Mortgage debts equivalent to over 80 per cent of our economy
A federal bank regulator has given a stark warning about the state of the Canadian economy, saying that any decline in housing prices could flatten Trudeau’s economy, according to Blacklock’s Reporter. Mortgage debts are equivalent to over 80 percent of Canada’s economy. This means that a drop in housing prices could have severe implications for the entire country. Despite this, housing prices are on the rise across Canada. This is particularly the case for metropolitan centres. FULL REPORT
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We have known for decades that Canada’s residential housing prices are unsustainable. Housing prices had increased faster than inflation and much faster than wages and incomes. Rising housing prices are supported by increased debt, not value.
Low down payments combined with low mortgage rates mean people can buy expensive homes by taking on larger mortgage debt. The federal government, through the Canada Mortgage and Housing Corporation
(CHMC), supports this scheme by protecting banks and other mortgage lenders.
When the Bank of Canada rate is a fraction of the 3.5% rate the government pays on its borrowing, we can expect a depression. It is a not matter of if, but when.
“I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” ― Winston S. Churchill
Interest rates must rise above the government borrowing rate. Any other path leads to insolvency.
While increased lending and mortgage rates are not direct taxes, they have the same effect on consumers. The costs of goods, services and housing increase while incomes do not. The resulting inflation results in bankruptcies and foreclosures. People take a direct financial hit.
While housing prices fall, affordability does not. While a house priced at $950,000 may fall to $550,000 or less, higher mortgage rates and reduced disposable income mean many people will not qualify for purchase. Worse, while the house price falls, the mortgage contract does not. If the owner had increased equity to 20% of the original purchase price, he would still owe $650,000 on a property now valued at $550,000. Defaults result, and banks become major residential property owners.
That is why regulators are worried. Bank balance sheets shift mortgage loans which are an income-generating asset, into real estate, which is an asset but not readily convertible to cash. The mortgage contracts can be readily sold, but real estate is not liquid. That restricts banks’ lending power, and if severe, can leave a bank unable to meet financial regulations.
Regulators and governments don’t care if you go bankrupt or lose the equity built up in your home. They look after the banks, and the public be damned.
All the noise Trudeau and provincial governments make about creating affordable housing is just that – noise! Our governments have created an unsustainable housing market and have no idea how to get out of it without economic disaster.
Governments could freeze residential property prices and mortgages as of January 1, 2022, and then reduce the values (and mortgages) from 2022 values by 5% or the inflation rate, if lower, annually and over time attain housing affordability without an economic melt-down.
We are drifting in a canoe, listing to the roar of the falls ahead, and no one is paddling.