Home ownership, mortgage regulation and rising household debt

Household debt has emerged as a common theme from an unlikely range of sources.  The Vanier Institute of the Family, in its annual report on the state of Canadian families, reported that this past decade has seen savings halved and household debt doubled over the previous decade.  On the same day, the Finance Minister moved to limit access to mortgages to “reinforce the importance of Canadians borrowing responsibly and using home ownership as a savings mechanism.”

Is the rising debt level related to housing mortgage policy?  Is this household debt a new problem? And why is the policy response focused on mortgage regulation?

The Progressive Economics Forum has posted articles each year for the past three years on rising household debt. in 2008, 2009 and 2010.  Armine Yalnizyan of the Canadian Centre for Policy Alternatives has been sounding the alarm about rising household debt, combined with lower savings and reduced social supports since at least May 0f 2009.

The Certified General Accountants Association of Canada identified rising household debt levels as an emerging issue as early as 2007, and in a 2009 report, noted that this debt was rising especially fast for low-income households and households with children.

The link between high household debt and housing debt was made in a 2009 Bank of Canada report. That report concluded that rising household debt was the greatest risk to the Canadian financial system.  It also presented an analysis of how the composition of household debt had changed from 1999 to 2005, to include much higher debt in mortgages and home equity loans. This report also flagged the disproportionate burden of debt on low-income households and households with low educational achievement levels.

Earlier in February, the Globe and Mail reported that the largest banks were encouraging the Finance Minister to “tighten mortgage rules,” pointing out that increases in housing prices were accelerating and that 40% of the loans of large banks were in mortgages.

What is not clear is the extent to which the intent and the impact of changes announced to the mortgage lending rules relate to reducing household debt levels, reducing risk for financial institutions, or both.

Despite these concerns, home ownership is often seen as an important means to laudable policy goals.  These will be considered in the next post. (In the right-hand column of this page, you can sign up for an email notification of updates, or an RSS feed of new entries.)

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