Bank Of Canada Warns Canadians About A Debt Related House Of Cards

CANADIAN PRESS OTTAWA - Canadians are becoming increasingly vulnerable to a housing correction, exposing them to a perfect storm of high debt and falling assets, the Bank of Canada warns.

In a book of four research papers released Thursday, the central bank suggests many Canadians have constructed their finances on a house of cards, with ever rising home values the key and vulnerable support.

The bank economists point out that home prices have risen sharply in the past dozen or so years along with debt, as households needed both bigger mortgages to buy homes and used equity from higher home values to finance other purchases.

"These facts are interrelated, since rising house prices can facilitate the accumulation of debt," the report notes. "Households therefore experience a significant shock if house prices were to reverse."

It adds that falling home prices could have a "relatively large impact on consumption" as equity disappears and the ability of householders to borrow is diminished.

It calculates that a 10 per cent drop in home prices could generate a one per cent decline in consumption, which would slow economic growth.

TD Bank chief economist Craig Alexander said the fact the central bank devoted it's winter review on a single topic — debt — demonstrates how seriously it takes the issue.

You can read the entire story here. Take it from me, the Canadian recovery is as fragile as it gets.  My own business has felt the effects of the economic downturn for the last two years and It is increasingly harder to make ends meet as a family of 4 facing increasing fuel costs, heating costs, food costs and the skyrocketing cost of basic necessities.

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