Homeownership in Canada—benefits and costs

Middle-income households face a big decision—whether to rent or own a house. Governments also face a big decision—whether to favour homeownership, support rentals or stay neutral. Canadian governments, provincial and federal, have chosen to support homeownership by taxing investment in housing less than other investments.

It’s well known that capital gains from a family’s principal residence escape taxes unlike gains from other real estate, stocks and personal property. Governments would gain $5 billion a year by taxing these gains the same ways as others.

Less well-known is the tax break on the benefits from owning a house. Rather than money income, these benefits consist of the house’s shelter services and the enjoyment from using its property.

How big are these benefits?

They can be compared with the rent paid on similar houses. But just as the landlords have expenses, so to do households. Costs include heating, utilities, depreciation and maintenance. Rent also covers mortgage interest and property taxes. The remainder of rent, which consists of the benefit to the owner—the return on invested capital and profit.  

These benefits face different tax treatment than returns on other assets. Bond and deposit interest is taxed at the same rate as wages and salaries while stock dividends are treated more favourably. The “return” from owner-occupied housing is not taxed at all. My estimates suggest that the annual tax saving on a $600,000 house compared to other investments would be $6,000 with a 90 per cent mortgage and $12,450 without a mortgage.

Finance Canada does not estimate the revenue it would gain from taxing these benefits. The U.S. Treasury pegs it at $114 billion per year. Since home ownership rates tend to rise with age and household income, this benefit is tilted towards older and higher income households.

Provincial governments also favour home ownership. British Columbia, for example, offers property tax relief of $570 to $770 to owners of homes worth less than $1,200,000. Seniors aged 65 or over receive larger grants of $845 to $1,045.

B.C. seniors together with families supporting children can also defer their property taxes on favourable terms. The interest rates on the deferrals are low (seniors at 1 per cent and families at 2.7 per cent) and, unlike bank loans, apply only to the deferred taxes themselves and not to built-up   interest.

Given these favourable policies, how does Canada stack up in terms of homeownership?

At 68.9 per cent it sits in the middle of the pack of OECD countries. Spain on the high side at 83.2 per cent and Germany (41 per cent) and Switzerland (38.4 per cent) on the low side are the outliers.

So why do governments favour homeowners? The main benefit touted for this treatment consists of greater community engagement and voting behaviour by owners. This benefit may be overblown. In country comparisons across the OECD, there appears to be no clear relationship between measures of either economic or political freedom with homeownership. In addition, a recent OECD study argues the people active in community activities are already the most likely to be homeowners. They are also well placed to get the politicians’ ears.

Against these possible but uncertain benefits are clear costs. Homeownership adds to the risks faced by families. Housing can loom so large among their assets that they are woefully under diversified and excessively exposed to ups and downs of the housing market. Witness the damage to U.S. household wealth in the housing crash.

This problem will be especially serious when the industry where the homeowner works in looms large in the local economy. Families could then face a collapse in the value of their home at the same time as they lose their jobs.

Owning a home also adds to the difficulties of moving away from distressed areas to find better opportunities. Encouraging home ownership may deter the labour mobility vital for a dynamic economy.

Efforts to increase homeownership in Canada have at best had uncertain social benefits. The private benefits flow mostly to older and higher-income families. These policies raise risks for homeowners and inhibit labour mobility. It’s hard to justify housing policies that offer sizable benefits to homeowners and none at all to renters.