December 25, 2016

Canada's central bank has ramped up its warnings about heavily indebted households

ZeroHedge sums up what worries the Bank:

1. As the Bank has pointed out already, households are highly indebted and house prices are rising at an unsustainable rate, though as Slive observes, people can often cope with these vulnerabilities for an extended period.

2. That is, until an economic shock triggers a negative chain of events. For instance, a severe recession would lead to “a sharp increase” in unemployment.

3. A lot of households, especially those carrying the heaviest debt loads, would have trouble meeting their debt payments. As a result, some households would start to default on their loans, and in turn, banks and trust companies would foreclose and try to sell those houses.

4. At the same time, with the economy slowing, new buyers would delay house purchases until the economy improved. Given the challenges already facing the economy, this could “cause a large drop in house prices.”

5. If house prices fell, it would push down household wealth, which has received a huge boost from the housing boom, and that could curtail consumer spending, which itself has become a primary driver of growth. The added stress on the financial sector would also weigh on the economy as lenders cut back on making new loans. Slive doesn’t use the term, but what he’s talking about is a credit crunch.

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