New Mortgage Rules

OTTAWA -- Jim Flaherty, the Finance Minister, says he is targeting "reckless" speculators who buy up multiple condominium units in the country's biggest cities with new rules introduced yesterday that will make it tougher for Canadians to get a mortgage....

Read entire article at http://www.nationalpost.com/scripts/story.html?id=2569008


Jonathan's Opinion:

Do you remember what happened near the end of 2008 in the U.S.? The sub-prime mortgage meltdown happened! It was so devasting to all major developed nations worldwide, that it almost lead to what some economists were calling, "the greatest depression".

This occured (in a nutshell) because of the lack of consumer savings, and excessive consumer spending. The worst part is that the consumers were spending BORROWED MONEY.

Lets look at this in a step by step, easy-t0-understand fashion:

Why were consumers borrowing, and spending?
Because interest rates were so low, and it was therefore cheap to borrow money.

How were consumers borrowing this money?
They borrowed against the equity in their house. (e.g. if your house is worth $500,000 and you have a $400,000 mortgage, this means that there is $100,000 of equity in your home. Banks would lend up to 95% of that equity. So in this case, the bank would lend you $95,000)

What did consumers do with this money?
They spent in on cars, vacations, clothes, cell phones, TVs, etc.

Why didn't consumers save their money, and only use it if they really needed too?
They thought that real estate prices would never fall, and they could therefore always borrow against their houses, and never be out of money.

Boy were they ever wrong!
And we all know what happened next. U.S houses lost as high as 70% of their values in just one year. There were millions of foreclosures, and bankruptcies.


I don't know about you, but I see the same thing starting to happen here in Canada. We have extraordinarily low interest rates, consumer debt levels are the highest they have ever been, and real estate prices are at their all-time highs.

If we do not want to see the same fate as the U.S., then mortgage regulations like the ones announced by our finance minister are not hurting us...rather, they are saving us.

I just hope it is not too late!!