A root cause of America's housing crisis...

...and resulting sputtering recovery is that too many folks bought homes.

That they often were talked into doing so by unscrupulous mortgage brokers, were encouraged by Alan Greenspan's record-low interest rates, and were exhorted by George W. Bush's "ownership society" mantra I'll leave to the political scientists.

What the economists will tell you is that there's an ideal level of U.S. home ownership, a "Golden Mean," and that's 64% of occupants owning their home. Others rent, for awhile or forever - myself and my maternal grandparents being in the latter category. Lifetime home rental was once so commonplace that one spoke of "rental" cities (Montreal, with its above-average percentage of folks preferring to rent), and "ownership" cities (Toronto).

Given how massive housing is as a component of the economy, even seemingly tiny departures from that golden mean have a powerful impact. During the record U.S. housing boom of the 2000s, characterized by skyrocketing house values, rampant speculation, and entirely too much new-home construction, average home ownership peaked in late 2004 at 69.2%. Economically speaking, far too much of the population was attempting to finance home purchases that decades of previous experience showed was feasible.

So anyone who says that no one could have seen the Great Recession coming - and I'm among them - was not monitoring the U.S. housing market. Which is an inexcusable lapse among financial journalists, economists, regulators and mortgage financiers including banks, credit unions and so on. Canada and the U.S. have been providing monthly, in some cases weekly, reports on housing-market conditions since the Great Depression. When we saw house prices tripling in two years in Phoenix, Vegas, Orlando, San Jose and pockets of the Midwest, that was adequate warning that the U.S. Federal Reserve should have jacked up interest rates to discourage potential mortgagees, and community, regional and national banks should have tightened their lending standards and shown many of those same mortgagees the door.   

In writing about the comparative resiliency of the Canadian banking system in February 2009, just six months after the global credit crisis began in earnest with the collapse of Lehman Brothers the previous September, Newsweek foreign-affairs columnist Fareed Zakira came across a curious fact still rarely commented on. Namely that Canadians are as likely to realize the dream of home ownership as Americans, absent so many stimulants to do so.  

It would be an exaggeration to say Canada discourages home ownership. But Canadian banks are leveraged at 18 to 1 ($1 of capital reserve backing every $18 lent), compared with 26 to 1 in the U.S. and a scary 61 to 1 in Europe. (Hence the housing bubbles in Ireland, Britain, Portugal, Spain and elsewhere.) Canadian bankers simply have less money to lend, due to regulatory requirements that they set aside far more capital as reserves against potential losses.

Also, mortgage interest is not tax deductible in Canada. It is in the U.S. Mortgage-interest deductibility is a $100-billion a year social-welfare program for the U.S. middle class. One that never comes up in arguments for defunding "midnight basketball" programs in inner cities or expansions of Head Start, SCHIP or other assistance to low-income Americans.  

Just as the U.S. Tax Code heavily subsidizes and thus encourages what Zakira described as U.S. "overconsumption" of housing, the bankruptcy laws make walking away from a property whose debt you can no longer handle mostly the lender's problem. Canadians don't get off the hook nearly so easily.

But here's the odd part: Canadian home ownership at the time Zakira was writing was 68.4%, well above the U.S. "golden mean." Turns out the American Dream of homeownership needn't be subsidized by taxpayers, including renters whose taxes help finance home purchases by others. Nor do lenders need to be imperiled when mortgagees renege en masse.

What's going on here? Canadians typically put off buying a house longer than Americans. They make larger downpayments, scrimping on other expenses for years in order to do so. And lenders, joined at the hip with the Bank of Canada (they're in daily contact), grant mortgages far short of the selling price, to build in a safety cushion, and won't lend to folks without provable sources of reliable income.

Canadian lenders have their share of "impaired" residential loans on their books; they miscalculate risk, too. They're just much less likely to do so because of a more risk-averse national culture. And, bottom line, we make potential homeowners work harder to be eligible for homeownership.

 

Comments

[Darwin O'Connor]

"So anyone who says that no one could have seen the Great Recession coming - and I'm among them - was not monitoring the U.S. housing market."

For the record, I foresee the collapse of the Canadian housing market. It my may not be as devastating of the American one, but there will be plenty pain.

Try to pretend to be surprised when it happens.