Housing Finance Innovation and How Canadians May Evaluate Homeownership as a Critical Asset Allocation

This research makes a significant and important contribution to the literature on Canadian housing finance by identifying four regimes that represent a continuum toward a market-based mortgage system where Canadian households can readily access mortgage credit. The history of housing finance in Canada, like many nations, has been plagued by a lack of an effective way to channel savings into mortgages, and this has influenced households in the process of making the rent versus buy decision to obtain housing services. Innovation and advancements in Canada`s mortgage lending system and integration of mortgage funding with capital markets from 1900 to 2010, specifically mortgage backed securities enhanced with mortgage loan insurance, allow more households to shift from renting to homeownership. A cross-country comparison of OECD nations illustrates that a domestic mortgage market system must be sufficiently liberal and flexible so that a representative household can evaluate homeownership as an investment decision. In addition, a stylized Markowitz optimal portfolio selection model looks at homeownership as a critical asset allocation in the presence of bonds and equities in two Canadian markets: Metropolitan Toronto and Metropolitan Vancouver. The conclusion is that when the long-term mortgage loan borrowing rate is used to construct the capital allocation line, the efficient frontier is a blend of bonds and equities, and housing only forms part of an optimal risky portfolio over long holding periods. The economic model and empirical results show that single detached housing and apartment condominiums offer households different economic returns. A household may respond to this reality through deferring maintenance and holding the housing asset for long periods to maximize the implied imputed return. The instructive finding is that homeownership is a long-term investment that hedges rent risk, and if a household does not over-consume housing, there are significant gains from imputed rent. The homeownership decision for most households is often based on maximum permissible mortgage credit granting rules rather than optimal portfolio selection. The equilibrium approach verifies the probability distribution of positive economic returns in both Metropolitan Toronto and Metropolitan Vancouver over long holding periods.