When he was zipped and steady, Bill Clinton thought everybody should buy a house. In 1994 America made a commitment get home ownership levels from 64% up to 70% of the population. In that year governments and banks started to undo lending requirements, working especially hard to shove more low-income people into mortgages.
It worked. By the end of 2004, with George W. Bush pumping ‘the ownership society’ and subprime lending in full flower, 69.2% of all Americans owned a house. Of course, this came with record levels of debt. So when the pool of new buyers ran out and cheap interest rates rose the next year, housing imploded.
You know the rest of the story.
This week came news the ownership rate has plunged back to 1998 levels – under 66%. It’s now forecast it will sink to 62% by 2015, or where it was 30 years ago. Of course, all the debt remains. It’s why there are 18.7 million vacant homes (two million of them are for sale), and why more than a quarter of all families have negative equity, owing more than they owe, unable to sell.
Sales of existing homes are on track to hit 1997 levels. New home sales are slumping. Incredibly, half of all the 3.8 million houses now on the market in America are empty.
What does this tell us?
Hmmm. Lots, in a country where flagrant pro-real estate policies have resulted in a 70% ownership level and world-class piles of steamy fresh debt.
A dramatic increase in the number of people buying houses without a dramatic increase in income is doomed to fail. Just a matter of time. As you may have noticed from Friday’s news, the Canadian economy contracted last month – which is the opposite of growing. A few months of that is called a recession, which means fewer jobs and less money to go around. This is not good.
So why have house prices risen here with so many people herding to buy?
Simple. We did what the Yanks did under Clinton and Bush. We dropped interest rates to emergency levels (as the US did after Nine Eleven), and kept them there far too long. Low rates meant people could borrow more money, then spend more. So real estate values shot higher – all on the back of debt.
Second, we lowered lending standards. Mortgage amortizations lengthened and down payments shrank. Zero-down home purchases became common, and today our big ‘conservative’ banks will even spot you the money to buy. We have no-doc mortgages for the self-employed, 125% mortgages for everyone, while the feds encourage lending to people with no money by wiping away banks’ risk.
So now the average down payment is just 7%, two-thirds of all new condos in Toronto are going to speculators, it takes 70% of a family’s income to carry the average house in Vancouver and we’ve passed $1 trillion in mortgage debt. But, praise be, we hit 70%.
There’s no doubt where all this is going. By keeping rates low, expanding the reach of federal mortgage backing, raising tax-free RRSP withdrawal limits for home purchases and subsidizing first-timers’ closing costs, the Harper government is just like Clinton’s, but without the bodily fluids and all those endorphins. And where’s the fun in that?
The basic flaw: not everyone should have a house. Shelter may be a human right. Granite counter tops aren’t.
As the world holds together with gossamer threads tonight, contemplating what could be, it’s worth remembering how we got here.
Are you ready?