Ounce of (Debt) Prevention Worth a Pound of Cure

I was glad to hear the federal finance minister Jim Flaherty state that he does not believe Canada is going through any kind of housing bubble. Rather, his changes to mortgage rules are meant to embody the adage, "an ounce of prevention is worth a pound of cure." Small changes now, to avoid a crash in the housing market later.

The minister said he wants to be sure that Canadian homeowners don't get overextended - taking on more debt than they could handle when interest rates go up (as soon as this summer).

A new report, The Current State of Canadian Family Finances (PDF), suggests the problem is real.

Ottawa-based Vanier Institute of the Family reported last week that average household debts loads climbed 5.7 per cent to $96,100 in 2009. The institute estimates some 1.3 million households could be vulnerable to a dangerously high debt service load by the end of 2011.

Interestingly, the report states that "housing prices are likely in a bubble" - contrary to what the finance minister and industry experts say - based on house prices in October-November 2009 increasing about 5 times the average after-tax incomes of Canadian households

General Support for the Changes

The majority of financial and real estate professionals are going on record supporting the federal government's mortgage rule changes.

Satisfied with the changes, the Canadian Real Estate Association has added that "the Canadian resale housing market is healthy, and does not require regulatory changes beyond those announced" by the finance minister.

TD Bank's deputy chief economist, Craig Alexander, says the rule changes only limit the size of the mortgage you are going to be able to get, and would likely affect only about 25% of all new mortgages. He's added that the changes...

  • Don't prevent people from buying homes
  • Don't drive a lot of new home buyers out of the market
  • Don't lead to higher payments

Another Home Buyer Deadline

The day the mortgage rule changes kick in - April 9 - is the new date to beat for Canadian home buyers. The deadline falls halfway between the now-expired Home Renovation Tax Credit spur to buying, and the Harmonized Sales Tax deterrent to buying (being implemented July 1, 2010 in Ontario and British Columbia).

What is your reaction? Will you be personally affected by the mortgage rule changes? Leave your comments below.

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