Taking on more debt is not a good thing. In fact, it could be devastating for the Canadian economy
The future, when it arrives, isn’t always what we imagined. Technology hasn’t yet brought us vacation trips to the moon or Mars. But it has brought us Twitter, where even world leaders communicate in 140 character blocks.
Does this affect our brains? Can we no longer hold more than one simple idea in our heads at a time?
Recent news suggests the answer is yes.
Bad news attracts more eyes and ears than good, so when housing sales and prices in Canada started to fall, we didn’t see stories on housing now becoming more affordable and accessible.
Perhaps this was because much of the price drop was in multimillion-dollar homes, with less impact in the million-dollar-and-under price range, where most of us live.
The dropping number of home sales, however, is being treated as something unexpected and to be avoided.
Here’s where the Twitter effect comes in. Falling home sales wouldn’t be a surprise had we remembered other common tweets about the aging population and the gig economy.
The number of seniors is passing the number of young people. And seniors are more likely to sell than buy homes.
And today’s young people are less likely to buy homes than previous generations at their age. Affordability is one factor. More years of education and more work in the gig economy – rather than in traditional jobs – keep young people in the parent’s homes longer. Delaying marriage and children has a similar effect.
We can’t expect the housing market to continue as it did when large numbers of baby boomers in their 20s had conventional weddings and soon bought a house for their 2.1 children.
If falling home sales are bad, there must be someone to blame for the drop and something we can do to raise sales. Government policy, particularly the mortgage stress test, gets the blame. Eliminating the stress test is offered as the solution.
Here again, we’re caught in a Twitter conflict.
Alongside the news about housing is more bad news. Canadians have too much debt. Both mortgage debt and household debt are rising, certainly faster than income. At the end of last year, Canadians owed $1.79 for every $1 of after-tax income.
This high level of debt not only reduces our freedom to spend and consume, it also puts us at risk for bad things like foreclosures, repossessions and bankruptcy.
The Bank of Canada and financial advisers tell us that we should be reducing rather than increasing our debt – but it’s not easy to do.
The stress test is a way to ensure that people seeking a mortgage don’t get into debt over their heads, that they only borrow what they can pay back.
Removing this test will increase home sales in the short term. In the long term, the effects are more dire – take a look at the United States.
At the beginning of this century, American policy-makers thought the economy could be improved if more people owned homes. To increase home purchases, mortgages were freely and generously offered to people regardless of their income levels or ability to repay.
In the short term, U.S. home sales rose and all was well. In the longer run, the news was bad. People who were allowed and even encouraged to get into debt over their heads couldn’t keep up payments and lost their homes.
The situation in the U.S. wasn’t as bad as it would have been in Canada, since in some states mortgage debt applies only to your home; other assets or income can’t be attached to pay it. So some Americans could just walk away from their homes and their debt problems.
Lenders were left holding the bag and this contributed in no small part to the recession that began in 2008.
Technology has brought us Twitter and many wonderful things. It hasn’t yet replaced our human capacity to deal with multiple ideas and complex connections.
But even if the information we receive is delivered in tweets and other more discreet bits, it’s up to us to check out more than one news feed and put together the big picture.
Troy Media columnist Roslyn Kunin is a consulting economist and speaker.
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