Canada's Housing Bubble

Apr 30, 2010 Leonard Stern The Ottawa Citizen

During the month of March, some 1,300 single detached homes were sold in Vancouver, for a total of $1.35 billion. This was the subject of news reports because it meant the average selling price of a home in that city hit $1 million.

Home ownership has long been considered an act of responsible citizenship, associated with middle-class values such as independence and personal stability. But $1 million for a house? That’s hardly the road to independence or stability for anyone in the middle class. The weight of the mortgage would be more oppressive than any feudal arrangement between lord and serf.

The Vancouver real estate market is perhaps not representative of North America. Even so, homes are expensive enough in most urban centres that some people have begun to argue that the ideal of home ownership — traditionally embodied in the single family dwelling — has been oversold.

This is a radical proposition in North America where the availability of land led to the ethos that all citizens must have their own piece of it. People who are young and uncommitted can rent for a while, just as they are permitted to play the field in their romantic lives. But the expectation is that all of us are supposed to grow up, get married and take out a stake in our community by becoming property owners.

The idealization of home ownership is both an American and Canadian phenomenon. Both countries had frontiers to settle and homesteading movements. Today our home-ownership rates are identical. About 69 per cent of Americans and Canadians are homeowners — or were homeowners, because those numbers are pre-recession and, at least in the U.S., people have lost their homes.

Indeed, it was the recession that prompted critics to ask whether, after all these years, governments should continue to pursue policies designed to increase homeownership.

The Yale University economist Robert Shiller, writing in The New York Times, noted that homeownership violates the central tenet of personal finance — that people should diversify their wealth. Because a home usually represents a disproportionate chunk of a family’s capital, the family is in trouble if the house value collapses. As Shiller puts it, “Why should housing consumption be better than other consumption, or investments that people might choose?”

Writing in the journal National Affairs, Vincent Cannato of the University of Massachusetts traces the increase in American homeownership over the past 80 years, showing how the rise was orchestrated by government elites who believed that a citizenry of homeowners made for a more civilized nation.

The unintended but invidious consequence was to normalize personal debt. The most notorious pro-ownership policy is the one allowing Americans to deduct the interest on their mortgages, thereby encouraging them to borrow more money. “Saddling people on the economic margins of society with large mortgages turned out to be a bad idea for borrowers, lenders and the country as a whole,” writes Cannato.

As the waters of last year’s economic tsunami receded, they revealed the wreckage of all those homes bought by Americans who couldn’t afford them.

Canada, thankfully, has never had a mortgage deduction, though we came close. In 1979 Joe Clark promised to introduce one but he never had the chance. No Canadian government has revisited the idea, knowing that it would only inflate house prices and cause families to take on more debt than they can manage.

Yet, for years, Canadian governments have been as obsessed as their American counterparts with raising home-ownership rates. In 2006 the Canada Mortgage and Housing Corp. decided to allow interest-only mortgages, and Canadian lenders began selling mortgages amortized over 40 years. There was even talk of 50-year amortizations coming next.

In 2008 the government realized that this could end badly — namely, a housing bubble — and cracked down, insisting that home-buyers need to make at least a five-per-cent down payment and limiting amortizations to a maximum 35 years. Last February, the Department of Finance further tightened the rules on government-backed mortgages. Finance Minister Jim Flaherty had seen the carnage in the U.S. and he was afraid.

These restraints mean that Vancouverites who are determined to own a single family home have to live an hour or two away in Abbotsford or Chilliwack, though this means they aren’t Vancouverites anymore. The other option is to surrender the idea that every Canadian is entitled to a detached family dwelling. To be sure, Vancouver has the country’s highest percentage of homeowners (31 per cent) for whom “home” is a condo unit.

And then there’s always the unmentionable — rental apartments. It’s true that renting has traditionally held low status in North America, but anti-renting prejudice is misplaced. As Yale’s Robert Shiller points out, Switzerland seems to be a country of renters — the homeownership rate is a measly 34.6 per cent — yet it’s a successful and stable society.

Answering to a landlord is not necessarily worse than answering to a bank, and not all that much different when you’ve put just five per cent down on a house worth 10 times your income.

Leonard Stern is the Citizen’s editorial pages editor. E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it