Wednesday, March 21, 2012

No Changing Minds when It Comes to Mortgage Debt!

I just got finished reading an article in the Financial Post called “Why you need to pay off your debt now”. Now there was nothing really new in this article.

It pointed out the usual things like:
  • Canadians are carrying way too much debt.
  • It is mortgage debt combined with low interest rates that are the greatest risk to Canadians, not credit card debt.
  • Interest rates are historically low and it is not a matter of if they will rise, but when.
  • The Bank of Canada (Mark Carney), Finance Minister (Jim Flaherty) and big banks like economists like TD’s Craig Alexander all warning us that these levels of debts are unsustainable.
  • To expect a correction in the housing market of 10- 15%
  • Canadians face serious risk because when interest rates rise the economy will slow and some will lose their jobs.

This is all stuff that we have been told now for a least a year. The only real difference is that we are hearing it much more frequently than ever before.

Still it seems no one listens! Banks continue to lower interest rates with 5 year mortgage terms now available at 2.99% from most major banks. Realtors are telling buyers to buy now or loose out when interest rates go up. And of course people continue to pile on debt.

I have often wondered why people do not seem to change their behaviour when the facts seem to be staring them right in the face. Then I started reading the comments that followed this article and it started to become clear.

The comments I would break down into two categories:
  1. Those who are believers and have all ready taken action, in other words, warnings like this are already preaching to the choir.
  2. Those who believe that housing and debt are not issues and housing prices will rise forever. The, we will not be moved crowd!
Here is a sampling of the comments:

There's no housing bubble. People want to live in Canada since we have the most stable democracy in the world. As long as people want to come here, we'll be fine. Think housing is too expensive? Have a look at Hong Kong.
or
Just bought a house so will have a closed mortgage at 2.99% over 3 years. Will attempt to put 10% against the mortgage on each anniversary date. Have no other debt. I spend more than I should but less than my income.
or
It pays to shop around for a mortgage refinance. Mortgage rates have gone down like anything. My brother in law just got a 30-year fixed loan at 3.76%. He told me search online for 123 Refinance for the lowest rate.
or
No commentary needed. Just watch the video.
Canada's housing bubble is of epic proportions relative to its last 200+ housing history. It will unwind just as it always has in the past, but the ferocity of it will be exponentially more severe than at any times in the past. Perhaps, the Great Depression of the 1930s serves as its closest comparison, just like what the U.S. has been undergoing year 5 on.
http://vimeo.com/38500767
or
If you can't afford to pay down your debt, you shouldn't have taken it on in the first place. Have you ever heard the expression 'live within your means'?
or
Those people that have gone out and racked up debt like rates would stay low forever deserve what they have coming. 30 years ago mortgage rates were as high as 20%. Those people that think that could never happen again need to get out of their shell. I am not saying that we will reach 20%, but 6-8% for a 5 year mortgage is not unreasonable, and if you stretched to buy a $500,000 home, this is something you should have considered before you 'signed on the dotted line'. Even worse, those that have used their house as a second income via a HELOC, are about to get a rude awakening.
 or
Beware those of you that are living on credit, your house of cards will fall. Those of us with our finances in order will be the ones to benefit.
So it seems that since it is highly unlikely to be able to change anyone's mind about debt, especially mortgage debt, then the powers that be (our governments)  have only two options.
  1. Stop trying to influence behavior and just let people self-determine and if they screw up. too bad. or
  2. Take action; by changing rules to, shorten mortgage amortization and increase minimum down payments.
What do you think? Should governments just stop talking or take action or both!

Until next time.

Gord

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