Can The Canadian Economy Avoid The Mistakes The U.S Made Four Years Ago?

16 July 2012 11:30 - Phoebe Robinson

Can The Canadian Economy Avoid The Mistakes The U.S Made Four Years Ago?

There are worries from the inside over the Canadian economy. Economists are worried that Canada is heading the way the U.S economy was in 2008-09, especially in the housing market. There are concerns over the debt levels being carried by the average household. The Witness Finance Minister Jim Flaherty’s recently announced that he was changing the maximum amortization on a government-backed mortgage to 25 years from 30 years. 

This decision has had mixed reviews. Some have criticised the announcements as they worry that the younger generations will have a significantly harder time trying to afford first homes. However others have said that reducing the limit for mortgage amortization is a good public policy which will calm the speculation over the real estate sector but at the same time it will not kill the home-construction industry it is good for homeowners in general.  There are several reasons for this.

U.S banks and lending firms took part in two inappropriate activities in the U.S housing and mortgage market before 2008, both these sectors allowed the government in the hope of assisting low-income Americans to own their own homes. In order for this to happen, firstly banks were offering mortgages with very low interest rates to first time borrowers, these rates would however later rise to higher ultimate rates. Secondly, banks were offering mortgages at very high ratios in comparison to the values of the house. This would have been ok for both homeowners and banks if the value of houses continued to rise. This however did not happen. Homeowner’s mortgages with low introductory rates came up for renewal and lots of people could not afford the new higher payments that came, so people had to walk away from their loans and their homes.  Furthermore for those people who had used their homes as collateral against their mortgage suffered. The falling value of house prices meant that they now had a mortgage with an outstanding value that was bigger than the value of their home. Therefore these people had to leave their homes and hand the keys to the bailiffs.

Canada has been lucky in the sense that the governments in recent years have always ensured that higher down payments for homes are paid. With new the new limits on the amortization period, the Canadian government is determined to avoid the kind of crisis that American faced four years ago. Therefore this new decision seems forward thinking and will safeguard the economy in general.