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BoC warns of potential home price correction

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guest | 23 Feb 2012, 10:10 PM Agree 0

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% in 1999 to 153% 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% drop in home prices in the near future could result in a 1% 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.
  • Carol Bell | 24 Feb 2012, 07:21 PM Agree 0
    What about the effect on municipalities' reduced revenue should MPAC realign house assessments according to today's market. Currently MPAC has assessed homes at 2008 prices which are much higher than today's market value, resulting in homeowners currently paying higher property taxes.
  • Rob | 24 Feb 2012, 08:09 PM Agree 0
    This is nothing but unfounded scare mongering that has been around for years. Yes, it could happen but how about some data to back it up? Drives me crazy when people say if this happens and that happens then....this other terrible thing could happen too!

    Give people the facts and let the data speak.

    Look at the words being used "The bank also suggested at 10% drop in home prices in the near future could result in a 1% drop" How about they "suggest" a 5% bump in prices in the "near" future "could" result in a x% increase? Evidence in the market shows home prices continue to appreciate as immigration swells the population, historic low interest rates encourages spending and years of home renovations due to gov't stimulus increases home values.

    Oh, and when mentioning DTI ratio's be sure to post Canada as well as other countries to put it in perspective since this isn't a well known ratio in the general public.
  • Richard | 24 Feb 2012, 09:25 PM Agree 0
    Sooner or later the interest rates will rise, if we get back to normal rates of 7-8% mortgages there will be a huge adjustment in pricing.
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