The prospects of a housing market correction in B.C. don’t bode well for the province’s economic growth.
With residential real estate sales hitting decade lows, it’s only a matter of time before prices start dropping.
If they start spiralling downward long enough, home-owning consumers could start limiting their discretionary spending, which would hurt key job-creating sectors like retail and restaurants.
It’s been suggested that many B.C. households weathered the financial crisis and subsequent recession comforted in part by a relatively buoyant housing market. While housing prices dipped during the global financial crisis, they recovered quickly and then continued to rise, especially in the single-family home segment.
Concerns over slow income growth were partially offset in households that were able to take equity out of their homes and spend through their home-equity lines of credit (HELOC). A recent Bank of Canada study found that more than 20% of a family’s HELOC has been used to finance household consumption.
Some might have also applied for a HELOC to use as a financial cushion. A November 2011 Leger Marketing survey found that about a quarter of households with a HELOC had not used it. More than a third who had a HELOC said they planned to use it for home renovations, while 22% were going to use it for basic living expenses or for a vacation.
With the Department of Finance and Canada’s central bank clamping down on HELOCs and other forms of household debt in recent years, the era of continued spending on borrowed money might be numbered. That would suit Bank of Canada governor Mark Carney, who has continued to warn Canadian households about record high debt levels. But recent changes, like shrinking amortization periods, could erode the value of a key household asset and threaten to make even more households financially vulnerable.
With B.C. already one of Canada’s most vulnerable to interest rate and housing market shocks, further tightening might exasperate the very problem policy makers are trying to avoid.
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