(November 23, 2012) Halve the rate of home ownership.
Finance Minister Jim Flaherty is triggering a “policy-induced housing-market downturn,” in the view of experts such as those at the Canadian Association of Accredited Mortgage Professionals. They blame Flaherty for tightening the rules that apply when people seek mortgages, squeezing them out of the housing market.
The federal government no longer promotes no-down-payment mortgages, for example, no longer backs mortgages that won’t be repaid for 40 years, no longer insures those with pathetic credit scores. Instead the federal government now wants to see a 20% down payment before it offers insurance, it now wants the mortgage paid off in 25 years or less, it now wants to see a decent credit score.
Flaherty does deserve criticism, but not for curtailing too-easy credit — a move taken to prevent a housing bubble. His blame lies in failing to curtail easy credit earlier. There is no “policy-induced housing market downturn,” if by that Flaherty’s critics mean that he is interfering with a free market in mortgages that artificially depresses demand for housing. To the contrary, the government for decades has thwarted a free market in housing by pumping it up beyond anything economically rational. A free market — one without any policy inducements — might have halved the number of owner-occupied houses now standing.
By removing some federal government guarantees, Flaherty is in fact removing policies that improperly induced Canadians to buy homes. According to CAAMP’s chief economist, Will Dunning, as a result of three Flaherty steps alone “9.3% of all home buyers would be removed from the market.” But why should Flaherty stop at 9.3%? More should and would leave the market if the federal government guaranteed no one’s mortgages. Or subsidized no one’s housing through federal agencies such as CMHC. More still would leave the market if the provincial and municipal governments stopped favouring home ownership through subsidies of their own. Prior to government interventions — in good part to provide work for the construction trades during the Great Depression — terms for homeowners were far more stringent. Homeowners needed to provide down payments of at least 40%, mortgage terms were five years, and mortgagees had no duty to renew a mortgage.
What would happen to Canada’s housing market if governments didn’t prop up the home-ownership market? One indication comes from Europe, where countries such as Denmark and the Netherlands don’t much pull people into buying homes. There the rate of home ownership is about 50%. In Germany it’s closer to 40% and in Switzerland, 30% — less than half of Canada’s current near-record high 70% home-ownership rate.
Where would Canadians live if they weren’t induced into home ownership? In rental accommodation, a high-demand, low-availability commodity in Canada because of a different set of government policy inducements that have long punished the rental market. These include rent controls, which prevented apartment building owners from operating freely, and property taxes, which are far higher on rental properties and thus on tenants than on owned residences. Because of these two factors, apartment building construction all but stopped decades ago, despite near-zero vacancy rates. Condo rentals have emerged in a big way to satisfy the public’s pent-up demand for rental accommodation but this is at best a second-rate solution, both for many tenants and for society at large.
The condo landlords are in good part amateurs in the rental business. Unlike professional apartment building owners, who are in it for the long haul and thus want stable long-term tenants, those who rent out condo units typically seek short-term tenants. Some buy condos as speculators, planning to flip them when prices increase. Others are homebuyers who expect they’ll need to downsize in a few years; others still are foreigners from volatile countries, who want a safe house in case they need to leave their native land in a hurry. In all these situations, the tenant who wants a permanent address but doesn’t want the responsibility or financial commitment of home ownership is ill-served.
Society at large is also ill-served by abandoning a once-stable apartment-building industry. The condo boom — or bubble that so many fear — is in good part fuelled by the rental market for condos, which would be greatly diminished if high-quality apartments were again readily available. Rental-rationalized condo purchases would no longer represent a big component of the housing bubble that Flaherty is trying to avert, to prevent the meltdown that the U.S. saw when it pushed home ownership to levels comparable to Canada’s, and to prevent the meltdown that other countries have experienced over the decades. According to an IMF study of 20 housing meltdowns that occurred in various countries between 1970 and 2001, recession followed 19 times.
The key to better living costs nothing: Simply remove the carrots luring people into home ownership, and the sticks punishing apartment dwellers.
Lawrence Solomon is executive director of Urban Renaissance Institute.
This article was first published by the National Post.