Housing crisis???

In the United States, house prices ran up so high and fast that people flocked to the market to make a quick buck. They would mortgage their houses for two to three times its value in order to find other properties with skyrocketing values. This meant that people held onto mortgages that were multiple times their income. When the bubble burst, the owners were stuck with homes previously valued at $800K were now worth less than half. Owners would sell for less just to save their shirts. They didn't have the income to support the mortgages.

One of the dangers in Canada is the record low interest rates. When rates begin to go up, the affordability goes down for Canadians. In some cases, people can barely afford the mortgages they currently own. One of the issues is that the bank lends on the fact that it is the primary debt holder. They know they will get paid before any other debts in the case of bankruptcy. The banks know that they get paid before you pay for your groceries.

This has an impact because costs like groceries are not accounted for when determining whether or not you should qualify for a mortgage. You, as a consumer, should try to know this. If the bank qualifies you for a certain amount, it may be difficult to manage your mortgage if you take out the full value. It is best to consult your financial advisor about what is affordable for you.

With interest rates at a point where the only direction in the future is up, there is a great concern that, if rates rise too quickly, Canadians will not be able to afford the houses they currently own. This will cause an increase in the supply of houses in the market and thus prices will start coming down. This is not necessarily a certainty, but it is certainly a risk the Bank of Canada has to think about when they set their lending rates.

I saw an article today with references to household debt as a percentage of income. The article can be found at the link below.

http://www.ottawasun.com/2011/06/20/canadian-households-more-indebted-than-ever

This type of information indicates that there needs to be some action on the part of the government or the Bank of Canada to help protect the Canadian Real Estate market. The government introduced new lending rules in April that will assist, and the Bank of Canada has been holding rates steady over the last year. It remains to be seen if further action needs to be taken.