Canadian mortgage requirements tightened in recent weeks from a maximum amortization period of 30 years to 25 years, the consequences of which will serve to undermine the currently bloated real-estate market as less buyers will be able to enter into the market as mortgages become more expensive (assuming a same down payment).

How is this market doomed?

The current real estate bubble can best be analogized with a ponzi scheme. Although ponzi schemes are notorious for security investments (think Bernie Madoff), in this case it can also be associated with real-estate: this market is fueled on perpetually new debt (see: “Fractional Reserve Banking” to see how debt serves as ‘fuel’). This debt is fueled by additional people entering into the market to increase total national mortgage debt.

If total mortgage debt is not expanding, it is contracting. This contraction in total debt decreases the supply of available new credit and, therefore, can restrict liquidity for banks to create loans and mortgages, in turn affecting real-estate prices (in this case, downwards).

Much of Canadians purchasing a home today is participating in a nation-wide ponzi scheme based on ever increasing debt. Today, real estate is traded like a financial asset as its price is based on the ability to get a mortgage.  Take away the mortgage market and home prices will crash. If prices were based on real savings in a bank then this would be very different. But just as Bernie Madoff victimized many investors and ended up in jail for his financial schemes, the Canadian taxpayer will, as a whole, eventually suffer the consequences of falling home prices. Yet they won’t have the luxury of expiating their frustration on a Madoff or an Earl Jones; there will be no one in particular on which they can place the blame.

Who is responsible for this ponzi scheme?

Those in government and central banks, responsible for our laws and money. It appears, unfortunately, that most are oblivious to what is going on and have adopted failed Keynesian economics, a philosophy which benefits only the few.

When the fruits of this government ponzi scheme finally come home to roost, the very same people who created it will say that it was impossible to see it coming. They will blame it on speculators and maybe even the European debt crisis.

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