June 21, 2012

The number one news item today is the Federal government’s new mortgage rules that will reduce government-insured mortgages to 25 years from 30 years. As expected  opinions vary, some support the reduction and labels it as prudent for cooling down an overly hot real estate market and controlling the troublesome levels of household debt.

Others like me wonder how my children will ever be able to get their own home. Unless of course when I die they get mine!

Once again I shake my head in bewilderment. This artificial policy driven intervention into the otherwise worshipped free market disrupts a number of economic areas that will hurt basically the same people. Firstly, the wealthy don’t need a government insured mortgage, just poor and cash strapped middle income groups. So, the ability for lower income groups to join the investor class and begin their assent out of poverty is diminished. Secondly, house prices will fall because of this. So, this will slow down the economy for a wide range of businesses such as the construction industry, real estate companies, banks, consumer spending and create the conditions for unemployment and layoffs. Hence, the economic downturn that everyone has been scared about will now be inevitable and not because of what’s happening in Europe or the United States, but by a government induced, made-at home recession.

That said, nothing is mentioned about the real consumer debt problem facing Canadians: the $486 billion of credit card debt and consumer loans. This is the troublesome part of the household debt problem. Why are individuals and families so deep in debt? Is it because they have a 30 year mortgage instead of a 25 year mortgage? No, no, no.

People have been sinking into a morass of debt since the mid 1970s. The reasons for this dependency upon credit have been growing along with the total amounts owed. The cost of raising children, lack of significant wage increases, inflation (look at the price of gas), tax increases (including property taxes) and an economic system that spends billions of dollars a year to encourage people to consume, borrow, buy unnecessary products and live an extravagant lifestyle.

If the government is serious about reducing the troublesome debt levels for individuals and families, then there must be some action taken to reduce the exorbitant interest rates on credit cards and loans. The mortgage loan is tied into the Bank of Canada lending rate, so why aren’t the other credit products?

Instead of reducing the price of homes and making it more difficult for first time home buyers why not help the consumer with their consumer debt?

Perhaps to set the conditions that might promote better lending practices with credit cards and consumer loans would better help individuals and families get control – not so much of their finances, but of the high levels of consumer debt that forever remain high because of excessive interest rates.

So, it seems to me that lower and middle income groups will actually sink deeper into debt as their equity in their family homes decreases. Meanwhile, their dependency upon consumer credit will continue and probably increase.