The world might be able to learn something from Canada about avoiding another housing-related financial meltdown, as the government recently announced several changes to the rules governing government insured residential mortgages. These changes are designed to reduce leverage in the system and promote housing market stability in the country.

This is the third time since 2008 that the government has tinkered with the system in an effort to reduce leverage and risk in the Canadian housing market.

The Canadian government has instituted several changes related to government-insured mortgages in an effort to promote housing market stability. These changes will reduce leverage in the system and are part of an effort to increase home ownership in Canada.

At the same time, America’s biggest foreign creditor wants assurances that its $1.2-trillion in U.S. Treasury holdings are safe despite uncertainty in Washington over how much money the U.S. can borrow to pay its bills. If Congress fails to increase that borrowing limit before August, that would likely send interest rates soaring and reduce the value of those Chinese investments

China’s expanding economic might will give it greater leverage now.

Nearly one in two clients – 46 per cent of those polled in the bank's private banking division – are using leverage as an investment strategy.

Using borrowed money to mini- mize taxes has also become common. Changing the mindset of the investor has been key, said Robert Doyle, head of client structures for RBC. In the past, such leverage was generally used as a short-term strategy rather than a long-term foundation for building wealth.

At the time, the average household debt level including mortgages had reached a record 146 per cent of personal disposable income.

Ottawa also moved to lower the amount Canadians borrow against their home, reducing the amount homeowners can leverage in a mortgage refinancing to 85 per cent of the property’s value, from 90 per cent.

Even though Canada’s economic downturn was shorter and less brutal than in many countries, rising debt could be a problem in a future downturn, particularly if housing prices are hit.

Between 1990 and 2010, the Canadian prime rate declined by more than 10 percentage points, while inflation fell significantly. The result was a near-perfect environment for financial assets, pushing values for stocks and bonds ever higher.

Empowered by the regulator, the Canadian banks have leveraged their massive size and distribution powers to dominate virtually all the financial services sector.

The combined outcome was an explosion in trading and market-sensitive revenues, which grew by more than 15 per cent a year for two decades, and today are approximately 20 per cent of gross revenues. Although the process is not quite complete, the banks are also well on their way to dominating the domestic mutual fund business.