Housing Regulators Forced to Save the Canadian Lenders and Public from their own Hubris and Irrationality. Lines of Credit and Mortgages to Become More Difficult.

Canadian financial regulators are again indicating that they are going to start tightening up on the lending practices of the country's banks. With the housing market still hot in many Canadian cities, many home-buyers are digging themselves into deep financial holes. As they pile on more and more mortgage, credit, and other debt the Canadian consumer is banking on an ever increasing value of their home to save the day.


In particular, the Office of the Superintendent of Financial Institutions wants new rules in place that require lenders to take a closer look at the value of people's homes, and investigate more closely the financial habits of their borrowers. Due-diligence requirements should already be mandatory for employees of these institutions, but lately it is clear that most of Canada's banks are more than willing to lead us down the same path as the United States, Ireland, England, and many other disastrous property markets. Quite simply, people are buying houses that they cannot afford, and then taking out lines of credit on top of it, which they cannot hope to pay back in a reasonable amount of time.


According to the Globe and Mail:

"policy makers and regulators are concerned about the debts consumers are taking on as a result of persistently low rates. The fear in Ottawa is that many borrowers will struggle to keep up their payments once rates rise substantially, posing a threat to banks and the economy. At the same time, economists say that Canada’s housing market – most notably in Toronto and Vancouver – is overpriced. If house prices fall at the same time as interest rates rise, borrowers could find themselves under water."


Ultimately, it should come down to cash flow. We need to start evaluating whether or not borrowers have the flexibility to pay back their debts in a reasonable amount of time based on their current and historical income and expense records. Too much borrowing power is granted simply on a generalized perception of real estate values that are currently at gross multiples to the average buyers annual income.


Will the banks be happy with new rules? Of course not initially, but over-time it will help to save them from their own greed and hubris, and the irrational expectations of the consumer marketplace.