


    “Monetary policy is not the first line of defence here. It’s not the second, it’s not the third — it’s the last line of defence. It’s a blunt instrument, so to try to target it into this specific issue is not where one goes first. A number of measures have been taken by authorities and they include: moving up the capital ratios of the banks faster than virtually everyone else in the world, the Superintendent has done that. Tightening the mortgage underwriting standards, the HELOC underwriting standards. Three separate tightenings of mortgage insurance standards … the last thing I’ll say is just to reassure what you would expect, is that the officials from the Superintendent to the Bank of Canada, to the government of Canada are co-operating very closely on this issue. We will each, within our own responsibilities, take appropriate actions as needed.”


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