Using Debt to Unlock Equity

Vancouver Housing Market Blog, a consistently bearish opinion on local home prices, points to Saturday's Vancouver Sun Article on British Columbians' propensity to use debt to unlock equity in rising home prices. The Sun interviewed Benjamin Tal, a senior economist with CIBC World Markets:

B.C.'s explosive real estate market and its concurrent rise in property values has [sic] also led to increasing debt loads. As home equity rises, people spend more, Tal said. It's called the "housing wealth effect."

For every $1 increase in house value, a homeowner generally spends an additional five cents. But that five cents is not actual money in our pockets, Tal said, so it must come from somewhere else, like increased debt. In the last three years, that five cents per dollar accounted for $25 billion in increased spending, Tal said.

If BC residents have been living better in recent years, it would be useful to know what is the contribution from debt compared with income gains.

In a post in late June 2005, Vancouver Housing Market Blog plotted disposable income in BC against a falling saving rate from 1981 to 2004. The results are surprising, since inflation adjusted disposable income seems not to have changed dramatically, moving within a band of about $2,500, while there is a determined downward trend in the saving rate over the same 23 year period.