Similar to other western countries, Canada has deliberately encouraged homeownership as a policy objective. One of the means Ottawa uses is the Canada Mortgage and Housing Corporation (CMHC), a crown corporation created in 1946 to resolve housing shortages that emerged when swaths of soldiers returned home from Europe and Asia following the Second World War. Today, it encourages banks to provide mortgages in many ways, such as insuring risky loans, which reduces the cost of homeownership for low-income individuals. In response, bank officials assert that interest rates on mortgages would rise with CMHC’s support.
However, since many Canadians rely on mortgages to purchase their homes–and since higher interest rates would deter loans and mortgages–removing insurance, it appears, would reduce Canadian homeownership.
Currently, Canadian homeownership is nearly 70 per cent. In other countries, though, homeownership rates are dramatically lower. Switzerland’s rate, for instance, is 34 per cent, Germany is 41 per cent, and Denmark is 52 per cent. In fact, all three countries rank higher than Canada in terms of human development as reported by the United Nations in 2013. Although the average rate of home ownership of OECD members is closer to Canada’s, the fact that some countries have succeed without such high rates raises the issue of whether encouraging homeownership is worthwhile.
Upon examination, it seems that Canada’s homeownership policy facilitates a number of serious economic harms.
First, encouraging homeownership destabilizes the economy. The CMHC lowers mortgage rates artificially by providing insurance on all mortgages. This creates significant moral hazard–a situation in which an actor privately benefits from taking excessive risks, since the costs are borne unto other actors (i.e. taxpayers).
If a mortgage falls, for example, CMHC compensates the lender. Knowing this, the lender is more likely to give risky mortgages.
In the United States, the federal government created similar environments, albeit much worse, by instructing Fannie Mae and Freddie Mac–government-sponsored enterprises–to encourage homeownership aggressively among low-income individuals that would not otherwise qualify for a mortgage. Insuring these firms and providing them with implicit government support fueled the subprime mortgage crisis that wrecked the American economy and deflated its real estate market.
Many factors differentiate the American arrangement from Canada’s system–CMHC insures all mortgages rather than aggressively encouraging lower-income ones. And, for the most part, in the United States, it is easier to walk away from mortgages. But in both situations, the public must take on private risk in the mortgage market.
The second destabilizing characteristic of government-sponsored homeownership is that homes become difficult to convert into cash and usually constitute a very large chunk of their owner’s net worth. By subsidizing mortgages, Ottawa encourages people to invest their income in a single volatile asset that, unlike stocks and bonds, are difficult to sell. Furthermore, when payments or rates increase, the possibility of a national housing crisis emerges and the inability to convert assets to cash exacerbates the process.
Encouraging homeownership also reduces labour market flexibility by making it more difficult for people to mobilize when new job opportunities arise or old employment arrangements dissolve. Renters, however, by virtue of renting and not owning, tend to be keener of exploiting interregional wage and employment differences. In fact, studies reveal a positive relationship between homeownership and unemployment. This is probably because homeowners are less likely to move to areas with more job opportunities. (Economist Milton Friedman argued that the natural rate of unemployment in an economy depended on its labour market mobility, which is dependent on how people house themselves.)
The politics of homeownership are appealing and owning property is an attractive prospect. However, the economic harms associated with government-sponsored homeownership suggest that it is imprudent. Considering the rising demand for mobilize labour, not only in the global setting, but also in Canada, it is, perhaps, time for the Canadian government to reconsider the role of the CMHC and homeownership in general.
Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute