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%
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.