This year, keeping inflation under
control is proving difficult for the Bank of Canada. The main reasons for this
are, increased spending by consumers and the economic stimulus program of the
federal government. The housing sector is one of the main areas of concern. The ‘wealth effect’ resulting from the increasing value of real estate is inducing
consumers to borrow rather than save in order to purchase desired things as
they feel wealthier that they actually are.
Reports
indicate that average debt stands for 148 percent of disposable income. This
has become a matter of concern for the federal Finance Minister and the Governor
of Bank of Canada as they fear that this may lead to a housing bubble, which
can be detrimental for the entire Canadian economy.
To counter the threat of a housing
bubble and to curb rising household debt, federal Finance Minister Jim Flaherty
has made some changes in the mortgage rules. The changes include lowering of
the maximum sum that can be borrowed for a mortgage refinancing from 90 percent
of the property value to 85 percent, withdrawing the government insurance on home
equity line of credit and lowering the maximum period for paying back from
35 years to 30 years.
The changes will help the central bank
avoid an increase in interest rates for preventing excessive borrowing. Higher
interest rates discourage business investments, which are necessary for
sustained recovery, so they would have escalated the problem of household debts
rather than provide a solution.The government is hoping that these
changes would encourage people to save rather than borrow to buy.
