The Bank of Canada is warning of an impending housing price correction, putting Canadian mortgage holders at risk.
In a four-part series of papers, economists at the bank said a drop in home prices could also impact overall consumption and the Canadian economy.
In one of the reports, authored by Brian Peterson and Yi Zheng, the bank cautioned that the risk for fluctuations in house prices has “increased markedly.”
The authors noted that house prices have risen sharply in most parts of the country over the past decade, with house prices reaching a historically high level in relation to income. The percentage of household debt to income has risen from 110 per cent in 1999 to 153 per cent currently.
“These facts (rising debt and house prices) are interrelated, since rising house prices can facilitate the accumulation of debt,” said guest editor Graydon Paulin, introducing the four papers. “Households could therefore experience a significant shock if house prices were to reverse.”
The bank also suggested at 10 per cent drop in home prices in the near future could result in a 1 per cent drop in consumption, negatively impacting the overall economy.
A “significant” share of borrowed funds from home-equity extraction in the past decade was used to finance consumption and home renovation, notes the report.
“Such indebtedness constitutes an important source of risk to household spending, since it makes households more vulnerable to a potential decline in housing prices,” one paper states.
While rising population and income gains over the past 30 years have mostly related to the rising house prices, other factors were taking more prominence in the past decade, such as lowered interest rates, higher expectations for house prices and the liquidity of the housing market.
Those rock-bottom rates may have encouraged some Canadians to buy bigger and pricer homes than they otherwise would have been able to afford, Finance Minister Jim Flaherty suggested Thursday.
“It isn’t necessary for everyone to have the most expensive house possible,” he told reporters in Toronto. “People have to be wise (and interest rate) “have nowhere to go but up.”