September 5, 2017

Jesus was able to feed 5,000 people with nothing more than 5 loaves of bread and 2 small fish.

Through the miracle of credit and fractional reserve banking, banks make Jesus’ miracles seem insignificant.  Using complex calculations of loss expectations and by creating their own rules, banks have been able to loan thousands of trillions of dollars more than have ever even existed in human history.

The news media is filled with economists’ predictions of a “market correction” or another “banking crisis”.  Most predictors aren’t saying “if” they are saying “when” it happens.  Canadian bank regulators have instructed banks to be prepared to withstand a shock of a 30% correction in the housing market.

It has been reported that the vast majority of Canadian homeowners actually own less than 20% of the value of their homes – many having purchased with the fuzzy 5% down-payment rule, and many having cashed in their live savings (RSPs) to come up with the down-payment, creating a double jeopardy.  So a 30% decrease in property values would mean that those properties are overleveraged.

All other things being equal people would carry on paying their mortgages and keeping their homes in spite of the fact that they are paying far more them than they are actually worth.  But that is not the problem.

The problem is that far too many Canadian consumers are using their homes like piggy banks, every 3-5 years when the mortgage renews they dip into their equity, extend the term of the mortgage and refinance credit card debt and other loans into the mortgage allowing them to continue to use credit to fund a lifestyle they have become accustomed to.

It takes discipline to live within one’s means, not to jump on the debt bandwagon, especially in a climate of ever decreasing wages, and ever increasing taxes and living costs.