This article appeared in the Economic Times on February 24th, 2012.
OTTAWA: Canadian homeowners are loading themselves with too much debt and face serious problems if house values start to drop, the Bank of Canada warned Thursday.
For months, some economists have warned that Canada is in the middle of a housing bubble, with prices in many cities doubling in the past five years. House prices are now out of reach of most working and professional families in the country’s four largest major cities.
“There has been a steady rise in Canadian household indebtedness,” the Bank of Canada said in the winter issue of the Bank of Canada Review, a quarterly publication of academic articles.
“Households could therefore experience a significant shock if house prices were to reverse.”
A large correction in the housing market would hurt the Canadian economy by having “a relatively large impact on consumption”, Xinhua quoted the report as saying.
Still, the bank said other countries have seen worse housing issues.
“The Canadian housing market has not exhibited the excesses seen in other countries,” the bank said in the Review.
The bank says consumer spending pulled Canada out of recession in 2009. Unlike the US, Canada did not see a major drop in housing prices in the last recession, and house prices have continued to grow since then.
Canadian home buyers have been spurred on by easy credit and low interest rates, with banks offering mortgages at historically low rates below 3 percent. The ratio of mortgage debt to disposable income has increased to almost 100 percent from about 50 percent over the last 30 years, the report said.