What lessons can the U.S. learn from housing programs, policies, or regulatory frameworks in other countries? Are there specific tools in use (e.g., covered bonds, full recourse loans, prepayment penalties, etc.) that we should consider adopting or using on a larger scale?
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Social scientists do not have the luxury of natural experiments. When it comes to housing policy, we will not exactly know the precise impact of saying removing the mortgage interest deduction until we do so. We are forced to rely on theory and imperfect comparisons. A useful and rich set of comparisons are the policies of other countries. Such offer us an interesting list of do’s and don’ts.
First let’s acknowledge that despite previous claims, America’s system of housing and mortgage finance is not “the envy of the world”. Few countries are scrambling to copy our various mortgage subsidies and few are interested in making mortgage credit as easy as it once was here. Yet many countries maintain homeownership rates comparable or higher than that of the U.S. Many also have housing markets that are far more affordable than the U.S. Of course others are more expensive and have lower rates of homeownership.
Perhaps the most important thing to learn is to not use centralized government planning to restrict or direct the use of property. The United Kingdom “pioneered” the use of centralized land planning. The result has been some of the least affordable housing in the world. The UK has also witnessed at least four housing bubbles since 1970. It should be clear, whether its London or San Francisco, that extensive government planning of land usage leads to both un-affordability and higher price volatility. If we are to follow the lead of any country, in terms of land-use, it should be Germany, with its’ constitutionally guaranteed “right to build”. Such would reduce bubbles and increase affordability.
Turning to the mortgage market, the U.S. should follow the lead of most other countries and reduce its massive, costly and inefficient system of mortgage subsidies. No other country guarantees individual mortgage credit risk, the payment risk in mortgage securities and has large government backed secondary market purchases. Our system has been extremely costly, most likely driven up housing prices and has had little long-run impact on homeownership rates. Other countries offer long term fixed rate financing, at rates comparable to the U.S., without government guarantees.
The U.S. is also an extreme outlier when it comes to responsibilities facing the borrower. Few other countries widely ban recourse. In most of Europe, were a borrower not to pay their mortgage, they would quickly see their wages garnished. Such obviously reduces the rates of mortgage delinquency. It also allows for the offering of low-down payment products in many countries, although such products are generally restricted to prime credit quality borrowers. Most other countries also allow for the use of pre-payment penalties, which can more efficiently control interest rate risk. Despite being portrayed as the home of free markets, America’s mortgage markets are excessively regulated (and litigated). Allowing a greater range of mortgage options and reducing excessive regulation would result in better risk management in our mortgage markets.
There is a considerable amount the U.S. can learn from other countries, as it relates to housing policy. There is also much the U.S. can teach. The relative ease of building in places like Texas should serve as a model for the world. America’s rejection of extensive government direct ownership of housing has been a blessing. The social and economic problems of U.S. public housing look small when compared to the social isolation and economic costs of the French Banlieues.
Mark A. Calabria is Director of Financial Regulation Studies at the Cato Institute.
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