Can Increasing Consumer Debt in Canada cause a Housing Decline?

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Canadian Consumer Debt

Another story is emerging in the Canadian housing market as pundits search for signs of a more moderate housing recovery.

Instead of banks in Canada being exposed to massive mortgage defaults such as in the States, banks in Canada seem to be

saddled with an increasing amount of consumer debt.

The nay-sayers are worried that if unemployment starts to increase and consumer debt borrowers are not able to meet

their credit card payment oblilgations or payments on their lines of credit, then banks could have a bigger problem.

In Canada, most of the riskier home loans are guaranteed by the CMHC which is backed by taxpayers.

More recent debt financing vehicles such as HELOC represent an increasing percentage of outstanding household debt.

The home equity line of credit is the second largest debt pool behind mortgage debt itself.

The latest change by the federal government is to stop allowing banks to get CMHC insurance for HELOCs. This could create an alternate

form of capping home price increases due to necessary sales resulting from HELOC defaults which in turn can lead to foreclosures.

Whether the consumer overextension will flow into the mortgage market remains to be seen, but the total amount of household debt in

Canada is on the rise and that may cause home prices to moderate from their quick rebound after the impact of the global financial crisis.

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