Canadian Homeowners Have Extracted Hundreds Of Billions In Equity

Posted by BetterDwelling

Share on Facebook

Tweet on Twitter

Oliver Heights

The Christopher Columbus of central banks has discovered what everyone knows – Canadians are burning equity. A LOT of it. Bank of Canada (BoC) staff have concluded homeowners are extracting a lot of home equity. Consumption and the economy are boosted by the home equity extracted. However, the more significant the sum extracted, the more vulnerable the economy becomes to a housing correction.

The Collateral Effect

The withdrawal of home equity tells us a lot, but today we’re focusing on the collateral effect. This is when people extract home equity to spend, as home prices rise. What’s the point of being a multi-millionaire bungalow owner, if you can’t have a few toys – right? This spending helps to propel the economy. It’s a twofer – home prices rise and the economy gets a boost. Score!

BoC researchers warn, this is a problem if the collateral effect contributes meaningfully. If home prices fall, the equity-based spending disappears. Combine that with slower sales, which leads to lower spin-off economic activity. A decline in home prices is no longer just a hit to paper-based wealth. It has a significant impact on the general economy, and employment. Oxford Economists have been discussing the collateral effect’s role in the US and UK, since the Great Recession….CLICK for complete article