Household debt responsible for housing bubble - Capital Economics

A new report pins the blame for the Canadian housing bubble solely on debt holders and the banks that approved these transactions

The latest study from independent research body Capital Economics stated that the factor that is most to blame for Canada’s housing bubble is not foreign money but household debt, which has ballooned to dizzying heights in the past few years.
In a Huffington Post Canada article by Jesse Ferreras, the “House Price Gains Fuelled by Increasingly High-Risk Mortgages” report pinned the blame solely on Canadian debt holders and the banks that approved these transactions.
“House prices have been boosted by domestic credit growth, fuelled by relaxed lending standards,” economist Paul Ashworth wrote in the document. “The decline in interest rates and interest servicing costs allowed households to expand their debt without increasing the proportion of their incomes needed to meet their overall debt service obligations.”
“The massive surge in risky debt being taken on by Canadian households illustrates that the housing bubble can't be blamed on cash purchases by foreign investors,” added the report, which pegged the household debt ratio as of the first quarter of this year at 165.3 per cent of disposable income.
And while the report also showed that net wealth per family increased significantly over the past year, “anybody taking comfort from that should remember the value of asset prices is variable while the value of debt is fixed.”
Other observers have voiced similar concerns over sustainability, although so far they remain optimistic of Canadian housing’s prospects for the short and medium term due to stable debt servicing costs and a manageable level of delinquency.

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