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This special report, “Household Finances and Financial Stability,” examines recent Bank of Canada research into two interrelated facts: the steady increase in Canadian household indebtedness in recent decades, and the upward trend in real house prices in Canada since 2000. Rising house prices could lead to the accumulation of debt, and abrupt movements in either factor can influence the financial health of households, which are a central part of Canada’s economy.

Highlights from the 2011- 2012 review:

  • The aggregate debt-to-income ratio of Canadian households has trended upward over the past 30 years. Both mortgage and non-mortgage (consumer) credit have contributed to this increase.
  • The sizable increase in the ratio of household debt to income in Canada over the past decade has coincided with a period of sustained strong growth in house prices. The main driver of the rise in household debt has been home-equity extraction—household borrowing against equity in existing homes through increases in mortgage debt and draws on home- equity lines of credit.
  • House prices in Canada have experienced a steady annual increase for more than a decade. Understanding the key factors behind this price rise is important for assessing the implications for future growth in output and inflation and the risks to financial stability.
  • Since 1999, the level of indebtedness of Canadian households has increased from 110 per cent to 150 per cent of personal disposable income, making them more vulnerable to shocks that will lead to insolvency. There may be significant implications for the financial system if a systemic shock leads to reduced access to credit.
  • Bank of Canada Review – Winter 2011-2012