Debt is Redder than Ever

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Nothing like waking up on a Friday morning to find out that the Bank of Canada governor says house prices are overvalued by 30 %.  As reported in the Vancouver Sun, Stephen Poloz, the Bank of Canada Governor said, “The vulnerability associated with household indebtedness is edging higher and the overall risk to financial stability in Canada is slightly higher…..house prices overvalued 30%”

Yikes.

Hidden behind the carefully worded text is another warning. As reported, “The bank continues to expect a constructive evolution of imbalances in the household and housing sectors as the economy improves and interest rates begin to normalize.”

Guess what normalize means? No doubt it means – interest rates will be going up.

What hasn’t been mentioned is the devastating effects higher interest rates will have on middle and lower income families.

Once again the term household debt is being used to cast a dark shadow of fear across the land pointing a scolding finger at consumers/debtors, individuals or families – whatever term you would like to you use – to get control of their household debt or else something bad is going to happen.

That seems to me like the finger of blame has already been pushed off the government’s desk and into the living rooms of all homeowners. Kind of like – “You’ve been warned. Now brace yourselves for a direct hit to the family wallet.”

There are a few problems with this analysis and warning. The first is this. What is the evidence to support the assertion that properties are 30% over valued? This most certainly isn’t true in every city town and hamlet in Canada. It could have some substance in a few highly dense urban centres but the issues of supply and demand and affordable housing for middle and lower income families are missing.

After all, what drives real estate prices up? We need to identify the key factors that may over-inflate properties and take specific action to better regulate speculators and others, such as foreign investors, but the governments also need to act on the affordable housing front for the non-wealthy.

The absence of affordable housing no doubt translates into higher rents, higher debt levels and young families borrowing from Mom, Dad, Peter and Paul to somehow get into a house – even though they cannot afford all of the associated costs of home ownership.

The issues of affordable housing, unaffordable house prices, unaffordable mortgages and rising consumer debt are all linked in one way or another. However, by lumping consumer debt and real estate mortgage debt together and calling it household debt, it’s impossible to get a clear understanding of why people are borrowing so much. It just seems far too simplistic to blame everything on house prices and then follow the well-travelled but unsuccessful road to higher interest rates.

Higher interest rates on mortgages and interest rate increases on the $532 billion outstanding in consumer debt (seasonally adjusted and reported by the Bank of Canada June 12, 2015) would undoubtedly leave families with a lot less money and create new reasons to borrow and increase the household debt, rather than decrease it.

The Bank of Canada needs to widen the scope of its studies and predictions. Let’s work together and remember the struggles of middle and lower income families – and find realistic ways for them to pay down their consumer debt rather than increase it.

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