Should we stop encouraging home ownership?
Home ownership is often connected to the notion of living the "American dream." But it is as much a part of Canadian identity as it is in the U.S.
Indeed, statistics show that the percentage of home ownership in Canada is edging close to 70 per cent, which is actually higher than the ratio south of the border at the moment – 65.4 per cent, a 15-year low, according to the most recent data. Many economists believe the Canadian government has played an active role in spurring home ownership, particularly by forming the Canada Mortgage and Housing Corporation back in 1946.
Primarily set up to address Canada's postwar housing shortage, the Crown corporation is now Canada's top mortgage insurance provider and has facilitated the purchase of millions of homes. But not all are convinced of the merits of pushing home ownership and some people question whether that ideal has been romanticized to the detriment of fiscal prudence.
"I don't know that home ownership should be a right and that it should be backed by taxpayer dollars and kind of be the prime mandate of a Crown corporation," says Ben Rabidoux, creator of the Economic Analyst blog, which looks into housing and mortgage trends.
Over at York University's Schulich School of Business, finance prof Moshe Milevsky also believes that too much is sometimes made of owning a home.
"The way I look at it is, I tell people your house is a big fridge," Milevsky says. "Are you romantically attached to your fridge? Do you plan to sell your fridge in 20 years and retire on it? No, it's a fridge, you store things in there.
"It's a place to live. We need it. You enjoy the benefits of it, backyard and so on, but it has to be done in perspective." Milevsky feels there has been a serious rethink now, especially in light of the U.S. housing crash six years ago, over whether home ownership makes sense for a mobile workforce that has to deal with fluctuating property values.
"If you're in your 20s or 30s, not sure what you're going to be doing for a living, and your job is relatively risky, the last thing you want to do is pile on risk," Milevsky suggests.
"But if you're a 42-year-old teacher, have two kids, and your husband has a secure job for some government agency and you know you'll be here for next 25 years, OK, maybe home ownership makes sense because your personal balance sheet is a lot safer, it's a lot more secure.
"It has to be viewed as a portfolio transaction."
Home ownership in North America is much more of a cultural phenomenon than it is in other parts of the world. About 70 per cent of Europeans rent rather than own, and in some South American countries people don't buy a house unless they have 70 to 80 per cent of the money.
Michael Haan, Canada research chair in population and social policy at the University of New Brunswick, said the differences are in part historical.
In parts of Europe, there was a landed aristocracy where individuals weren't allowed to own homes. But part of the lure of North America — the "New World" — was the promise of free land.
"So what do you do with free land? Well you have to build a house on it. So that mentality has prevailed over time," Haan says.
Also, disposable income in European cities like Paris, London and Amsterdam is quite a bit lower than in North America, and the price of housing in Europe is quite a bit higher.
"So the average individual probably finds housing to be out of reach," Haan says. "Therefore the stigma of not being able to own a home is much lower because it seems everyone within a certain social class is unable to afford a home.
In Canada, after the Second World War, the federal government wanted to help returning soldiers and young families enter the housing market, which is when CHMC came in to being.
Its role was to provide mortgage insurance so lenders wouldn't lose their shirts on a property. But over time, says Rabidoux, "we're asking taxpayers to basically take on the risk to allow people to jump into ownership with the risk being held by somebody else. And I'm not sure that's sound policy."
Inflate house prices
In a recent speech at CMHC's annual meeting, CEO Karen Kinsley said the corporation's housing finance programs "are essential components of Canada's strong and well-functioning housing finance system."
CMHC provides a range of housing options to Canadians, she said, and contributes to a stable housing system in part by addressing gaps in the marketplace left by private sector mortgage insurers.
She also argued that the corporations securitization programs lead to more choice and price competition for Canadian borrowers, adding that these programs and loan insurance have contributed $16 billion to government coffers through the income tax and net income that CMHC passes along.
Kinsley pointed out that the arrears rate of all CMHC-insured loans remains "historically low," and that a recent analysis of their portfolio "confirms that CMHC borrowers are credit-worthy" and that the corporation maintains strong reserves to cover those who fail to meet their mortgage obligations – twice the minimum level required by the Office of the Superintendent of Financial Institutions.
Still, Rabidoux, for one, suggests the CMHC has "absolutely been the key driver in the boom in the ownership rate in Canada," and that this is having an inflationary impact on everyone.
"Without that government support that's allowing people with very little down to jump into the ownership pool, you just would not see the ownership rate expanding the way that it is," he argues. He also believes the CMHC mandate is inherently self-defeating.
"They don't provide affordable housing, they provide affordable financing. And when all you do is provide affordable financing, you inflate house prices."
With CMHC loan mortgage insurance, a prospective homebuyer need only pay five per cent down on a home. Banks will secure a loan because it will be covered by the CMHC insurance.
"Now I don't think that's a healthy dynamic necessarily," Rabidoux says. "I don't think that expanding our ownership rate indefinitely is a good thing."
While not against home ownership per se, Rabidoux believes that at some point housing starts will fall substantially, and that more homes are being built than demographics would warrant.
The problem is the Canadian economy is more reliant on the current housing boom to generate GDP and labour market growth than ever before, Rabidoux says.
"So in my mind what's going to end up happening is when this whole thing turns to normalcy there's going to be a period of readjustment in the economy where there's going to be unfortunately high unemployment and persistently high unemployment.
"What happens when you have a high home ownership rate is it reduces worker mobility and that's a fairly well known phenomenon. So there's that danger as well."