Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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CBC reported that Moody’s said – Canada’s banks are collectively the soundest in the world. That is good news for lenders or borrowers – both. We want to be sure that our lender or our banks are in sound financial condition.

While the lenders continue to be in a good financial health – the borrowers became ill with debt load. The debt level is so alarming that once again all parties started to warn each other about the growing habit of the Canadian to lend to spend.

Generally in a free market economy the lenders and the spenders (borrowers) should be left alone to deal with the problem. But that happens only in an idealistic market. If left alone then both the parties will bleed each other to death – yes in the name of competition they behave recklessly.

The irresponsible behaviour is introduced by some lenders who just want a fat quarterly earning without any long-term planning. So Office of the Superintendent of Financial Institutions (OSFI) chief Julie Dickson had to point out that regulator had noticed cases where board-approved policies were not being followed.

Standing in the side line Bank of Canada really does not have much to do. It has kept the interest rate low, mainly to deliver boost to businesses. Unfortunately the commercial lending part did not grow much but the personal borrowers seized the opportunity. Knowing full well that this low interest rate is causing people to borrow more, the bank is kind of helpless. Raising rate will curb the personal borrowing but it will take business growth down with it.

Therefore, now the politicians are stepping in and with the stimulus provided by healthy job numbers – Canadian Finance Minister Jim Flaherty said that he is ready to step in. Later he added that he’s planning to make changes to reporting requirements for CMHC.

Stricter oversights are needed in Canadian lending market. Be it reducing insurable HELOC LTV or by lower GDS TDS numbers – without that Canadians will fall into that debt spiral which is difficult to get out.

The most serious warning comes from IMF. In its Global Financial Stability Report it said the following;

Does household debt amplify downturns and weaken recoveries? Based on an analysis of advanced economies over the past three decades, we find that housing busts and recessions preceded by larger run-ups in household debt tend to be more severe and protracted.

It also said that;

Based on case studies, we find that government policies can help prevent prolonged contractions in economic activity by addressing the problem of excessive household debt.

There will be some actions from our government too. How soon or what exactly will be changed – only time can tell.