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Home Ownership Isn't For All

By: 
Nicolas Van Praet
Source: 
Financial Post
January 21, 2011

Peter Schiff is not what you’d call a typical homeowner. He doesn’t think buying a house is generally a good idea.

At least, not for the reasons many people give when they pull the trigger: That it’s an investment. That it will gain value. That when you’re all grown up, it just seems like the responsible thing to do.

In fact, Mr. Schiff, a middle-aged investment broker and well-known financial commentator in the United States, only got into the market himself recently after renting for years. He bought his 9,000-square-foot colonial home in the affluent town of Weston, Conn., for 40% less than what the previous owner paid. And, combined with cheap credit — he got a “superjumbo” 30-year mortgage at a fixed interest rate of 5% — that was the kind of deal he just couldn’t pass up.

“I own a house but I don’t expect to make any money off it,” says Mr. Schiff, chief executive of Euro Pacific Capital. “I own a house like I own my car or my boat. I need a place to live and I enjoy it. And I expect it to depreciate just like all the other things that I own.”

That’s not the prevailing wisdom that has been fed to a generation of new homebuyers in North America. Real estate agents make their living selling people on the dream of big backyards and cozy fireplaces. Politicians, especially in the United States, have backed them up, insisting everyone has the right to own a house even if they have less-than-spotless credit.

It’s all come to this: The housing market collapse in the United States has altered that wisdom. But it hasn’t killed it. And while America is still smack in the middle of the financial reckoning and soul-searching in the wake of the subprime mortgage crisis, Canada is tweaking policy to make sure it doesn’t have to have a conversation about who should own a home.

Maybe it should.

The housing measures unveiled Monday by federal Finance Minister Jim Flaherty represent the third time in 26 months that the government has altered mortgage insurance rules. The latest changes reduce the maximum amortization for government-backed mortgages to 30 years from 35, reduce the maximum amount Canadians can borrow against the value of their homes to 85% from 90% on a refinancing, and forces lenders to be more careful about which clients get home-equity lines of credit as government backing is removed.

Reaction to the new policies has been generally positive. Industry representatives interviewed for this story said the moves take the country back further toward a more measured approach to home ownership and debt. The 2007-2008 experiments with 40-year payback terms and no money down seemed fine at the time. But it’s clear today they went too far.

The federal government is moving now to limit its own exposure to mortgage insurance. More importantly, however, it is doing for Canadians what they have been unwilling to do themselves: Be responsible with debt. It wants people to own homes. But it wants them to buy a home they can afford comfortably, not one that will make them house-poor. It wants them to use their houses and apartments to build up wealth, not dig themselves a bigger hole by buying TVs.

“They did it to make sure that housing is a means by which people save rather than continuing to withdraw the equity and spend it,” says Gregory Klump, chief economist for the Canadian Real Estate Association.

Still, the moves raise an interesting question: If the government sees the need to save Canadians from themselves, what does that tell us about the people who own homes in this country? Will there be another round of cleanup measures required in the months ahead if our appetite for credit continues?

The Canadian Association of Accredited Mortgage Professionals says fears about debt are overblown and that the vast majority of Canadian home owners can handle interest-rate shocks. Group president Jim Murphy says he hopes the government will weigh whether to loosen certain regulations once the economy strengthens. He argues, for example, that you could keep 35-year amortizations for people who want them but have them qualify for the loan at a 25-year term.

“It would have the same result,” he says. “The more you restrict things, the less choice and options there are.”

One industry veteran paints a bleaker picture from the trench.

“We’re no different from Americans, that’s for sure,” says John Cocomile, a broker with GreedyMortgage.com in Toronto. He says of 100 first-time homebuyers he arranged mortgages for in the past three years, 95 of them took the longest amortizations possible.

“Generally homeowners are not conservative. They want the most they can get.”

Some of those clients are now living hand-to-mouth, Mr. Cocomile says. And he worries that when interest rates correct upwards, as they inevitably will, they’ll be underwater. “I think there’s a lot of homeowners who probably shouldn’t be homeowners.... There’s a lot of teetering right now.”

Those who have acknowledged they are on the edge are seeking the help of counsellors like Laurie Campbell, executive director of Credit Canada. She notes that the average Canadian with a credit profile owes $1.48 for every dollar they make in disposable income, the highest debt-to-earnings-power ratio on record. And she says mismanagement of personal finances remains rampant.

“Consolidating debt, getting home-equity loans out to pay for credit cards is often something that we see. But then the credit cards are racked right back up again.”

In the United States, the decades-old policy of encouraging home ownership is undergoing major debate. Commentators like Richard Florida argue owning a home is preventing the natural flow of labour across the country because people can’t break free of their mortgages. Others say U.S. measures that let homeowners deduct the interest they pay on their mortgages against their personal income just doesn’t make sense. Meanwhile, the pace of foreclosures continues, hitting one million last year.

In Canada, the mortgage default rate remains low, at less than 1%. Nobody in the business of lending money is saying publicly that they are concerned about delinquencies. But as the Canadian Association of Accredited Mortgage Professionals says, the available data shed virtually no light on the quality of mortgage credit in this country. For the most part, we just don’t know exactly what the breaking point is for Canadian household finances.

Why are so many Canadians desperate to own a home anyway?

Partly because they have jobs and it’s affordable to do so. But there may be another reason.

Canadians, like Australians and Americans, have a “new world” attitude whereby owning property is a deeply embedded aspiration, says Phil Soper, president of Royal LePage Real Estate Services. It’s one of the “pillars of Canadianism,” he says, and it doesn’t exist as much in Europe, where generations of class culture made having land impossible for anyone but aristocrats.

“Stocks come and go.... Companies come and go. But owning a piece of your country, actually owning real property, intrinsically holds a permanent value where consumer durables simple can’t. And people have bought into that.”

History shows that owning a piece of property typically brings a return, he says. A home in urban Canada is a “limited commodity” in a finite pool of land.

Mr. Schiff, who has added a guest house and tennis court to his property since taking possession, is more pessimistic. He says real estate in Canada remains overpriced, as it does in the United States.

There was a time when you could make money buying a home, he says, but that time is dead. He says public pressure to become a homeowner, and the public subsidies and tax treatments that fuel it, should die too.

“It’s still the general consensus that promoting home ownership is good. I don’t think that’s true. I don’t think the government should be promoting anything.”

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