As Canada’s economy has continued to churn out decent results in recent quarters, with the country’s unemployment rate the lowest in years, and interest rates, while rising, still at extremely low levels, those who are bullish on the long-term ability of markets to continue to rise at a meaningful clip certainly have a lot to be excited about.
That being said, recent reports covering the state of the Canadian household show a rising correlation of home equity line of credit (HELOC) and mortgage balances to stock markets, a fact which has many concerned that a potential downturn in the country’s red-hot housing market could impact equity markets as well.
Home equity lines of credit have grown in popularity for many Canadians, due in part to the fact that having a large lump sum of money available for general purposes can be a very attractive thing for some.
The temptation to borrow $50,000 or $100,000 at a 3% interest rate with the expectation of a 7% or 8% return on that money in the stock market has resulted in many Canadians turning to their HELOCs as a way to fund their tax free savings accounts (TFSAs), a trend which could potentially turn out to be a dangerous one if house prices decline meaningfully in key markets such as Vancouver and Toronto.
While debt reduction should always remain an important goal for Canadian households, given elevated household debt levels and increasingly high valuations in equity markets, now is definitely as good a time as any to start for those who may be behind the curve.
Invest wisely, my friends.
