September 5, 2017

The answer is simple – people are broke and money is cheap!  Whether the trigger is a loss of job, decreasing family incomes or simply a refusal to change lifestyle people, find themselves leveraging the equity in their homes again and again to manage out of control credit card and other unsecured debt.  Mortgages are the last source of easy access to money.

According to the Deutsche Bank Canadian housing is overvalued by 60%.  That simply means that your house is worth a lot less than you think it is.  In fairness it is clear that some markets may be in better shape than others, London, ON for example is far more stable than Vancouver BC for example.  Nonetheless, prices In London have also been inflated due to cheap mortgage money, consumer expectations and eager lenders.

The Canadian Bankers Association offers up some interesting, to say the least, statistics.   According to the CBA ” Canadians with mortgages have significant equity in their home, averaging about 66 per cent of the home’s value“.  So what does that mean?  According to the Canadian Bankers Association, if your house is worth $250,000 you probably only have a mortgage of $85,000.  Since banks can lend up to 80% of the value of the house your bank may be willing to lend you another $115,000 against that equity.

This may explain why there has been a shifting trend of bank consumer lending from unsecured loans and lines of credit to secured credit cards, second mortgages and HELOCS.  It has been reported that Canadian debt loads have been leveling off but that is not the result of the debt being paid but rather transferred from an unsecured to a secured form of debt.  Because the then available unsecured debt is quickly reused or else, logically, we would see a trend of rapid consumer debt reduction.

So how do we solve our addiction to debt?  Downsizing our expectations and living within our means helps – but is not a long term solution to the economic hardship facing many, if not most, Canadian families.  The longer term solution must surely come from political changes, particularly to our minimum wage, welfare, EI and income tax systems.  Putting more money into the hands of the people at the lower and middle parts of the economy is the only way to create long term economic change. 

Our current economic system has created as many inherent obstacles to change as it has inequities, but that is a whole other blog.