Thursday, October 01, 2009

A Meaty Read

The Bank of Canada produces some great analysis that I read from time to time. This paper was quite interesting.

A quote:

From an aggregate perspective there are a number of reasons to think that house prices
could ináuence consumption decisions in Canada. First, residential structures and land
account for a large share of Canadian household sector wealth. Sixty eight per cent of
Canadian households own a home and for many it represents their largest asset. Second,
house price growth is associated with higher household borrowing. The positive correlation
between consumption and house prices may be related to housingĂ­s role as collateral. Between
2000 and 2007 the real price of existing homes increased by 52 per cent. At the same time,
the ratio of household debt to GDP rose dramatically from 58 per cent in 2000 to 76 percent
in 2007. By 2007 roughly 80 per cent of Canadian household debt was secured by real estate.

8 comments:

gprofessionals04 said...

This is really strange, prices of homes increased by 52% and at the same time Household debts increased by almost 80%. I read the research paper provided in the link of this post; it was interesting research.
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RentingSucks said...

I guess if things slide sideways long enough inflation will take care of this. Otherwise it will be what I call a "double negative" people will have to curtail their spending and then curtail it again to start to pay back their debt. If things do slide sideways it will just be a single negative where people just have to curtail their spending. Assumming of course they stop their spending ways once house prices stop their climbing.

I have actually had a conversation with a homeowner where I mentioned how I didn't have any debt and paid off my credit cards. They said that they used to be like that then figured what the heck we're building equity. It was just that clear to them.

david said...

RentingSucks:

I have always wondered if people even know what building equity means. If you pay off a house, put money in the bank or buy lumps of gold you are building equity all the same. It's just in different forms.

jesse said...

Banks build equity too, through interest payments on debts. Seems like more than one entity is building equity but there's still only one paycheque at the source.

mikyung said...

"Banks build equity too, through interest payments on debts. Seems like more than one entity is building equity but there's still only one paycheque at the source."

You are right in that there clearly must be some sources other than paychecks(local). Foreign cash is one such source.

jesse said...

"You are right in that there clearly must be some sources other than paychecks(local). Foreign cash is one such source."

I don't know about that but the comment was on how people were "building equity" by paying off debt. These foreign sources would already have had equity before buying property. There's little additional equity on which to "build".

A large proportion of funds for property investment funds come from outside the province, either in the form of foreign savings or debt issuance. Sometimes people forget where borrowed money comes from.

RentingSucks said...

Lemmings or geniuses. Can't tell right now:

http://tinyurl.com/yage94q

RentingSucks said...

At least there might be some semblance of intelligence:

http://tinyurl.com/y96phxm

I still don't get the promise of low rates for a year. Weren't they trying to juice the housing market? Now they think they juiced it too much? Kind of confusing.

Also what happens if housing and the dollar continue to rise. What do you do to rate then huh? Kinda like a rock and a hard place.

Interesting times indeed.