The federal government has tightened mortgage lending rules four times in the past five years in a bid to cool the market and prevent home buyers from taking on too much debt.
Why owning a home is bad for you
Efforts to promote home ownership have had troubling and unexpected side effects, distorting the economy and taking an unexpected toll on our minds and bodies
Saying no wasn’t easy. Harpreet Pandher had spent more than a month casing apartments in Toronto’s frantic condominium market, and the one-bedroom gem at Queen’s Quay seemed custom-made for her lifestyle. The pool was cool, the gym would save her the cost of a health-club membership and the view of Lake Ontario was downright sublime. The $500,000 price tag was not unreasonable—not, at least, by the giddy standards of her adopted hometown. And the low-rise complex was within walking distance of Pandher’s new banking job in the Bay Street financial district. Everything seemed to fit.
But the more Pandher pondered that price, the more she felt a chill in the region of her shoes. “I would have been going paycheque to paycheque,” acknowledges the 23-year-old. “I’d be giving up a lot of recreational things, even just going out with co-workers, because everything in Toronto costs a little bit more.” And she didn’t need her economics degree to understand the financial risk: Even a modest bump in Canada’s rock-bottom lending rates could send the market into a tailspin, she knew, leaving her stuck with a home she wouldn’t be able to sell at the price she’d paid.
So Pandher demurred, retreating to live with her grandparents in suburban Brampton. “Everybody wants to own a place, and you hate to throw money at rent,” she says. “It was very discouraging.” But her experience reflects that of many a young Canadian these days, and gives rise to a heretical idea: Maybe home ownership isn’t all it’s cracked up to be. Maybe people like her—property neophytes being egged into massive purchases by cheap credit—don’t belong in the housing market. Maybe there’s such a thing as too much home ownership.
When the numbers from Statistics Canada’s 2011 household survey came out last week, they revealed, much as expected, that home ownership in Canada had soared close to the 70 per cent level, meaning nearly three-quarters of households own the properties they live in. That’s a 13 per cent jump over 1990s levels, reflecting the frenzy of purchasing that’s gone on in the low-interest era of the 2000s. More than one-quarter of the approximately 9.2 million owner households moved into their dwellings in the five years prior to the survey, and today, fully 82.4 per cent of what StatsCan calls “couple families”—households with two adults—own their own homes.
A decade ago, when faith in house ownership reached its apogee, this might have elicited cheers. In 2004, then-president George W. Bush heralded the arrival of an “ownership society,” offering up what might be the purest formulation of the buy-at-all-costs mentality. “The more ownership there is in America,” he said, “the more vitality there is in America.” By then, the ownership rate in the U.S. stood about where Canada’s does today, and it would keep climbing for four years until the subprime mortgage crisis pushed it off a cliff, triggering the financial meltdown that devastated the global economy. It’s been falling ever since, and currently stands at about 65 per cent—the lowest level in 18 years.
The fears these parallels raise are well understood: Everyone from the Organisation for Economic Co-operation and Development (OECD) to Paul Krugman, the Princeton University economist, have drawn comparisons between Canada’s housing bubble and that of the U.S. before the fall, warning of a sell-off that would erase tens of thousands from the net worth of the average Canadian family. But even if the mania continues, other downsides to the dream are starting to come clear. Owning houses, a growing body of research suggests, adds to labour imbalances by making us less willing to move to areas where there is job creation, while all that debt we’re racking up may be taking a toll on our minds and bodies. Studies have linked it to disorders ranging from anxiety to poor eating. On a macro level, meanwhile, decades of efforts to promote home ownership as an economic cure-all have distorted the economy, to the point that housing accounts for almost a third of GDP.
That’s not a healthy ratio, says economist Ben Rabidoux, president of North Cove Advisors and one of the country’s leading pessimists on the housing market. “Our love affair with home ownership has gotten dangerous,” he says bluntly. Yet we’re nowhere close to ending the romance. With other sectors of the economy in neutral, the business of building, selling and fixing houses is something we can’t do without. Our national and personal fortunes are tied to it, and there’s something elemental—atavistic, you could say—about our desire to own the space we live in. Indulging it has been easy enough in recent years, thanks to cheap money. But now we are trapped, literally and figuratively, by the four walls around us.
