Marc is in charge of mortgages at a large bank, and he’s getting nervous.
“Many cases are scaring me. One customer owes $60,000 in credit card debt, and he wants to refinance his mortgage to repay it.”
Another uses his house as an ATM. “He’s refinanced his mortgage eight times. To buy a Ski-doo, a truck, a boat … The day his house’s value starts falling, this guy will lose everything.”
Is this scene taking place in the U.S.? No. In Montreal. Forget about Canada Day. Partly thanks to our politicians, we’ve all become Americans — version 2007, a few months before their economy collapsed.
Remember what caused the financial crisis: The central bank (the Fed) slashed interest rates, holding them too low, too long. What do you do when interest rates are low? You borrow to buy a house. You take out a line of credit and buy a car. Save? When a deposit certificate earns 1.5 per cent? No thanks. With help from “creative” bankers, this fuelled the biggest housing and debt bubble the world has ever seen. Then the bubble popped, leaving millions unemployed.
What are politicians doing here? Same thing. The Bank of Canada has kept interest rates at rock bottom levels for almost three years now.
Remember Fannie Mae and Freddie Mac? Those loan companies have so far cost U.S. taxpayers $250 billion. Here we have the CMHC — a Crown Corporation that insures about 60 per cent of banks’ mortgage loans — generally the riskiest ones. Last year, the government allowed CMHC to insure up to $600 billion in mortgages, up from $450 billion the year before. Since CMHC is backed by taxpayer money, banks can lend to people who can’t afford it without bearing the risk. You think they had any scruples about doing so?
As a result, people are spending like there’s no tomorrow. The median house price in Vancouver now exceeds $700,000. In Toronto, an average bungalow will set you back $400,000. Meanwhile, Canadians are drowning in debt. A recent survey showed that one in four of us would be unable to cope with an unexpected expense of $5,000, even if allowed to use credit cards.
We have created a legion of subprime borrowers, one broken refrigerator away from default. If interest rates rise, the U.S. economy relapses, or home prices fall … our house of cards collapses.
Politicians should understand that building a healthy economy requires saving, not mountains of debt. In the meantime, we’ve become Americans, circa 2007. No wonder Canada fared well during the crisis: It hasn’t hit home yet.
David Descôteaux est chercheur à l'Institut économique de Montréal.