Bank of Canada worries about potential for debt shock

Thu Feb 23, 2012 1:02pm EST
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By David Ljunggren

OTTAWA (Reuters) - The Bank of Canada warned again about rising household debt on Thursday, saying Canadians could "experience a significant shock if house prices were to reverse".

Last year Canada posted a ratio of debt to income of 153 percent, above that in the United States. The central bank says it is concerned that low interest rates are persuading Canadians to take on too much debt.

In the introduction to the latest edition of the Bank of Canada Review, a collection of articles on the economy and central banking, the bank said there had been a increase in both household indebtedness and real house prices since 2000.

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

Canada has not seen the kinds of excesses in other nations such as the United States, where homeowners took advantage of rising prices to remortgage properties and were then left stranded by the crash.

Finance Minister Jim Flaherty also warned Canadians they should prepare for the impact of higher borrowing costs.

"On the housing market, we've seen some moderation of late in good parts of the residential mortgage market. We watch that carefully, particularly the condominium market," told reporters in Toronto.

"Interest rates are going to go up ... people need to be sure that they can afford higher mortgage interest, for example. It isn't necessary for everyone to have the most expensive house they can possibly buy."   Continued...

A sign warning pedestrians of falling ice from buildings above its path is seen in front of the Bank of Canada building in Ottawa January 17, 2012.       REUTERS/Chris Wattie