In the recent Canadian election, Stephen Harper’s conservative party ran on a platform that was to help young families purchase their own homes. The Tories hoped to help house 700, 000 young families over the next five years. They also committed to allowing new homeowners to withdraw more money from their RRSPs to make down payments.
The conservatives also intended to review foreign investors in the housing market to ensure they were not pushing the prices up and out of the range of most first time homeowners. Even once families had settled into their homes, a permanent home renovation grant would help to bring homes up to the standards of more stringent environmental codes.
These measures wouldn’t only help young families, they would have bolstered the housing market so that baby boomers who are looking to the value of their homes to carry them through retirement could rest assured that their investments were secure.
This resonates with Harper’s (and indeed many Canadian’s) belief that true financial independence comes from owning your own home. While putting more Canadians in homes may appeal to some; it does have its downsides. Take for example a similar policy implemented by Bill Clinton through his National Homeownership Strategy. Here the standards for home loans were relaxed to reach a wider audience of lenders and many Americans qualified for mortgages they couldn’t afford.
In Canada, most big banks have learned their lesson and have maintained a tight fist when it comes to qualifying first-time buyers. Unfortunately, a swathe of private lenders and institutions have sprung up to take the place of big banks and we don’t really know how large or precarious this sector is. What we do know if that home-related debt is soaring again in Canada.
A new research paper by economists from Princeton and the University of Chicago suggests that soaring debt could cause problems down the road for unwary Canadian homeowners. The researchers examined the relationship between GDP and household debt in 30 countries form 1960-2012. Findings suggest that an increase in the household debt to GDP ratio is a reliable indicator of slowing economic growth.
Coupled with a rise in household debt, an increase in consumption and growing trade deficits, Canada seems poised for an economic slowdown. That would make it dangerous for young couples to take on more debt than they can realistically handle.