The ownership society

Ownership society and the American/Canadian dream

”We’re creating… an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, welcome to my house, welcome to my piece of property.” – President George W. Bush, October 2004.

Sometimes it’s worth remembering that humans have exceptionally short memories….and we are terrible students of history.  It bears noting that the current love affair with real estate (and associated stigma with renting) is a new phenomenon within the context of even the last half century.  It hasn’t always been this way.  One need only look at our record high home ownership rate in Canada to see this.

Somewhere along the line we stopped looking at a house as a place to live, separate from our savings and wealth, and instead we embraced the house as the new source of wealth at the expense of what used to be considered savings.  Simultaneously, we developed a collective notion that every person ought to own their home…that it is a fundamental human right.

Even more significantly, some western nations (particularly in the English speaking world) made it a matter of public policy to encourage home ownership.  Here in Canada, CMHC was created for this very purpose.  The benefits of high home ownership rates to a society are often purported to include social stability, higher educational achievement, increased civil participation, and lower crime rates.  And yet even these arguments are questionable once we start comparing them to the actual experience of other countries with notably lower home ownership rates: France, Denmark, Netherlands, Germany (all around 50%).

The negative economic impacts of the home ownership society

In fairness I actually believe that there are social benefits to home ownership.  My concern is that government involvement in promoting home ownership has potentially negative economic impacts.  Several papers, most notably by the OECD, have linked high home ownership rates with lower labour mobility.  The natural repercussion is higher and more persistent unemployment during recessions in countries with higher home ownership rates.  But the economic dangers don’t stop there.

It’s worth noting that it’s widely accepted among those who study the US housing meltdown that one of the precipitating factors to the fiasco was government involvement in encouraging home ownership in the years leading up to the crisis.  Government sponsored entities like Fannie Mae, Freddie Mac, and the Federal Home Loan Banks all funded or guaranteed trillions in mortgages.  Tax policy was aimed at promoting home ownership via interest deductability (in Canada we have tax free capital gains on primary residences which serves a similar purpose).  But arguably the greatest policy blunder was the Community Reinvestment Act which had the following purpose:

“The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods”

Much has been written both defending and attacking the CRA for its (potential) role in the housing crisis.   It’s well worth reading some of it.  But is it relevant to us in Canada?

For that let’s turn back the clock a little and revisit a speech given by Laurence H. Meyer who at the time was a governor of the US Federal Reserve.  The speech was given at the 1998 Community Reinvestment Act Conference of Consumer Bankers and was titled ‘Community Reinvestment in an Era of Bank Consolidation and Deregulation‘.  Some snippets:

“The Community Reinvestment Act has contributed to this increase in the availability and affordability of credit. At a minimum, CRA has helped spur the development of new tools and techniques to help serve credit needs that in the past banks were either unable or unwilling to serve. At its best, CRA also has stimulated competition for loans and banking services in low- and moderate-income communities”

“One quite interesting development is use of these technologies by banks to develop and market new credit programs that are specifically targeted toward low- and moderate-income consumers. New mortgage products, for example, that employ low or no down payments and up to 100 percent loan-to-value ratios…”

We know how that ended.

The issue for me is that we know that negative equity is the primary motivator for mortgage default, be it in a recourse or non-recourse jurisdiction.  If banks want to take risks by giving no money down mortgages to customers, ultimately that’s their decision.  Of course the banks understand the risk and would never do it without explicit government guarantees on the mortgages.

But what has me shaking my head is similar boneheaded government initiatives in our own country.  To wit:

Saskatoon spending $3M for home down payments

“The City of Saskatoon is going to start financing loans for “moderate income” renters who want to make the jump to home ownership.

On Monday, council approved a plan to spend $3 million to help 250 families over five years raise down payments so they can get mortgages.

Under the plan, individuals earning between $44,500 and $70,000 (or families earning between $52,000 and $70,000) can apply to get a low-income loan for a five per cent down payment.”

Why?  Have we learned nothing of the dangers of zero equity mortgages, which is exactly what this is…

And the madness is not limited to Saskatoon.  Here in Ontario we have our own taxpayer sponsored plan to give away interest free down payments:

The Canada-Ontario Affordable Housing Program Homeownership Component

“The Government of Ontario has increased from $62,600 to $75,800 the maximum amount a household can earn to be eligible to receive interest-free down- payment assistance loans”

Once again…..why?  We know there are additional risks with high ratio mortgages…..after all, there is a reason why the banks won’t touch them without a government guarantee on the principal.  So why would we use taxpayer money to encourage this if in fact the societal benefits of high home ownership rates are largely unproven?  If we consider Ontario’s ridiculous plan, at best we get back the original loan amount over the course of 20 years with no interest earned on our tax payer dollars.  At worst we lose those dollars to default and are unable to recapture them by selling the home in a falling market.  And for what?

