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Saturday, Feb. 4, 2006

English lesson for Ernie: Dump mortgage freebie

By ERIC REGULY
Globe and Mail
Saturday, Sep. 13, 2003

Ernie Eves should get out of Ontario more often. If he had travelled, say, to Britain a few months ago and talked to politicians, economists and housing experts about mortgage interest deductibility, the idea of introducing it at home might have died after his second Scotch on the return flight. Instead, it is the centrepiece of the Tory Leader's increasingly desperate re-election bid. In Britain, a similar program mangled the property market and nearly bankrupted the Treasury. Yet Mr. Eves thinks traipsing into the housing market is the greatest thing since fireproof hair gel.

Mortgage interest breaks are nothing new.

The Americans have it but don't know how to get rid of it. The Brits had it and buried its last remnants three years ago. John Wriglesworth, the housing guru at London property research firm Hometrack, says the British version of mortgage interest deductibility, best known by its acronym MIRAS, overheated the market and led to "the biggest property crash since the Second World War" in the early 1990s.

Home ownership is generally considered a noble pursuit. People tend to take care of things they own. Renovations and additions make houses more valuable, which means governments can jack up property taxes. In Canada, ownership is encouraged by exempting houses from capital gains taxes upon their sale, and it has worked pretty well. At last count, Ontario's home ownership rate was slightly more than two-thirds. Still, it's not good enough for Mr. Eves.

Britain had some form of interest deductibility, for both purchase and renovation loans, for as long as anyone can remember. In the mid-1970s, interest "relief" was available on loans as high as £25,000 (about $55,000 at current exchange rates), which was ample enough in those preboom years to lure a generation into the housing market. During the 1980s, when Margaret Thatcher launched her fatwa on council flats, the limit was raised to £30,000. Home ownership soared. So did prices. Then disaster struck, led by MIRAS.

In 1988, the government announced it would abolish multiple tax relief, where unmarried couples could each claim deductions on home loan interest. But it gave new borrowers a few months to beat the deadline. Panic buying was the result and house prices went crazy just as interest and unemployment rates began to climb. The market duly collapsed, leaving many homeowners with negative equity -- their homes were worth less than the mortgages on them. But that was just one side of the story. The other side was the damage to the government purse. MIRAS was costing the Treasury billions of pounds a year. In 1990-91, just as the British economy was going into the tank, the MIRAS tab peaked at £7.7-billion. By then, it was a question of keeping homeowners happy or hospitals open.

MIRAS was slowly withdrawn during the 1990s and finally killed in 2000, by which time the annual cost to the taxpayer had declined to £1.6-billion. Scrapping MIRAS didn't stop house prices from rising dramatically since the mid-1990s. But given that a two-bedroom basement flat in London can set you back the equivalent of a million bucks, the fire didn't need any more stoking. The government has since gone off in the opposite direction on the home ownership front by boosting the the tax charged on property purchases to 3 to 4 per cent.

Evidently, Mr. Eves is cheerfully ignorant of the British experience with mortgage interest deductibility. Most voters own houses. So, his scheme will buy the affection of most voters. And if you oppose the idea, as Liberal Leader Dalton McGuinty does, you are against home ownership, making you an enemy of the state, a Marxist, anti-family or all three.

The Eves plan is all the more cynical because it actually won't do much for your lifestyle. The Liberals calculate it will save the average mortgage payer about $2 a week at first. Nonetheless, that's more than enough to put stress on a provincial budget that will be in deficit unless more education programs are gutted and Crown assets sold. When it's fully implemented in a few years, the tax revenue loss will be about $700-million a year. Why stop there? If the Tories get re-elected on Oct. 2 on the back of their mortgage freebie, they will be tempted to offer bigger freebies to get re-elected again (as the British Tories did in the 1980s). Once deductibility is a part of life, any government risks political suicide by scrapping it or reducing its value. As the bill for deductibility rises, the government will come under more and more pressure to replace the lost tax revenue.

Where to stop? Mortgage deductibility is inherently unfair because it is of zero benefit to renters, whose average incomes are substantially lower than those of homeowners. The social and economic engineers in the Tory camp might argue that deductibility would make houses more affordable to renters. It could also put so much upward pressure on prices that renters would find houses even less affordable.

Mostly, though, deductibility just isn't needed. The market doesn't need exaggerated boom and bust cycles, nor does Ontario's treasury. Just ask the British.



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