our friendly financial institutions

In addition to the marketing machine which does so much to drive the housing real estate market, the very nature of the Western economic system - including a reliable system of land titles and financial institutions willing to provide credit - provides the framework enabling the ownership and sale of land and property. As the course content points out, it is very unlikely that anyone would be able to own their home without the necessity of a mortgage: the bank provides most of the money you require to buy your home in exchange for the right to seize your property should you default on your payments, as well as a hefty surcharge by way of yearly interest payments. In this way, many people pay for their homes at minimum a couple of times over by the time they actually own it, but by doing so they are able to live in a home as they are buying it, instead of the not-so-feasible alternative of paying rent to a landlord while attempting to save for a home.

Although this process is so ubiquitous as to seem hardly worth mentioning, it is extremely important in determining the shape of our cities. The interest rates charged by banks on mortgages have historically varied widely, but have been comparatively low for a while. More and more, financial institutions are competing with each other to attract mortgagees, offering a confusing array of new financing packages, and generally lending money to riskier clients. As this Globe and Mail article points out, while the recent upsurge in 'alternative' mortgages (especially in the United States) has made home ownership accessible to more people than ever, it has also left them more vulnerable than before to market fluctuations:

The conventional mortgage that Mom and Dad had -- a fixed rate over 30 years -- has given way to an increasingly exotic array of offerings. These include subprime loans, or high-rate mortgages for riskier borrowers. Subprime loans now account for nearly a quarter of all new U.S. home mortgages. (That compares to roughly 5 per cent in Canada.) There are also interest-only loans (designed to maximize tax breaks), no-down-payment mortgages and negative amortization loans, where borrowers take a break on monthly interest charges and add the amount to their debt.

Obviously, this new family of financing options makes it significantly easier for less qualified buyers to qualify for a home loan. But it also could mean more serious consequences if things go wrong - if interest rates increase unexpectedly, for instance. This piece from the CBC makes clear, based on the recent U.S. "subprime mortgage meltdown," some of the concerns surrounding 'subprime' mortgages and the effect they could have on the economy overall:

By late 2006, one subprime loan in eight was in default across the U.S. Foreclosures were soaring. More than 20 subprime lenders were bankrupt. And the National Community Reinvestment Coalition estimated that as many as 1.5 million Americans could lose their homes by the time all the damage is done.

Could the same thing happen here? What would be the outcome in Vancouver, for example, if the many people who bought an expensive condo they could afford at 4% interest suddenly found themselves proud owners of the same expensive condo at 10% interest when their mortgage came up for renewal? Certainly, this change would have a significant effect on housing prices, and the net costs of home ownership as indexed by RBC's quarterly Housing Affordability Index, making it much less affordable overall to own. Clearly, for better or for ill, the shift toward non-traditional mortgages has presented a riskier side of investment in real estate, but it has also had a profound effect on the demographics of the city by allowing a wider range of buyers into neighbourhoods they would once have been unable to afford.