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