Thursday, March 10, 2011

More on the Canadian Housing Bubble

On March 18 new government rules for mortgages come into effect into Canada. Announced with a 60 day delay before implementation, the rules will reduce the amortization period Canadians can spread their mortgage payments over. Starting mid month, the term will be dropped from 35 years to 30 years. The newsclip above talks about the looming changes.

Check out how the news story uses a $300,000 mortgage to analyze the impact. First of all you have a Canadian mortgage broker who dismisses the $106 per month increase in monthly payments the amortization change will bring to that $300,000 mortgage example. She opines it's as easy to handle as 'skipping one meal at a restaurant' per month.

Now consider that Vancouver's average single family house price hit an outrageous $1,173,395 last month.

A $300,000 mortgage? For a shoebox apartment somewhere, perhaps.

As Canadians are consumed by record breaking household debt, consider that total household debt in Canada now tops $1.5-trillion, or three times our nation's national debt, with a debt-to-disposable income ratio now at more than 145%.

Warnings are now popping up all over about our looming debt situation and borrowing habits.

Bank of Canada Governor Mark Carney has warned several times that debt levels are bloated, and Finance Minister Jim Flaherty is bringing in the above mentioned mortgage rule changes.

Recently a visiting scholar at MIT's Sloan School of Management also commented on our debt binge.

Derek Dunfield, a neuroscientist and visiting scholar in behavioural economics and marketing at MIT, warned in a paper that Canadian consumers "may soon be overwhelmed" given the inevitable rise in interest rates.

High debt levels could have dire economic consequences and "the historically high levels of household debt present two possible problems for the Canadian economy," said Dunfield.

"One scenario is that interest rates rise, house prices drop, and more people begin defaulting on their credit card debt and mortgage obligations. An equally worrying - and perhaps more likely scenario - is that interest rates go up a little, and more of people's disposable income goes to repaying their debt, leading to a significant reduction in consumer spending. Since personal spending on consumer goods and services accounts for 58 per cent of the Canadian gross domestic product, this decrease would provoke a 'made in Canada' recession.".

With that theme in mind Action Canada has released a cartoon short as part of it's new website,, to encourage Canadians to consider the reprecussions of their debt choices.

And for those who would like a primer on the role the Canadian Mortgage and Housing Corporation (CHMC) has played in our housing bubble, there is this cartoon that joins the Xtranormal craze for simplifying complex issues.

For our non-Canadian visitors, CMHC is Canada's version of America's Freddie Mac and Fannie Mae.

This is not going to end well,



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