Housing Bubble Burst? So What

So far, we Canadians have avoided the kind of catastrophic housing crash our neighbors south of the boarder experienced during the 2008 financial crisis.  And although a popping of Canada’s housing bubble would unlikely affect the global markets, it would be a downer domestically.

 Most people calculate their net worth largely based on the value of their homes.  The average Canadian household has a net-worth of $400,000 and home equity accounts for about 38% of it.  According to a study by the debt-rating agency DBRS; housing values could drop up to 40% and the average household could withstand it, providing their other assets remain intact.

Recent changes to the Canada Mortgage and Housing Corp. rules; was one of the latest moves by the federal government to slow the accumulation of debt by Canadian households.  These changes include the maximum term for insured mortgages was reduced from 30 to 25 years, and homes that cost over $1 million will no longer qualify for coverage.  Furthermore, the limit on refinancing loans was reduced to 80% of the value of the home, down from 85%.

Although Canadians are in a better position than most; mortgage debt has made a serious impact on disposable income.  Debt has risen from 73% to 153%.  The goal of the DBRS study was to make Canadians feel more secure about their debt levels.  So even if the housing bubble bursts; most likely people won’t default on their mortgage, they will have simply paid too much for their house.

I have always said you increase your wealth two ways; invest your money, or pay down your debt.  If you are nervous with the markets being so volatile lately, maybe it is a good idea to use that extra cash to pay down your mortgage.

Have a great weekend, and stay cool!

Tracey

Source: Advisor.ca