The idea of home ownership as a social good has deep roots in the economic and political life of North America. Walter Lippmann, the American public intellectual, famously mused that “private property is the original source of freedom,” while countless commentators have lauded pride-of-place as a virtue with power to uplift communities. In Canada, the federal Conservatives have touted home ownership as the solution to all kinds of socio-economic challenges, most notably poor living conditions on First Nations reserves. House payments, they argued, are a form of saving, since they allow people to build equity against which they can borrow to launch businesses.
If the U.S. crash failed to shake our faith in this picket-fence idealism, it should have, says William Strange, a real estate and urban economics specialist at the University of Toronto’s Rotman School of Management. “It was an epic disaster for the economy, for the banks and most of all for the people,” he says. “There are reasons why some people in the past didn’t buy houses. Maybe they weren’t financially prudent. Maybe they had uncertain employment prospects and didn’t want to be on the hook for mortgage payments. To take that person and say, ‘You’ll be better off if you own a house,’ well, it’s just wrong.”
To be sure, most experts doubt a real estate downturn in Canada would trigger a U.S.-style banking crisis. They point to our tighter lending rules, and less forgiving bankruptcy laws that discourage Canadians from walking away from their homes if their mortgages go under water. Yet, in 2009, central bankers and political leaders here faced a Hobson’s choice: loosening access to credit might produce a housing bubble; but if they didn’t they risked strangling badly needed business investment. So, in March 2009, the Bank of Canada lowered its overnight rate to 0.25, and that year the federal government added incentives aimed at getting more people into houses. It upped the amount first-time buyers could borrow from their RSPs to $25,000, while providing $750 in tax relief to help with closing costs. To put it mildly, Canadians bought in. By 2011, the mortgage debt of a typical Canadian household amounted to 100 per cent of its disposable income—reflecting a sharp uptick in the pace of borrowing from that of past generations. All signs suggested young people were leading the way. A report published last year by the central bank showed that between 1999 and 2010, the average household debt of people between 31 and 35 had ballooned by more than 60 per cent.
The effect has been to transform housing from a key sector of the economy into its main engine. Rabidoux, who spends a lot of time trying to bring attention to this warp, has taken to quizzing people about Canada’s leading industry. “It’s not manufacturing, not resource extraction,” he says. “It’s real estate services. I think a lot of people would find that shocking.”
Indeed, the sector accounted for $196 billion of GDP in April, compared with a combined $131 billion for oil and gas extraction and mining. That includes rental and leasing. But the lion’s share derives from the buying and selling of houses. Add in the $111 billion generated by construction, and wealth created by the financial side of the business, and you have a juggernaut accounting for more than 27 per cent of the country’s GDP (the historical average: about 23 per cent). “That doesn’t sound like an alarming increase,” says Rabidoux, “but consider the impact of a four-point reduction in GDP. I mean, the U.S. industry was at about 24 per cent when it peaked. It fell back down to 20, and look what happened. We’re way ahead of where they were. This is major.”
You wonder now if we could kick the addiction. Our preoccupation with house buying, after all, has gone cultural, as daily newspapers dine on condo ads and red-hot urban markets become settings for reality-based programs such as Property Virgins and W Network’s Love It or List It: Vancouver. There’s little room in the genre for pessimism. In 2009, HGTV aired a Canadian-made program called House Poor, featuring young families who had plunged over their heads into expensive Toronto homes. It folded after one season.
Perhaps it was ahead of its time, because these days, our romance with home ownership leaves a lot of us unhappy. A recent report by the Conference Board of Canada found that one in five first-time homebuyers meets the technical defintion of “house poor,” shelling out more than 30 per cent of pre-tax income on housing costs, while polls suggest some 60 per cent of first-time buyers wish they had amassed a bigger down payment. Anecdotes abound of people laid low by the unexpected costs of ownership. Heidi Eisenhauer, 39, thought she and her partner had stumbled on a gem when they shelled out $369,000 for a semi-detached Victorian in an up-and-coming Toronto neighbourhood. The house even had two apartments, the income from which would help cover their $250,000 mortgage. But their first minor renovation revealed jaw-dropping flaws their home inspector didn’t see, including an absence of beam work to support extensions added to the house. “We drained every financial resource we had,” Eisenhauer says ruefully. “Our in-laws had to remortgage their home, which they’d paid off, so we could do our renovations.”