Meanwhile we are accumulating a per-capita debt burden in Ontario that is making California blush.  Good to know we have extra tax dollars to be spent on such worthwhile programs.

Cheers

Ben

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12 Responses to The ownership society

  1. Mango says:

    Ben, I agree, somewhere a home went from being a financial investment to “entitlement”. Banks however don’t view it that way. You pay, you can stay is all that matters to them. The mortgage payer however “dreams” or feels society owes them a ownership at any cost. This is what i believe has made people jump into housing at such a fast rate, thus bringing on higher prices and ever so more pushing humans globally to lust for ownership. This is a very large human race movement (as your blog shows, home lust is everywhere and playing out in its own way) – social services, welfare, health care and now we have tacked on homes.

    When these ideologies clash, it won’t end well. But who can stand up a say that – “Hey you, with that crappy salary, you must stay a renter forever” We have created CMHC, Fannie, Freddie and pushed people to believe in that “dream”

    In the US, social groups are now looking at wall street and blaming them for foreclosures and are upset that people are making money, that people are homeless while homes owned by banks are empty. They are taking up arms and asking for “free” shelter as a result. What gives the right to feel this way? Why do they feel this way? What happened to hard work, savings, large down payments? Modern finance seems to tell us different.

    This Obama generation is one of entitlement, Canada’s social fabric is by no means different. Here people expect a floor on life, home ownership now has to be included in that.

    How do you change that mindset is the real question?

    • Jordan says:

      What gives the right to feel this way? Why do they feel this way?

      After seeing banks and car companies being bailed out to the tune of billions of dollars, I would think that their reaction was natural.

      This Obama generation is one of entitlement

      George Bush’s “ownership society” speech (quoted by Ben at the top of his post) was made before Obama had even held elected office. Why connect the entitlement to Obama? It started a long time before he came around.

  2. rp1 says:

    We are just so stupid, it can not be helped. My Mom would always say: “if everybody else jumped off a bridge, will you jump too?” For modern societies the answer is yes. The herd rules all. We will continue to jump even as we watch people splattering on the rocks below, believing ourselves to be infallible, so long as everybody else thinks that too. A meaningless existence.

  3. John in Ottawa says:

    Interesting post Ben!

    I often wonder about the genesis of these programs. Who gets the ball rolling and why? Who approaches city council and how do they convince council the program is worthwhile.

    The Saskatoon program is only going to help between 250 and 300 families or less than half of one percent of Saskatoon families. That doesn’t seem like much, really. It begs the question, why bother? Are we really that cruel a society if we suggest those 250 families should rent or save a little money first before buying?

    I guess there aren’t any single welfare moms in Saskatoon that can’t make ends meet and put warm clothes on their kids. They must have all been taken care of first.

    • John in Ottawa says:

      My rhetorical question has been bothering me all morning. Qui bono? I’m sure “Moderate Income Saskatooner’s for Down Payment Relief” hasn’t created a Facebook page or hired a high priced lobbyist.

      I can come up with only one influential group that would graciously step forward on behalf of this previously unidentified and under appreciated sliver of society. Property developers. Could be a little over building problem in Saskatoon.

  4. backwardsevolution says:

    Why? The banks make money and they can’t lose. The FIRE industry needs to be put out.

    Why do most programs come into existence? Because corporate business benefits. You and I are not part of the think tanks.

  5. Miminiska Matto says:

    Hey Ben, lovin’ the blog!

    I’ve been reading Fault Lines by Raghuram G. Rajan and it covers similar themes that you do here.

    http://www.amazon.ca/Fault-Lines-Fractures-Threaten-Economy/dp/0691146837

    He makes an interesting case that the education system has failed to keep pace with globalization and the transformation of western economies away from low-skill manufacturing towards an “idea” based, higher specialized economy. The result has been stagnating wages and greater income disparity which politicians have tried to fix in the short term by disastrously pushing home-ownership and easy access to credit. Couple this with a culture of declining ability to delay gratification and you have some real potential for nastiness.

    Kind Regards

  6. Mamabear says:

    I’ve just sent your last paragraph to my MPP for explanation, I’ll let you know what his response is.

  7. jesse says:

    “Once again…..why?”

    Because governments can fulfill their mandate — enabling access to affordable housing for lower income households — without measurably impacting their balance sheets. It will all end well I’m sure.

  8. JH says:

    Hi Ben,

    I understand CMHC will insure rental property mortgages and also has no limit on house price. Do you have any comments as to why anyone thought these lame-brain ideas would help people get into a first home of their own? Why are we taxpayers having to support speculation and move-up buyers who don’t even have 20% down? Why not limit a family to only one CMHC-insured mortgage at a time? (I’m assuming here, that since rentals are allowed, they’d insure both a primary residence and rental properties for the same family). CHMC’s website lists nursing homes among other possibilities that qualify for insurance. What gives?? What can we do about this, other than lobby our local MPs to change these policies?

    Thanks,
    JH

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