I found this article today in the Globe and Mail commenting on Federal government plans to make lending more difficult again in order to curb an increase in debt levels. Among the discussions that are supported by the banks are to make mortgage borrowing more difficult. If implemented, it will be the third time since 2008 that the federal government has taken these steps to cool an overheated “mortgage” market. Mentioned in the article is decreasing the maximum term that someone can take and increasing the minimum downpayment needed to purchase.
The rest of the article is quotes and opinion from bankers and government, but the thing that jumps out at me right away is that they want to make it more difficult to get a mortgage because people’s overall debt is getting too high and the low rates have caused people to borrow more than they could afford.
It occurs to me that while rates are low, they have already done plenty to safeguard the mortgage system against default. The mortgage market is very heavily regulated, and with good reason. However, it appears that there is not a lot of regulation in place for unsecured lending such as credit cards and subprime car loans (bankers do not consider car loans secured as it is a depreciating asset). I do not see much being discussed about making it more difficult for the banks to lend money unsecured. As such, I could see the banks wanting to make it difficult to borrow for mortgages because they don’t want their customers paying off their credit cards at 12%+ with a mortgage where they will receive 3%. Most people do not go on a spending spree with their mortgage proceeds, they spend on their credit cards and then run to the bank for a mortgage afterwards.
They also do not seem to be doing much to prevent the “keeping up with the Jones'” syndrome that is pandemic through society now. Everyone has to keep up with appearances it seems. Therefore everyone has to borrow so that they do not look poor to their friends. It appears to me to be a very dishonest way to live.
The way to prevent debt is to teach people responsibility in finance, and I for one never remember being taught that in school. It has never been refuted to my knowledge that the very nature of the monetary system we operate under is built to encourage and increase debt. We are also taught that an economy is usually at its best when people are spending money.
Until there is a fundamental change in how the entire system operates and in how people think, a mortgage will be the only way for most people to make debt more affordable. The market is not too hot right now, and is quite stable. It appears to me to be a ridiculous time to make it even more difficult for people to own their own shelter.