March 12, 2013

The global debt crisis has bombarded our senses since 2007 with unending bad news stories of all shapes and sizes. Now, the family home has been put on the chopping block – a new causality of our struggles with debt. Isn’t that just great?

Unfortunately the Globe and Mail reported February 17th 2013, that Mark Carney, the outgoing Governor of the Bank of Canada, not only warns us that the correction underway in Canadian house prices is likely to persist for another two years….but that there’s a bit more to come over the next couple of years.”

He then goes on to say that Canadians shouldn’t count on home prices to be their main source of wealth gains. 

What is this supposed to mean?

Since the earliest postwar days of consumerism and the rise of the middle class, the residential home in Canada has been considered primary and the biggest investment most middle and lower income families would make. This was a sure thing, unlike stocks and bonds - over the long term. The family home has consistently been viewed as a secure investment by experts in all branches of personal finance.

Now, all of a sudden, one of the highest ranking financial experts in the country counters the conventional wisdom since the 1950s?

I say, “Leave my house alone.” There are many other steps that can be taken to respond to worrisome household debt loads.

To begin with, we must separate mortgage debt from consumer debt. The current practice of mixing the two together misleads the true levels of troublesome debt – the unsecured debt.

Mortgage debt stands on the shoulders of real property, an asset. To get a true picture of the debt owed you need to subtract the equity from the debt. This significantly transforms the picture of impossible levels of debt because most mortgaged properties have equity, that is to say,  a surplus.

Unsecured debt is a much different story. This is the credit card debt and the lines of credit that are unsecured. Whether or not the unsecured debt levels are troublesome would require information regarding the other assets that individuals and families own. So, before we panic over the consumer debt levels, let’s examine all the relevant details.

Secured consumer debt, similar to mortgaged houses, has assets to support the borrowing. We would need to subtract the value of the cars and other instruments of security from the total debt to get the true picture.

To lump all of the debt into one barrel and call it all household debt misstates the true financial picture.

A more thorough review to better understand the dynamics of consumer debt and why people may have trouble paying the debt off would be the next step. This would require a more thorough analysis of the kinds of debt people have trouble with - and  allow regulators to take a more targeted approach to the real problem with debt.

One issue that has kept afloat since the global debt crisis began has been the historic low interest rates that have spurred much of the real estate activity in the recent past. In most circles this would be viewed as prudent – take advantage of favourable market conditions.

However, the matter of interest has not been mentioned with reference to the consumer debt. The interest on consumer debt has taken advantage of the historic prime rate lows by keeping them high. Since this practice is hard to defend when the profit margin is so high for the financial institutions, it makes much more sense that regulatory steps be taken here to reduce consumer interest rates which most likely would result in a reduction in the consumer debt. In any event the consumer debt problem should be tackled first before driving a silver stake into the real estate market.

In any event, I will remain faithful to the conventional wisdom of the past – which has succeeded for the last 60 years. The family home is a central aspect to getting ahead financially, not just because of equity growth but because of property ownership. It is very difficult to succeed financially while paying rent.

So, please leave our houses alone – or at least until other positive remedial steps are taken to assist consumers in paying off their unproductive consumer debt.

Remember, if you are experiencing financial difficulties do not wait. Call Solutions Credit Counselling at 1(877)588-9491 or fill out our Debt Consolidation Questionnaire and get your Free Credit Counselling Advice today.

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