Central Bank Targets Home-Equity Credit Lines

Published in

The steady climb in housing prices over the past decade has made it easier for Canadians to borrow against the value of their homes, leaving many families vulnerable to “a significant shock” if prices were to snap back, the Bank of Canada is warning. Governor Mark Carney and his policy team have long pointed to record levels of household debt as the chief domestic risk to the financial system and the wider economy, urging borrowers to resist the lure of ultra-low mortgages unless they can afford them once rates inch up, The Globe and Mail reported. In a series of research papers published Thursday, the central bank shows much of the growth in debt has come from a surge in home-equity lines of credit, which allow homeowners to finance renovations and other spending at reasonable rates. While this may be a predictable result of a long stretch of low borrowing costs, the central bank warned that it means a swift reversal in home prices could have a “relatively large impact” on consumer spending. “A fall in house prices decreases the value of collateral held by households, leading to a deterioration in the state of household balance sheets,” the central bank said, noting that many families “could therefore experience a significant shock if house prices were to reverse.” In one paper, the central bank says loans backed by homes made up almost 50 per cent of all consumer credit last year, compared with 11 per cent in 1995. In another, a simulation indicates a 10-per-cent drop in home prices could translate into a 1-per-cent decline in consumption. Read more.