Livio Di Matteo
National Post
April 30, 2003

If Ontario Premier Ernie Eves makes good on his promise, today’s Throne Speech may outline a provincial plan for mortgage interest income tax deductibility. This plan echoes a proposal that the federal Tories have made nationally.

The proposal has little economic merit. It will not help tenants, a group that government claims to be deserving of protection, and it will do nothing to help the overall Ontario economy.

The concept of mortgage interest deductibility is a simple one. Homeowners with mortgages would be allowed to deduct a portion of their interest payments from their income tax. This is already a common policy in the United States, which provides 100% deductibility of mortgage interest under the federal income tax.

Given that the average home mortgage in Canada reached a value of $108,700 in 2002, and that nearly two-thirds of Canadians own homes, the political calculus underlying this policy is obvious. For a homeowner with a mortgage, this tax break could be worth thousands of dollars. However, this tax break would not assist those individuals who rent. The subsidy to homeowners effectively lowers the cost of housing for non-renters relative to renters. A mortgage interest deductibility plan amounts to government bias against tenants and towards home ownership.

Because it tilts the housing market towards ownership, mortgage interest deductibility has serious economic implications. Because people see housing as an investment as well as a need, mortgage interest deductibility subsidizes both the consumption of housing by homeowners and their wealth accumulation. This subsidy accentuates the existing differences in wealth and income between homeowners and renters.

In 1999, equity in the principal residence accounted for about 40% of the average net worth of homeowners. The median net worth of owners of housing was $171,150 in 1999, up 21% from 1984, whereas the median net worth of non-owners was $10,201, down 41% from 1984. To add to the inequity of subsidizing the housing of this far more affluent group of Canadians, mortgage deductibility also promotes suburban sprawl: Rates of home ownership are much higher in rural areas and smaller centers with populations below 10,000, encouraging people to leave cities by transfering wealth from large metropolitan areas to lower-density areas.

A mortgage interest deductibility policy implies a social consensus that owning your own home is a superior form of housing than renting. B ut why should one form of housing receive preferential tax treatment over another? After all, home ownership is not in any way endangered. Ownership rates for households in Canada in 2001 were at nearly 66%, up from 64% in 1996. For the past three decades, the number of households owning their homes has grown faster than the number of renter households. Home ownership rates range from a high of 78% in Newfoundland to a low of 58% in Quebec.

The housing market is robust with national single detached housing starts at 125,374 in 2002, up from 77,996 in 1996. The growth rate for single detached housing starts was 4.2% in 2001 and 30.6% in 2002. A mortgage interest deductibility scheme will add economic fuel to an already robust housing market and create the possibility of a housing price bubble. Should this bubble burst, it would hurt homeowners with mortgages as well as those without mortgages who were unable to take advantage of the latest government subsidy scheme.

If anything, it is the rental market that needs some help, given low vacancy rates and the fact that the average rent for a two-bedroom apartment in Canada has risen 17% since 1996. Apartment vacancy rates in Canada in 2002 were 2.1%, down from 4.5% in 1995, making for a tight market.

Of course, mortgage interest deductibility dangles the dream of home ownership to renters. However, to get a mortgage interest deduction break on your income tax, it helps to have a secure job and income high enough that you pay sufficient taxes to apply your mortgage interest deduction against. In other words, a mortgage interest deduction will not provide much tax incentive to boost home purchases among those with low incomes or those with insecure employment. The average annual income of renters is approximately half that of those who own their housing.

A mortgage interest deductibility program can cost Canadian government treasuries hundreds of million of dollars – in the United States, where homeowners deduct mortgage interest from their income taxes, the cost exceeds US$60-billion a year. According to a study by the Joint Committee on Taxation of Congress, taxpayers with incomes over US$50,000 claimed 89% of all the tax benefits from mortgage interest deductions.

In Canada, home ownership rates currently are not much different than those in the United States. On either side of the border, mortgage interest deductibility is bad tax policy that creates a subsidy to already advantaged homeowners and does nothing for renters.

Livio Di Matteo is a contributor to the Urban Renaissance Institute. He teaches in the Economics Department at Lakehead University.

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Readers respond

May 12, 2003

Livio Di Matteo asserts that mortgage interest deductibility would not help tenants and implies that owning your own home is not a superior form of housing.

The fact is that homeownership is superior to renting. Study after study has shown that in the long run, the net worth of homeowners is far higher than tenants, thus homeowners are far more secure and comfortable in their retirement, which surely is a good thing.

As for the suggestion that mortgage interest deductibility would not help tenants, the Greater Toronto Home Builders’ Association proposal was a direct response to a province-wide poll of renters which showed the majority of renters aspire to homeownership. The only thing holding them back is lack of a downpayment.

Our association has proposed that renters who purchase homes should be allowed to deduct their mortgage interest for the first five years, starting with a 50% deduction in the first year, when the assistance is most needed, declining to 10% in the fifth year, after which they would be on their own. We have also suggested that the existing Ontario Home Ownership Savings Plan be enhanced to help renters save for their first home more quickly. Both of these proposals go with the grain of market forces and would be far more cost-efficient than government-built housing.

I fail to see how a proposal that would turn tenants into homeowners amounts to “government bias against tenants.” The worst thing that could happen would be that our apartment vacancy rates would increase and rents would decrease.

Our federal and provincial governments already encourage citizens to save for their retirement through RRSPs. Since home equity represents the ultimate retirement nest-egg, mortgage interest deductibility should be looked upon in the same light. And on that basis, extending mortgage interest deductibility to existing homeowners should also be considered.

Joe Valela, president, Greater Toronto Home Builders’ Association, Toronto.

April 30, 2003

It is hard to believe the column opposing mortgage interest deductibility (page FP 17, April 30) was written by someone who apparently calls himself an economist. His argument fails for the simple reason that tenants already enjoy the benefits of mortgage interest deductibility.

Unlike private homeowners, landlords may deduct mortgage interest, a cost reduction which, in an open marketplace, is passed along to tenants (if Mr. Di Matteo disagrees with that statement, ask him what he thinks would happen to rents if landlords were suddenly unable to deduct mortgage interest).

Deductibility of mortgage interest on private houses would therefore inject equity into a situation which is now biased toward tenants and against homeowners.

Lakehead University, where Mr. Di Matteo teaches economics, should re-name its economics faculty the Faculty of Left Wing Political Activism.

Dave Wreford, Winnipeg, Manitoba.