Suddenly, the couple’s seemingly manageable $1,700 monthly mortgage payment became a burden to meet. “We never thought we’d be house poor,” Eisenhauer admits. But after three years of struggling—even with income from the two suites—they gave up and sold the house last February.
It would be easy to dismiss these as uptown problems. But the relative wealth of new homebuyers doesn’t make their stress any less real, says Diana MacKay, director of health and education programs at the Conference Board of Canada. MacKay wrote the board’s report on housing affordability, and believes giant mortgages have left a sizable portion of house owners living lives of quiet desperation, their distress overlooked because they appear to have good jobs and high incomes. One of the few studies done on the psychological effects of home ownership, a 2004 paper by academics at McMaster University in Hamilton, reached the unsurprising conclusion that mental stress is higher for those who owe on their mortgages than those who don’t. “While they may feel more secure than those who do not own their own homes,” it noted, “[they] still feel the pressures associated with rising housing costs that outpace increases to personal and household incomes.” Another study, released in May, found a correlation between a rise in U.S. mortgage deliquency and Google searches that point to mental health concerns.
In many cases, says MacKay, children end up paying the price. “They live in good-quality homes in nice neighbourhoods, yet they’re being compromised through slow and steady deprivation. They stop signing up for sports programs. They don’t go out. And you’d be amazed how quickly things like good-quality food get sacrificed.” At the height of the past recession, for instance, U.S. grocers reported a rise in sales of what they call second-rate-brand food products—even in stores located in upper-middle-class neighbourhoods.
What happens to families if interest rates rise is a growing preoccupation of economists, because a slowdown of Canada’s disproportionately large housing sector would likely unleash havoc in the rest of the economy. It would cast many new homeowners out of work, Rabidoux and others warn, at which point their houses would become boat anchors. They’d become reluctant to sell because, highly leveraged as they’d be, they’d know they will take a financial bath.
This effect—which economists have long suspected—was borne out in May by a joint British-U.S. study that found high levels of home ownership in a given state are a precursor to sharp rises in unemployment. Put simply: property owners are loath to uproot and move to where the work is. “This suggests that high home ownership may gradually interfere with the efficient functioning of the labour market,” wrote authors David Branchflower of Dartmouth College, and Andrew Oswald of the University of Warwick in England. To make matters worse, the study found, high home-ownership levels might discourage business start-ups—a possible result of NIMBY-minded residents blocking the establishment of plants and industrial parks through zoning restrictions.
In this country, with its diverse regional economies, the risk of reduced labour mobility is a growing concern. Home ownership rates are, tellingly, highest in Atlantic provinces, where unemployment is highest, and lowest in B.C., Alberta and Saskatchewan, where jobs are more plentiful. Frustrated in their efforts to lure workers from other parts of Canada, companies in the West have been taking advantage of Ottawa’s Temporary Foreign Worker Program, hiring outsiders willing to forsake homes in favour of income. Yet, it’s the torrid pace of residential construction that is creating many of those jobs, with Saskatchewan, Alberta and B.C. leading the recent growth in per capita housing starts. In these places, we’re building the homes that might someday discourage families from pursuing better opportunities.
It’s hard to ignore the absurdity of the entire predicament. Buy a house, we’re told, because it’s good for the economy. But don’t get rooted—it’s bad for the economy. For young people like Pandher, that kind of contradiction is enough to scare them out of the market. She’s got a decent-paying job, and a friend willing to go halves with her on a rental suite this fall. She can invest whatever money she saves, and while the allure of ownership has not quite dissipated (“I’ll wait a year and see how things look,” she says), Pandher’s taste of the home-buying experience has equipped her with useful wisdom for her next foray into the market. Home might be where her heart is. But it’s not necessarily where one’s best interests lie.