Like an American president in his final days at the White House, Stephen Poloz plans to leave a note in his desk drawer for the next Bank of Canada governor.
He says it will be about the need to surround yourself with smart, critical thinkers who will challenge your views so that you don’t overlook a good idea. And in his own way, Poloz is already issuing a more public goodbye letter for Canada in advance of his departure in June.
In an interview, he spells out some thoughts on how to deal with the high cost of housing — that seemingly intractable problem that weighs on so many people.
His solution? Shared equity.
It’s a concept that the federal government has already flirted with in its First Time Home Buyers Initiative that sees Ottawa buy up to 10 per cent of a new home, so that first timers can more easily scrounge up a down payment.
Poloz sees the concept going much further than that, and led by the private sector — banks, not government.
Here’s how it works: If a prospective home buyer wants a home for $1 million, but can only realistically afford to carry a mortgage on $500,000, then an investor of some kind could be found to buy the other half of the home.
The home buyer would live in the entire house, but only pay the mortgage on half of it.
The investor who finances the other half would receive a rent-like fee for the housing services the home buyer uses and also pocket half the capital gains or losses in the home’s value.
“That’s complicated, but that’s a solution to the affordability issue,” Poloz argues.
“I’m thinking of it that way because it kind of gives me a clue of the sorts of things we could try to do to at least begin to address the affordability problem. We will not address it by wishing it away, or somehow building more houses.”
As real estate prices soared over the past few years, and household debt piled up, policy makers have tried a range of measures to take some of the heat out of the housing market and help affordability.
Regulators have imposed a stress test on borrowers so they don’t get in over their heads. Governments have cracked down on foreign buyers. There’s a range of federal and provincial incentives and subsidies to build more homes, increasing the supply.
Taken together, the measures appear to have calmed down the speculation that had been notable in big cities.
The shared-equity idea is not a new one, but it’s certainly not pervasive in Canada.
Poloz was inspired by House of Debt, a 2014 book by Atif Mian and Amir Sufi about how the great recession of 2009 was driven by the indebtedness of American households.
In the book, the authors urge a rethink in how mortgage risks are shared between homeowners and their banks, arguing that homeowners shoulder too much of the burden.
Poloz spoke briefly once last spring about the book, pointing out a need for banks and financial services in Canada to think more creatively about risk sharing and mortgages.
But even the federal government’s relatively timid foray into the world of shared equity has met with criticism.
Experts and policy makers alike have said that the main reason homes are unaffordable in big cities is because there are not enough of them to go around and meet the demands of burgeoning urban populations.
In other words, supply is the problem; not demand. And anything that encourages demand, including shared equity schemes, makes the supply problem worse.
Heather Scoffield is a columnist with Torstar Syndication Services.