Solving the Homeownership Crisis

A semi-formal policy proposal to establish tax and product parity between Canadian Equities and Principal Residence Real Estate

TLDR;

• The Big Problem: Young Canadians (Millennials and Gen Z) want to save for the future but can’t get into the housing market. They're feeling angry, hopeless, and even financially nihilistic because rents are high, ever-increasing, and homeownership feels impossible. It’s unclear if the proposals will solve the problem.

• Why It's Happening: It's not just that high prices or there’s not enough houses. There’s no going back to that. The real issues are that our money is constantly losing value, and homes have become the main way people save for the future. The financial system actually encourages this, making housing unaffordable for many.

• My Solution: The "TFSA Mortgage": What if we could get the same kind of long-term, low-cost loans for investing in things like diversified stock market funds (ETFs) as we do for houses? My idea is to create a "TFSA Mortgage" that would let you do just that, giving other savings options the same boost that real estate gets.

• The Upside: This wouldn't crash the housing market, wouldn't cost the government a dime, and would free up tons of capital to invest in Canadian businesses instead of just real estate, and it would finally give people a real choice in how they save for their future.

The Homeownership Crisis

For the first time in Canadian history, the current generation(s) is actually worse off than the prior. In this case, it’s both Millennials and Gen Z. Millennials first, given they were “coming of age” throughout the post-2008 Zero Interest Rate Policy (ZIRP) era, and they’ve all but given up. I couldn’t find the source, but I read somewhere that over 70% of Millennials have completely given up on the prospect of every owning a home. Now Gen Z is starting their “coming of age” and is feeling the same pain.

This phenomenon is not exclusive to Canada — every Western country that has a similar policy goals of high homeownership rates are experiencing the same thing (USA, Australia, UK).

The crisis is obvious and everywhere — it seems like rent always comes up in small talk and it’s unusual to have a conversation where rent doesn’t come up. The fact that the average Canadian pays more in rent than taxes is alarming and I think perfectly captures the essence of the issue (~37% of their pre-tax income on rent, according to my calculations).

This has left both Millennials and Gen Z angry, hopeless, depressed, and wanting change. Many invest in stocks and crypto with the hope of eventually stacking up enough to make a downpayment, but their savings aren’t growing as fast as downpayment requirements. Some go into financial nihilism as a way to cope with the seeming reality that no one is coming to save them (and perhaps that the system is actively working against them).

The implications of are massive. When an entire generation doesn’t have skin in the game, they no longer care about things that are required for a prosperous society. This is the kindling to communist or nationalist uprisings. See Ray Dalio’s work on the wealth gap for more details.

Why Existing “Fixes” All Have Trade‑Offs

There’s a lot of talk from politicians in the media about how to fix the problem. I think the conversation is dominated by conventional thinking and I’d like to offer my proposal.

We can setup the solution as a 3-legged stool: supply, incomes, and financial requirements. These are the main factors that determine whether or not you are eligible to purchase a home. To increase home ownership, you can either: change the supply/demand dynamics in the housing market, increase the incomes or borrowers, or lower the requirements for lenders to lend money. Let me elaborate:

• Housing supply

  • Generally, we need to build more houses but this is very hard and takes a long time. This kind of push also creates a lot of jobs in the economy, so that’s a plus. Growing supply too much is actually bad for existing homeowners and banks, because it could lead to a collapse in property values. So, unfortunately we can’t really grow supply in a meaningful way fast enough or without blowing everything up.

  • We could also lower immigration, since increasing property prices are driven by the housing stock being unable to absorb the inflow of newcomers. Again, this is not really feasible because even if immigration was 0, there still would be a shortage and it wouldn’t change anything about prices, affordability, etc. Homeownership rates just won’t go up if we get rid of immigration... Additionally, immigrants contribute a lot to GDP growth, so without them GDP would flatten out. This could scare markets and cause property prices to collapse, which doesn’t work either.

• Productivity and incomes

  • If people earn a higher salary, they could save more and qualify for financing faster.

  • This is hard to make happen, because it’s a function of GDP: how much income is produced per employee (GDP per capita) and what can a business afford to pay an employee and still remain in business? Practically every economist or policy maker is trying to figure out how to increase GDP and incomes because of the huge amount of prosperity it brings. Increases in GDP per capita come from productivity gains, which is a function of deploying capital/technology into a business. Perhaps AI will result in higher productivity and incomes? Unclear and hard to make happen. It’s not something we can really control with policy, it’s a function of innovation and market forces over time.

• Financial requirements to qualifying for mortgage financing

  • If banks lower their lending standards, then more people could qualify for financing.

  • This is easy but comes with significantly more risk. The fundamental nature of risk is that it cannot be deleted or removed, only created or transformed. Suppose the government allows “no money down” mortgages, this increases the risk for the bank, because there’s no liquid collateral backing the loan. Sure the property still has value but the bank still has to own and dispose of it to recoup it’s capital, which in a forced-sale situation means they likely have to take less than they’d like to sell it fast. There are innumerable ways to increase the number of qualified applicants (by lowering the bank) but it will always increase the risk. For one, lenders might not even want to take the risk and second, the risk could build up so much in the system that we have a repeat of 2008.

As I see it, each leg of the stool has major issues. And it’s not clear that any of the the solutions would even solve the problem… Even if we pursued multiple or all legs at the same time…

A New Perspective: Stocks Vs. Real Estate

To get out of the trap of conventional thinking, let’s step back and ask:

• What is the root cause problem? (what happens if we ask why 5 times…)

• How does the system work, what does it optimize for, and why was it set up the way that it is?

