Canadian homeowners accessing home equity through a loan or refinancing helped boost household spending in recent years, according to new research from Bank of Canada.
Household spending moved in a similar direction to home prices over the past decade, with both soaring in 2016 and 2017. In 2017, household spending rose by 3.51%, while home prices jumped by 13.57%.
That trend comes partly from the collateral effect of homeowners finding it easier to borrow against their homes when home prices rise – either through a home equity line of credit (HELOC) or mortgage refinancing.
The research found that in 2017, homeowners extracted $89 billion in home equity through these two methods, with more money coming through HELOCs. Borrowers used that money to pay for big-ticket items such as cars and furniture or to fund renovations, according to the research.
The research found that by the end of 2017, this equity extraction could have added 2% to consumer spending on durable and semi-durable goods (including cars and furniture), as well as 11% to renovation spending. That translated into a 0.5% impact on the GDP level.
However, in 2018, the amount of equity homeowners extracted from their properties dropped, and that could have had a negative impact of 0.1% on the GDP.
"If this collateral effect is strong, it could leave the economy more vulnerable to adverse events, such as a large decline in house prices," researchers said in a note, adding that the absence of equity extraction can intensify spending cuts in bad times.
The researchers expressed plans to continue studying this area in the future, with a deeper look at the characteristics of equity extractors and an analysis of what factors influence the decision to access home equity, according to a report by The Canadian Press.
