Saturday, March 20, 2010

Why Canada Avoided a Mortgage Meltdown

From my AEI colleague Alex Pollock writing in yesterday's WSJ about America's "homeownership mantra," and how government intervention and public policy contributed to our housing troubles and mortgage meltdown, and why Canada was able to avoid both and achieve a higher rate of homeownership in the process:

"Suppose we agree that we would like our society to have widespread home ownership and a property-owning citizenry. Does it take government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac with implied taxpayer guarantees, tax advantages for the interest paid on home mortgages, and government pressure for "creative" mortgage lending to achieve this?

The Canadian experience shows that it doesn't."

See my related article "
Due North: Canada’s Marvelous Mortgage and Banking System."


At 3/20/2010 11:01 AM, Anonymous Anonymous said...

Reading your article on Canadian mortgage lending, I was struck at how closely the Canadian system tracks to the left's definition of "predatory lending":

Predatory lending is characterized by a number of specific practices including making a loan for more than the borrower can repay, repeatedly refinancing a loan without benefit to the borrower, charging excessive prepayment penalties, and financing single premium credit insurance.

Curbing Predatory Home Mortgage Lending

If one accepts the concept of "predatory lending" (I do not), every mortgage written in Canada is a "predatory loan". Go figure.

At 3/20/2010 12:08 PM, Anonymous Anonymous said...

This is very good information. Canada is obviously doing something right. Good reporting.

At 3/20/2010 12:26 PM, Anonymous Anonymous said...

Slow, steady growth, and people work for what they get..used to be US...

At 3/20/2010 12:36 PM, Anonymous gettingrational said...

Prof., your article and graphs are very interesting and nicely presented.

The Canadian home lending terms resemble my multi-family loan terms from a very conservative Washington state lender.

At 3/20/2010 1:03 PM, Anonymous Anonymous said...

I am glad the Wall Street Banks are not be made the villans in this article.

The people working in Wall Street are the most honest and hardest working people in the U.S., they should be paid even millions more for all their efforts.

We also don't need government regulations on the banks and investment companies on Wall Street.

At 3/20/2010 2:16 PM, Anonymous Benny The Man said...

The homeowner-s mortgage interest tax deduction is by far the biggest federal intrusion into financial markets.

The higher your income tax bracket, and the more-expensive the home you buy, the more the federal government will help you buy a house. Of course, if you pay less in taxes, then others must pay more, including non-homeowners, those poor suckers.

This deduction rewards a vast over-investment in housing by America's upper classes, siphoning capital away form productive enterprises.

The second and third-home has become an upper-class norm, again abetted by taxpayers who must make up the difference by paying relatively higher tax rates.

I am glad to see Dr. Perry giving an airing to a truly enfeebling tax policy, which could not be better designed to destroy real productive investment in America.

At 3/20/2010 3:23 PM, Blogger PeakTrader said...

Can you have a meltdown without a meltup? Canada has more space than the U.S. Yet, smaller houses.

At 3/20/2010 6:53 PM, Anonymous Anonymous said...

Mark, in your article you say:

"Canada remains the only industrialized country in the world that has survived the last two years of financial and economic stress without a single bank failure"

Let me be a little bit parochial here for a moment and add that there have been none in Australia either.

At 3/20/2010 7:17 PM, Blogger BxCapricorn said...

What if we sent this woman

to Canada? Couldn't she take down an entire nation?

At 3/20/2010 8:26 PM, Blogger PeakTrader said...

I stated before:

The bank's gain is the borrower's loss.

I wonder how many Canadians were able to buy a house without a job, extract a large amount in equity within a few years, refinance at lower rates more than once within a few years, lock-in a low 30-year rate, etc.

Terrence added: And if a Canadian mortgage holder walked away from the house for any reason, they STILL hold the mortgage.

And I added: I also wonder if Canadians can live in their houses without paying the bank for a year or two?

At 3/20/2010 9:25 PM, Blogger PeakTrader said...

According to the National Association of Home Builders, the average home size in the United States was 2,330 square feet in 2004. The average square footage for new U.S. homes completed in 2007 was 2,521 square feet.

Canadian Home Builders' Association (CHBA): The average new single-detached house built last year (in 2003) in Canada was 1,800-square-feet, on a lot 50-feet-wide and 110-feet-deep, builders say.

At 3/21/2010 7:58 AM, Blogger Nick Rowe said...

Mark: Good article. One minor mistake. There *is* a tax advantage to owning vs renting in Canada: you don't pay income tax on the imputed rents you pay yourself on an owner-occupied house (plus no capital gains tax, as you noted). So if two neighbours, in identical houses, with no mortgages, decided to move next door and rent each other's houses, each would now pay income tax on the rents they receive.

The big difference is no mortgage interest deductibility. That means paying down your mortgage is like a tax-free investment.

At 3/21/2010 8:28 AM, Blogger Nick Rowe said...

Actually, here's a more accurate way to think about it.

In Canada:

If you have a 100% mortgage, there's no tax advantage to owning vs renting, since you don't pay income tax on the imputed rental income, but can't deduct the mortgage interest.

But if you have no mortgage, there is a tax advantage to owning vs renting, since you don't pay tax on the imputed rental income.

So the tax advantage is on home *equity*, not on home ownership.

Paying down your mortgage to build up home equity is a tax-free savings vehicle. And people respond to incentives.

At 3/21/2010 9:31 AM, Blogger PeakTrader said...

There are greater disparities in homeownership between U.S. states than between the U.S. and Canada:


"The state with the highest home ownership rate in 2007 was West Virginia (77.8%), followed by Delaware and Utah (76.2%). The state with the lowest home ownership rate in 2007 was the District of Columbia (44.1%), followed by New York (55.0%) and California(57.5%)."

Another article:

The Midwest had the highest rate of homeownership, while the West had the lowest. The difference between the two regions was almost ten percentage points—72.0 percent in the Midwest versus 62.8 percent in the West.

There is a large difference in homeownership rates between rural and metropolitan areas: the homeownership rate was 67 percent in metropolitan areas, versus 75 percent for nonmetro areas. The South and Midwest, which have high rates of homeownership, also have fewer major cities than the West and Northeast, where homeownership rates are lower.

Among racial and ethnic groups, Whites had the highest homeownership rate: 75.0 percent. Both Hispanics and Blacks had rates under 50 percent—48.9 percent and 47.1 percent, respectively.

At 3/22/2010 11:34 AM, Blogger Razor said...

before you guys get too excited about how fantastic the Canadian mortgage / real estate market... do a little reading of the facts...

Just because it hasn't imploded yet doesn't mean it wont. In the past year prices are up 20% while unemployment is also up and GDP growth (except for the olympic blip and government stimulus) is not stellar...

At 3/22/2010 6:11 PM, Anonymous Anonymous said...

Imputed rental income? To say you get a benefit from not paying taxes on income you didn't receive is batshit insane.


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