Thanks to the right set of incentives, Canada’s homeownership rate has surpassed the United States’ for the first time in years. U.S. policymakers should be paying attention, write Brian Lee Crowley and Sean Speer in the Wall Street Journal.
By Brian Lee Crowley and Sean Speer, June 3, 2016
Where homeownership is concerned, Americans have fallen behind their northern neighbors. In 2011 the rate of homeownership in Canada, 69%, overtook that of the U.S., 66%, for the first time in more than four decades. Evidence suggests Canada’s rate has held steady, but the U.S. rate fell to 64% in 2015. An average Canadian now has about 74% of his home’s value in equity, compared with 50% for an average American. And the number of mortgages in arrears is nearly eight times lower in Canada than in the U.S.
How did this happen? Incentives matter. The U.S. tax code allows homeowners to deduct the interest paid on their mortgages, which encourages borrowing and debt. The Canadian system has no such deduction but fully exempts capital gains on one’s principal residence, which rewards the accumulation of equity. Washington would be wise to take a look at what’s working in Ottawa.
Virtually every country in the Western world uses public policy—tax incentives, direct financial support, government-backed mortgages—to promote homeownership. And for good reason: Owning a home promotes social mobility, and neighborhoods are the basic building blocks of strong, safe and dynamic communities.
Washington would be wise to take a look at what’s working in Ottawa.
Leading thinkers such as Harvard University’s Edward Glaeser have found that homeownership is linked to less crime, better health, greater educational attainment, more civic participation and, perhaps most crucial, wealth accumulation. One study, for instance, found that owning a home is consistently associated with increases of roughly $9,000-$10,000 in net wealth per year.
Yet some economists are critical of using public policy to encourage homeownership. They see it as distorting the market and nudging people into homes that they can’t afford when savings might be put to better use elsewhere. These are legitimate objections.
It’s the reason that pro-homeownership policy must get the incentives right, and economists can help craft such programs to be effective. The U.S. mortgage-interest deduction is anything but effective. Encouraging homeownership fueled by debt rather than equity makes buying a house a source of instability—not the foundation of the middle-class.
Washington has effectively turned homes into ATMs, because, for the everyday American, it is the only form of borrowing for which the interest expense is deductible. Because the deduction applies to as much as $1 million in mortgage debt, it skews toward high earners. It also costs the government roughly $75 billion in forgone revenue each year, according to the congressional Joint Committee on Taxation.
Most important, the Canadian policy rewards families for building up the equity in their homes rather than accumulating debt.
Canada’s approach of eliminating capital-gains taxes on primary residences is the better one. While U.S. tax law allows for a “home sale exclusion” up to a fixed amount ($250,000 for singles or $500,000 for couples), Canada’s exemption isn’t capped. This tax treatment recognizes that the home provides basic shelter and a nest egg for the future.
Most important, the Canadian policy rewards families for building up the equity in their homes rather than accumulating debt. The tax benefit also arrives precisely when it is most valuable: at the end of a person’s working life when he downsizes for retirement.
Restoring the conditions for upward mobility in America ought to be the top focus of policy makers in Washington. Homeownership can contribute to social mobility and a family’s long-term financial security. Reforming federal support for it to encourage equity rather than debt, as the Canadian experience shows, would be a good start.
Mr. Crowley is the managing director of the Macdonald-Laurier Institute, a Canada-based public-policy think tank, where Mr. Speer is a senior fellow.