A quiz for you. First the scenario:

Common wisdom is mortgage rates can’t drop. In fact, most people expect them to rise, maybe double over the next couple of years. This will makes large debts harder to pay. Higher rates will therefore render homes, now at record prices, less affordable. House values will likely moderate as a result.
Do you:

(a) Recognize the risk of falling prices and steer clear of the market?
(b) Wait to buy so you can reduce the size of your mortgage?
(c) Take advantage of robust financial markets to grow your downpayment?
(d) Buy only if you can weather a rate hike and an equity drop? Or,
(e) Panic, borrow as much money as possible with the longest amortization, buy even if you have no downpayment, get into a bidding war, pay a premium over the asking price, get financial advice from your hairdresser and then call home to brag to your mom?

Well, if you picked (e), you can go straight to Toronto and assume your rightful role as a Housing Analyst. Like Will Dunning.

“Those are very robust numbers,” said Toronto housing analyst Will Dunning (comment to the Toronto Star on August stats released Thursday). “Part of this seems to be fuelled by the fact that some buyers fear interest rates will go higher next year and are buying now rather than taking a chance on next year.”

Bingo. Risk. Hate the sucker. After all, why would those young buyers risk buying a house when it might cost less in the autumn of 2010? Or avoid taking on the kind of mortgage necessary to buy a home at its most expensive moment in history? Or maybe even to suffer the acute embarrassment in front of your peers of having an actual downpayment? I mean, how sick is that?

But it ain’t just Godless T.O. Even in Halifax, where people are more sensible even if they can’t run a sewage plant, strange things have been happening. Here’s an email I received Thursday night from young Jeff:

“I’ve only recently come across your blog and it definitely has made me second guess the biggest investment I’ve ever done.   I’m from Halifax, NS and bought my first house at 25.  It’s a 4 bedroom split and I paid $187 500.  I make about 56 G a year.  Here’s how it all happened.  I was awake one Sunday night in my $900 a month apartment and called RBC’s 24 hour hotline and asked about mortgages.   Tuesday I met with a mortgage specialist and was told I was good at zero down for 40 years up to 230ish.  I met with a real estate agent Thurs, looked at houses Sat and had my first house by Sunday.”

Jeff tells me he has rented a bunch of rooms out and is collecting rent from others so he can meet the mortgage payments. “People tell me I’ve got my shit togoether for a young guy,” he says, “but I wasn’t concerned about paying down a mortgage.

“Now I know I’ll have to make a killing to make anything on this house since I had nothing going in….should I have stayed renting?  I feel stuck in this house now, because I can’t get a mortgage this high anymore or for this long.  When the renters eventually grow up and move on and interest rates jump….I’m done.  What do you think?”

I think the kid gets it.

But this little tale (along with the ‘analyst’ quote above) should underscore for everyone the fragility of the times we’re in. When people rush to load up on debt in advance of debt charges increasing, when newbies are pushed into investments they don’t understand, when bankers shower money on novice investors without savings and realtors sell to the uninformed, then this is no stable market. It might be robust, alright, but it’s also unsustainable.

Worse, it’s unethical.

In the financial services industry no investment advisor, stock broker or bond salesman is even allowed to follow such practices. Iron-fisted securities commissions ensure the ‘know your client’ rule is strictly enforced. The overriding principle of regulators is investor protection.

When it comes to the housing business, my gang of biker friends stands in stark moral contrast.