OTTAWA — Research by staff at the Bank of Canada suggests Canadian homeowners who accessed their home equity through a loan or refinancing helped fuel household spending in recent years.
The staff analytical note by several of the central bank’s researchers says household spending has moved in a similar direction to home prices over roughly the past decade, with both rising sharply in 2016 to 2017.
That trend comes partly from the collateral effect of homeowners finding it easier to borrow against their homes, either through a home equity line of credit (HELOC) or mortgage refinancing, when property prices rise.
In 2017, the researchers found Canadian homeowners extracted $89 billion in home equity through HELOCs and refinancing.
The researchers say borrowers used that money to pay for big-ticket items, like cars and furniture, or to fund renovations, among other things, and their research suggests this “has likely contributed materially” to this kind of spending in Canada in recent years.
They say that when the collateral effect is strong, it can leave the economy vulnerable to adverse effects, like a large house price decline as the absence of equity extraction can exacerbate spending cuts in bad times.