Thread by @ec_francisfong

I’m all for initiatives that help young people afford homes, but things like this make me skeptical that it’ll actually make a difference or outright fearful. This is going to be a long thread. #cdnecon #cdnpoli 1/n

theglobeandmail.com/canada/article…

First, I find it hard to see how the feds can make this sufficiently targeted. Presumably, you’d want $ to go to people that truly need it, which would exclude all sorts of young people (those with wealthy parents, older millennials that already have home equity, etc) 2/n

So you’d need all sorts of complicated restrictions to ensure just that, meaning increased complexity that hampers effectiveness and the risk of wrongly excluding people that might need support. 3/n

You could go with raising the first-time homebuyers tax credit (one of the NDP proposals cited in the article), but it’s hard to see how even doubling it from $750 to $1500 really helps people when condos are $400K and houses are $800K-1M to start in GTA, GVA, GCA, GMA. 4/n

Something like a rent subsidy might help some, but doesn’t help when vacancy rates in major cities are all at or near record lows. In GVA, last I read, it was something like 0.7%. 5/n

If you went broader, you risk getting into the prisoner’s dilemma that is characteristic of housing supports. This isn't like PSE grants where it’s ‘ok’ if some richer students get access to support that may not need it, so long as you’re supporting those that truly need it. 6/n

This is a situation where everyone is in direct competition with each other. So one person accessing a specific support invariably incentivizes others to do so in order to compete, bidding up prices and maintaining the status quo. 7/n

Those better off will still end up winning the war for housing, just that they leverage more support than they otherwise would to win it. Mortgage insurance is a good example of this. 8/n

And this is what I fear – that what we’re really talking about is loosening mortgage insurance regulations to allow more people to access it, particularly those that don’t have the free capital to compete in the housing market. This would be a major misstep in my opinion. 9/n

First, it has the same prisoners dilemma problem I cited above. Case in point, there are serious questions about mortgage insurance as a policy tool of raising homeownership rates. 10/n

Canada is only one of a few countries that makes extensive use of MI (others include the US, Hong Kong, Australia, France, the Netherlands). But compare the 6 of us to others and you’ll see we’re all pretty middle of the pack when it comes to ownership rates. 11/n

Many countries that don’t have government-funded/backed/whatever mortgage insurance have higher rates than Canada, including Sweden, Iceland, Belgium, Finland, Italy. Because the problem is that mortgage insurance doesn’t help expand access in a supply-constrained market. 12/n

But most importantly, loosening MI regulations would undo all of the hard work the dept of finance and CMHC have done to restrict MI eligibility to ensure financial sustainability. 13/n

Want to know why we haven’t had a housing crash? Part of the reason is because we have kept low credit quality mortgages out of our mortgage insurance system. 14/n

Keeping lending standards high (through income stress testing, strict documentation standards, etc) has ensured that credit quality has actually improved over time. Here’s a chart from my recent report. 15/n

Compare to the US in 2002-06 where subprime mortgages proliferated and ultimately were central in bringing down the economy. Some may remember that Canada’s regulators loosened mortgage regulations significantly between 2002 and 2007. 16/n

These included things like lowering down payment requirements, lengthening allowed amortizations, etc. But when 2008 hit, they realized their mistake and reversed every change they made in those preceding years and then some. 17/n

This is not to say that millennials all have bad credit or anything, but rather that a broad-based loosening of MI regulations naturally invites those with lower credit quality back into credit markets that were, by design, previously excluded. 18/n

The real issue here, and the underlying theme here, is that affordability is not an island – it’s part and parcel of a bigger issue around supply. That’s a whole ‘nother thread, but the lesson here for the government is to tread with caution. /end