Don’t encourage the un-encouragable

Alex Tabarrok of Marginal Revolution shares his favorite of Morgan Housel’s Motley Fool article, 122 Things Everyone Should Know About Investing And The Economy.

I especially agree with this one:

For many, a house is a large liability masquerading as a safe asset.

This is important to understand and relates to my previous post.

In the U.S. we (especially politicians) have rose-colored glasses when it comes to home ownership. We think it’s good, always. We think, the more the better, always. We have this same affliction with education.

So, you start to see politicians do things to make it easier to become a home owner, like lowering down payment standards.

Home ownership can be good, but as with all good things, it isn’t good for every situation. And, there is a law of diminishing returns that limits the more is better, always.

Back in 2010, the Wall Street Journal interviewed Canada’s Finance Minister, Jim Flaherty. I wrote about that here. Canada did not have a banking crisis in 2008. Part of the reason why is that they do not see home ownership with rose-colored glasses like we do. This prevents them from doing unwise things like getting people into home ownership when renting is likely the best option for them.

He said:

“They [Canada’s version of Fannie and Freddie] are supposed to have a certain part of the market but they are not supposed to be a dominant player in the market. They do make sure that lower income earners have access to a roof over their heads, but that can mean rental housing.

There’s no stigma to renting there. That kept Canada’s government, mortgage lenders and borrowers from doing things that encouraged risky home ownership.

In the interview, Flaherty points out some of these things

• Canada’s lenders didn’t securitize (sell off) mortgages, or off load risks of bad mortgages, to others. They lent and held the mortgage, so it was in their best interest to make good loans.
• Borrowers couldn’t just walk away from a home with a mortgage. “They remained personally liable.” That encourages borrowers to be more prudent about becoming a home owner. If you can’t rid yourself of the debt by simply stopping paying your mortgage and walking way from the house if things go south, then maybe you don’t buy a home or you buy one that better fits your budget.
• Canada’s tax code also doesn’t treat mortgage interest as a deduction. This policy also tips the scales toward home ownership in the U.S.

Interesting Piece on Canada

Canada: Land of the Free, an interview with Canada Finance Minister Jim Flaherty appeared in the weekend edition of the Wall Street Opinion Journal and was surprisingly interesting.  Here are some interesting tidbits:

Canada did not have a banking crisis in 2008 and, despite its vulnerability to U.S. economic weakness it emerged from recession in the third quarter of last year.

Mr. Flaherty was in New York this week talking up the Canadian economy at the consulate, where I cornered him for an interview. I started by asking him how his country avoided the mistakes that led to the housing and banking crisis in the U.S.

“One of the fundamental reasons is that Canadian banks, the lenders on residential mortgages, lend and hold,” he begins. “Someone getting a mortgage normally meets with a live human being in a bank branch and [the bank] will know something about the person before it makes the loan.” Banks don’t sell them, either, he adds; “there wasn’t that repackaging securitization—selling the loans—that happened a lot elsewhere.”