The more the Bank of Canada sifts through the data left behind by the housing boom, the clearer it becomes that the economy would be in trouble if we weren’t so willing to borrow.
Last month, the central bank published a staff note that shows household borrowing against the country’s various real-estate bubbles created a significant amount of domestic demand in recent years.
Higher home prices influence consumption by triggering wealth effects that make us feel richer and, therefore, keener to spend. But we couldn’t act on that impulse without a mechanism to turn paper wealth into cash. It’s the collateral effect that yokes housing prices to spending, since rising values allow individuals to take out bigger lines of credit.
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