21st Century Mortgage Expectations Meet 20th Century Corruption
How Government, Mortgage and Consumer Debt Has Shackled the Canadian Nation.
Total Canadian Federal Government net debt today? $768 Billion.
In the 1970’s it almost quadrupled. In the 80’s, it more than tripled. Since 1991, this debt has almost doubled again. Why?
According to Michael Hudson, economist at the University of Missouri, “In the 1970s, Canada abandoned the use of the Bank of Canada, embraced monetarism and now we find ourselves in a situation where we’re borrowing from private banks at higher rates of interest and we’ve seen deficits skyrocketing.”
“How are we going to pay this back” people ask? I laugh.
Further, Canadian household debt is $2.1 Trillion. This household debt coupled with housing market imbalances pose financial stability concerns according to the International Monetary Fund.
The nation’s politicians have set a bad example. Now we see that the citizenry has followed suit, falling into the debt clutches of the international banking system.
On a personal level, Canadians have taken over-spending to the extreme. Partially their fault. Partially not as you will see.
In all the G7 countries, Canada ranks worst for their atrocious household debt levels.
Not only that, half of Canadians have no savings and because they’re maxed out, there’s no money to put aside.
What’s going on? Why are we maxed out on credit; mortgage and consumer?
Planned obsolescence, instant gratification, outdated expectations and 40 years of wild west mortgage banking practices, that’s what’s going on.
Planned obsolescence
Planned obsolescence is a policy of planning or designing a product with an artificially limited useful life, so that it becomes obsolete after a certain period of time, assuring never ending repeat purchase profits in a world that already has enough garbage.
Instant Gratification
Marketing has tapped into consumer psychology and trained people to buy on command, sparking the whole FOMO (fear of missing out) concept. Cue….“Man I can’t wait to buy that latest iPhone”. The iPhone example is the worst because people don’t even use these types of products to the end of their planned obsolescence life. Most iPhones and devices like this hit the trashcan long before they stop working.
Just charge it on the credit card. My guess would be that lots of Canadians have more than one of their last few phones still piling up interest on their unpaid credit cards.
Unrealistic Mortgage Expectations
Let’s imagine I’m trying to live up to what my parents did early in their careers. Circa 1980. Both had teaching positions paying approximately $35,000/year and they bought a house in the Lakeview area of Regina for $65,000.
Fast forward to 2019. That house costs approximately 10 times what they paid in 1980. However, if I were a teacher in Saskatchewan today, my salary would surely not be $350,000/year. More likely $80,000 – $90,000 for a full-time teacher depending on qualifications and experience.
Yes, interest rates were crazy in the early 80s. But, if I buy today’s house with a mortgage at 2.69% fixed with a 25-year amortization, I have to pay off the principal $650,000 plus $242,000 interest cost. Compare that with the 1980 purchase where I have to pay off $65,000 principal plus about $150,000 interest.
I’ll take the $65,000, 1980s purchase any day at 12%. Not to mention the house would be 40 years younger.
Why have house prices, mortgages and the cost of living in North America accelerated so much while wages have stagnated?
The Essence of De-Regulated Banking
19th century bank lending was intended to finance new capital investments for industry, and public sector infrastructure projects for government, creating profits to pay the interest and principal to lenders. This aimed to increase wages and standards of living for those in society, build new and more modernized factories, employ more people, promote tangible capital investment.
Responsible, progressive lending happened for a while.
Since then, banks have been heavily de-regulated, thanks to extensive lobbying efforts, and have aligned with the FIRE sector of the economy (Finance, Insurance, Real Estate). Banks now prefer to back loans that extract “rents” from society rather than loans that expand and improve industry. With rents, the collateral is tied up immediately and they don’t have to suffer the risk of waiting for profits to materialize.
As a result, cost of living continues to rise at breakneck speed as loans for real estate are increasingly debt leveraged and government guaranteed (CMHC); causing increased competition for supply and boosting the real estate asset bubble.
Since 1980, productivity has theoretically continued to rise but wages have stagnated. Why? Much of GDP “production” is incorrectly based around this FIRE sector economy. Transfers of income from wage earners to finance, insurance, banks and pharmaceutical giants result in increases to GDP. These transfers do not produce a tangible anything despite what the Chicago School trickle-down economists may say. The trickle down doesn’t happen.
A rise in GDP helps the 10% of the population that owns stocks and bonds.
If you take FIRE sector factors out of GDP, productivity falls considerably.
So as housing prices rise, wage earners must spend more of their money on housing costs, leaving less for living expenses. Simultaneously, consumer debt has become so easily available since the 80s government directed finance de-regulation that citizens have increasingly come to subsidize their living expenses with consumer debt vehicles like credit cards, lines of credit and home equity lines of credit.
Hence the $2.1 Trillion in Canadian consumer debt.
If you want to get a handle on Canadian home prices and consumer debt, you need to get a handle on lending requirements and the speculation that dogs the Canadian housing market.
After WWII, you needed about 25-30% down for a home loan. Housing cost 5-10% of your earnings. Today, housing can cost up to 39% of your GROSS earnings on salary/wage and requirements for lending have fallen so much that, not only can you get in with only 5% down (which can be gifted from family!), but the government will guarantee these loans insulating the banks from having to absorb the inevitable foreclosures of high ratio mortgages. No wonder lenders are ok giving out bigger and bigger loans.
What do larger loans encouraged by lax lending requirements and government subsidy mean?
Increased competition for homes, escalating property prices, huge mortgages and an expanding real estate bubble.
You’d think that our federal political party leaders would understand these concepts. Seems not. The current federal election campaign has been a giveaway to the real estate industry; promises of a massively expanded First Time Home Buyers Incentive in Vancouver, Victoria and Toronto, renovation grants, extending amortizations back to 30 years, cutting back the OSFI implemented mortgage stress test, privatized surplus federal real estate.
It’s a smorgasbord that’s certain to swell government deficits going forward and privatize Canadian public domain.
These promises are sold to the electorate as a way to improve housing affordability. What will happen in reality is that the Canadian real estate market bubble will continue to expand, housing costs will continue to increase and Canadians will be forced to cut their non-home related spending, increase income to make ends meet or further utilize already maxed credit facilities.
It’s a vicious cycle.
That is how the banks got people to borrow larger and larger debts – hoping to buy homes that would rise in price. The larger the home they bought – with the largest mortgage loan – the more money they would make in the bubble economy. – Michael Hudson, Distinguished Research Professor of Economics, University of Missouri
3 Canadian money problems, 1 common lax bank lending requirement denominator.
With the Canadian Federal and Provincial governments and the Canadian citizenry under an ever increasing government, mortgage and consumer debt overhead, we lose our flexibility and realize our debt peonage.
Maybe it’s time for a debt jubilee?
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Sincerely,
Michael
