Doomed to Failure
Borrowers who use their homes as an ATM machine may be putting themselves and the Canadian economy at risk.
The growing trend of homeowners borrowing against the equity in their houses to splurge on consumer goods or renovations is contributing to record debt levels in Canadian households.
Some Canadian households are becoming overstretched and Canadian households as a whole are being overstretched, which creates risks for the economy.
If the housing market slumps or interest rates climb, overexposed borrowers could be forced to freeze their consumer spending, which hurts the economy. And, on an individual level, homeowners could find themselves struggling with no-longer-affordable mortgage payments.
If you”™re borrowing, make sure that you can sustain that borrowing in a world of higher interest rates. Be careful about borrowing on the assumption that rates are going to stay low… or that what you”™re buying — if you”™re buying a house or whatever — that its price is going to continue to go up.
Mark Carney, Governor of the Bank of Canada, 2012
For point of reference, Canadians took out over $64 billion in Home Equity Lines of Credit in 2010 up from about $8 billion in 2001.
Countless home purchases are doomed to failure from the start owing to insufficient equity and lack of sound advice to the prospective home purchaser regarding the financial obligations of his undertaking, and the committee believes that a down payment of about twenty-five per cent of the purchase price should be established as the basis of a sound home purchase transaction. Further, that realtors, builders and mortgage bankers should join in a concerted effort to assist prospective home buyers in analyzing their financial ability to consummate the proposed purchase.
The President’s Conference on Home Building and Home Ownership, 1931
Yes. 1931. Everything old is new again.
I think this blog is very interesting and a relevant one too. Mark C. is known to be a frequent visitor there.
http://www.greaterfool.ca/