Canadians are relying too much on home equity loans for their borrowing, the Bank of Canada warned Thursday.

In four research papers looking at trends over the last dozen years, the central bank says Canadians are increasingly exposed to a correction in house prices because they have increased their borrowing amid a sharp increase in house prices — and equity.

The bank expressed particular concern that much of the increase in household debt was not mortgages, but loans secured by home equity which Canadians in turn spent on consumer items and renovating their homes.

Statistics Canada has calculated that average household debt has risen as a percentage of income from 110 per cent in 1999 to 153 per cent currently, with about 70 per cent of that being mortgage debt. And debt to household equity has risen as well even as home prices have soared.

The economists who prepared the Bank of Canada reports point out that home prices have risen sharply in the period, along with debt, as households needed both bigger mortgages to buy homes and used equity from higher home values to finance other purchases.

"These facts are interrelated, since rising house prices can facilitate the accumulation of debt," one report noted.

"Households therefore experience a significant shock if house prices were to reverse."

Report warns consumer spending could drop

The report warns that any downturn that causes a drop in house prices will be made worse as consumer spending falls as home equity disappears and the ability of householders to borrow is diminished.

It calculated that a 10 per cent drop in home prices could generate a one per cent decline in consumption.

Only part of that is well grounded on growing incomes, it said, with super-low interest rates and unrealistic expectations that home values will keep rising other causes.

Just hours earlier, credit reporting firm TransUnion released an analysis that found that non-mortgage borrowing had slowed sharply in the past year to a one per cent increase, the lowest since 2004.

And in the last three months of the year, despite the holiday spending season, average credit rose 1.4 per cent to $25,960, reversing three consecutive quarters of flat growth or reduction on everything from credit card debt to lines of credit, consumer and car loans.

Finance Minister Jim Flaherty said he was pleased to see some reduction in credit demand.

“This is dealing primarily with non-residential mortgage credit,” he said, “so people are being more careful with their credit cards in Canada and that's a good thing.” “On the housing market we've seen some moderation of late in good parts of the residential mortgage market. We watch that carefully, in particular the condominium market in some of our large cities.”

The Bank of Canada also noted that increasing debt levels have made Canadians more vulnerable to bankruptcies and insolvencies. Since 2000, about 100,000 Canadians a year have filed for insolvency or bankruptcy, triple the number in the 1980s.

But it pointed out that in most cases, these were not homeowners. The vast majority are renters and the unemployed who have taken on too much in the way of credit card debt and bank loans.

With files from The Canadian Press