Bank of Canada to citizens: Household debt could lead to home price reversal

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The Bank on Canada recently issued a statement warning Canadians about the increasing levels of household debt, saying consumers could experience a shock if house prices reverse as a result.

The increase in total household Canadian debt since 1999 primarily consists of home equity extraction, which increased from 2.2 percent of disposable income that year to a 9 percent peak in 2007.

"The evidence indicates that a significant share of borrowed funds from home-equity extraction was used to finance consumption and home renovation in Canada from 1999 to 2010," an article in the review on household borrowing stated. "Such indebtedness constitutes an important source of risk to household spending, since it makes households more vulnerable to a potential decline in house prices."

Housing prices have trended upward over the past 30 years in Canada thanks in part to declining long term interest rates, increased expectations of rising prices and the liquidity of the housing market. Canadian mortgage rates also play a significant factor in the nation's housing industry, and the looming housing bubble may put a strain on mortgages.

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