Royal Bank Review of Bank of Canada Review– Household Finances and Risk of a Housing Correction

The Bank of Canada Review recently came out with 4 papers relating to household debt trends, household borrowing and spending, fluctuation in house prices and household insolvency.  The papers focussed on the elevated levels of debt could make households "more vulnerable to adverse shocks".  The reports downplayed the risk of such a shock coming from a housing correction, noting that "the Canadian housing market has not exhibited the excesses seen in other countries where severe economic disruptions have occurred in recent years". 

One of the reports noted that people are using equity in their home to create additional availability of funds for personal consumption more than ever before.  If there was a 10% housing correction, this could result in a 1% decline in consumption in Canada which would be quite significant. 

Due to the low interest rates, high turnover of properties and expectations of increasing prices, the long-term trend has been for significant price increases above the trend line. 

Finally, the increasing indebtedness in the Canadian household has weakened their overall financial position and created a larger vulnerability to adverse economic shocks resulting from a correction in housing prices or a drop in the labour market.

David Onyett-Jeffries, an Economist with RBC Economics Research, Royal Bank of Canada, reviewed the reports and downplayed the potential for any household driven downturn.  RBC expects credit growth to continue to moderate both in the near term with only modest increases of interest rates in 2013.  They see no catalyst for a sharp correction in the labour or housing markets as a result of limited risk of a household driven downturn.

For a more detailed discussion, please see the following link:

http://www.rbc.com/economics/market/pdf/debt.pdf