• Has anything changed since then?

I don’t believe any of the following are the problem: property prices are too high, there’s not enough supply of houses, there’s too many people coming in (demand outpacing supply), borrowers incomes aren’t high enough, we aren’t innovative enough, we have too much regulation to build new homes, we don’t have the labour force to build new homes, or lending standards are too high. These are symptoms, not problems.

The problems are:

1. The purchasing power of the currency is eroding 7-9% per year over the long-term. The only way to “stop the bleeding” is to invest in a long-term savings asset that retains it’s purchasing power.

2. The primary long-term savings asset is a utility asset (houses) rather than a financial asset (currency, gold, stocks, bonds, crypto). The amount of savings in the economy creates too much demand for housing that is price agnostic and makes housing as a utility unaffordable.

3. The financial system it not setup for and does not treat all long-term savings assets the same. One cannot get long-term financing for their long-term savings asset of choice (gold, stocks, bonds, crypto).

Let me walk you thought my thinking in real time through a series of bullet point Q&A’s:

• Q: Why do people want to own homes?

  • A: because it’s a good way to save for the future

• Q: Why is currency not a good way to save for the future?

  • A: because it loses value over time. I remember when a McDouble was $0.99 at McDonald’s, now it’s $3.65

• Q: What else is a good way to save for the future?

  • A: Stocks, gold, crypto. Bonds also lose purchasing power, same as currency.

• Q: Why do people prefer real estate over stocks, gold, or crypto?

  • A: because you can get a lot of leverage, which increases the financial returns (and purchasing power) of the investment over the long-term

• Q: If other assets had the same leverage and provided the same level of purchasing power as real estate, would this the problem?

  • A: Yes. Some people might prefer to still own homes, but now at least they aren’t losing money by not owning a home. They have the choice of which long-term savings asset suits them.

• Q: What does the system optimize for?

  • A: the system optimizes for stable or increasing property prices. this ensures that when the home is sold at retirement, the value of the currency received in exchange for the house is the same as it was 20 or 30 years before.

• Q: When was the system setup and why was it setup like this?

  • A: around 100 years ago, it was setup in the USA. Banks were primarily operating at the community level and the economy was still heavily agrarian, so it made sense.

• Q: Has anything changed since then?

  • A: Yes, many things have changed since then. Banks are no longer “community-oriented”, they are global risk allocation machines. Low-cost ETFs have proliferated, creating a secondary savings market.

Currently, there are “borrow to invest” products and programs out there, but they can’t compete with a mortgage. In the case of stocks, most of the financing is available in the form of margin financing, which is highly sensitive and meant for active management. It’s not suitable for long-term investing. There are also RRSP lending and lending facilities available for equity investment, but they are also not as favourable as mortgage financing. RRSPs are not a good financial product.

The Proposal

The “TFSA Mortgage”

My proposal is essentially to create policy, tax, and lending parity between low-cost index ETFs and principal resident real estate. This would allow for a “TFSA mortgage”, where borrowers could access long-term, low-cost financing to invest in low-cost index ETFs. Perhaps this would also work with Gold and Bitcoin, too.

Instead of attempting to fix the real estate market, why not just unlock this secondary savings vehicle?

Here’s how it would work, as an example:

1. Borrower plans to own a home in 10 years and makes $100,000 per year.

2. Bank lends them $300,000 at 5% on a 10 year contractual term and a 25 year amortization.

3. The Borrower now has a monthly payment of $1,753.77 (principal and interest) owing to the bank.

4. The Bank stipulates that the funds must be invested in any of the approved low-cost ETFs (think S&P 500 etfs, etc). This portfolio has returned on average 9% per annum after taxes and including dividends, or increases in value by $2,250 per month for 10 years.

5. The Bank also stipulates that the Borrower cannot withdraw the funds without a) paying back the lender entirely (either as a prepayment or at maturity). In the event that the Borrower can no longer make the payments, the Bank assumes their portfolio and the Borrower’s debts are discharged, netted against the sale proceeds from the portfolio.

6. At the end of 10 years, the lender removes the withdrawal restrictions and the Borrower can access the funds. They no longer have a monthly payment.

Here’s what we’d need to do:

• We merge RRSP and TFSAs, and replacing the TFSA contribution limits with that of the RRSP. This effectively makes one tax-advantaged program for people to invest in, same as real estate (no tax on sale of principal residence).

• We make TFSA a collateral asset, so that lenders can lend against the assets. We also create a risk framework and establish lending parameters for this type of transaction.

• We would also need to define what types of assets and portfolios are eligible for this type of product.

Importantly, it would need to be done in a way that actually makes banks want to lend the money.

Here’s some of the obvious benefits:

1. Solves the problem of long-term savings.

2. Does not crash the real estate market.

3. Doesn’t require the government to spend any more money to “fix” build more housing.

4. Unlocks new capital in the economy: the government could stipulate that only Canadian publicly-listed equities are eligible, which would redirect vast sums of capital in the economy towards productive purposes rather than real estate. When money goes into real estate, it doesn’t “produce” anything, but if it goes into the stock of a Canadian company, we reward companies that produce goods and services for Canadians.

5. Gets rid of RRSPs, which are a lowsy financial product anyway.

6. Creates neutrality across long-term savings assets.

What Next?

I think the next step is a proper policy evaluation and public discussion. This post was not intended to be a complete policy proposal, so it would be good to get contributions from online to improve it. So please share this on social media or comment your thoughts below.