Evan Siddall, chief executive of Canada Mortgage and Housing Corporation (CMHC), told a Bank of England audience last week that we should be thinking about raising down payment requirements for insurance-backed loans.
Since 1998, the Canadian government has required only a 5% down payment to buy a home. Siddall said that it does encourage homeownership, especially for first-time buyers, but that the low down payment requirement coupled with other programs including our capital gains tax exemption on primary residences, could have a downside: “At 69 percent, our homeownership rate is among the highest in the world. While homeownership has been an effective vehicle of forced savings and retirement security, it may also constrain labour mobility,” he said during his address.
So which mandate is primary? Assuming the federal government has a mandate to help us buy homes, do they also have a mandate to help boost the national economy by encouraging people to pursue employment, wherever it may be?
In their report “The Danger of High Home Ownership: Greater Unemployment” published in 2013, CAGE, a research centre in the department of economics at the UK’s University of Warwick, found that high homeownership is a major reason for high unemployment in industrialized nations in the post-war era; the authors said “rises in a US state’s home-ownership rate are associated with subsequent increases in that state’s joblessness,” calling the effects “strikingly large.”
Through their research on the US market, they found that doubling homeownership in a state could lead to more than doubling the unemployment rate. They attributed the higher unemployment to lower mobility, longer commute times and lower rates for business formation.
They said they also found that European data provided consistent evidence. Their recommendation? Do as the Swiss do, and encourage renting by eliminating financial incentives for homeownership.
A 2006 paper out of the University of Copenhagen’s department of economics found that “home ownership has a negative impact on job-to-job mobility both in terms of transition into new local jobs and new jobs outside the local labour market. In addition, there is a clear negative effect on of homeownership on the unemployment risk and a positive impact on wages.” It wasn’t hard to find other studies going back to the early ‘80s that present similar findings.
But what about that “forced savings and retirement security”? Many people reach retirement with their home as the biggest chunk of their portfolio — sometimes, it’s the only chunk.
To really help Canadians succeed, ideally we encourage both labour mobility and homeownership — but are they mutually exclusive?
I’m not a fan of government intervention into a free-market economy, period, but since the feds are going to intervene, why don’t we take the focus off the cost of borrowing for a change, and perhaps look at the cost of moving.
I’m not talking about hiring a few guys and a truck — you’d have to do that whether you were moving from rental accommodations or a newly owned home. But what about, for example, land transfer tax? On a Toronto home with a $600,000 price tag, the land transfer tax alone is more than $16,000 ($8,475 provincially, and $7,725 municipally). Talk about discouraging.
In addition to the financial benefits of homeownership, there are intangible benefits well documented in psychology, like personal security and community investment — there’s even a correlation between homeownership and children’s academic achievement.
Maybe it’s time we thought way outside the box and encouraged two things that are good for us — owning a home, and moving to pursue employment. One doesn’t have to preclude the other.