Saving the US Economy - the Canadian Way

[Admiral Yi]

It's important to keep seperate the effects of the mortgage interest deduction and the recent subprime bubble.  As long as proper credit controls are in place I don't see how the deduction increases inherent credit riskiness.

[Malthus]

It's important to keep seperate the effects of the mortgage interest deduction and the recent subprime bubble.  As long as proper credit controls are in place I don't see how the deduction increases inherent credit riskiness.

In that it encourages people to take out more debt and to amortize it over a longer period than they would otherwise. More debt over a longer period = more risk from market fluctuations.

[Admiral Yi]

In that it encourages people to take out more debt and to amortize it over a longer period than they would otherwise. More debt over a longer period = more risk from market fluctuations.

More risk to who, the lender?  Interest rate risk is compensated by the positive yield curve.  Longer term instruments pay higher interest.

[Malthus]

In that it encourages people to take out more debt and to amortize it over a longer period than they would otherwise. More debt over a longer period = more risk from market fluctuations.

More risk to who, the lender?  Interest rate risk is compensated by the positive yield curve.  Longer term instruments pay higher interest.

More risk of default, if economic conditions turn bad.

I am no longer as certain as I was that banks are necessarily good judges of the correct risk-reward ratio over the long term. 

[crazy canuck]

In that it encourages people to take out more debt and to amortize it over a longer period than they would otherwise. More debt over a longer period = more risk from market fluctuations.

More risk to who, the lender?  Interest rate risk is compensated by the positive yield curve.  Longer term instruments pay higher interest.

More risk to everyone.  More risk to lenders because they have not been able to judge risk appropriately, certainly more risk to borrowers and more risk to the general health of your economy.

[Admiral Yi]

Are commercial real estate loans typically shorter maturity?  You guys may be right, need to think about it.

Although Malthus' point about banks' ability to assess risk doesn't really touch on the mortgage interest deduction.

[alfred russel]

It also changes the dynamic of choice between owning & renting, if money paid in rent is not deductable.

You are ignoring my posts. What screws up that dynamic is the Canadian system, where renters can deduct their interest charges (which are at least partially passed on to rentors in a competitive market) but buyers can not.

[alfred russel]

Are commercial real estate loans typically shorter maturity? 

Yes. And they tend to be at higher interest rates.

But business loans in general tend to be shorter term, with the expectation of rolling the loan over versus paying it off. It isn't an apples to apples comparison.

[The Brain]

People who rent cannot be trusted and vote Socialist.

[alfred russel]

More risk to everyone.  More risk to lenders because they have not been able to judge risk appropriately, certainly more risk to borrowers and more risk to the general health of your economy.

Then why not protect the health of the economy by not allowing any interest to be deductible? From your line of thinking that would reduce risks to the health of your economy.

[crazy canuck]

Are commercial real estate loans typically shorter maturity? 

Yes. And they tend to be at higher interest rates.

But business loans in general tend to be shorter term, with the expectation of rolling the loan over versus paying it off. It isn't an apples to apples comparison.

No, commercial real estate loans are short duration because the bank anticipates that it will get its money (and the developer will make a profit) after the units are sold.  No bank, at least in Canada, would loan to a developer on a never never plan or rolling loans.  Maybe that is another aspect of the difference in lending practices between our countries.

edit:  There was one notable developer the banks did do that for but when it went tits up in the about two decades ago the banks learned their lesson and didnt do that again.

[crazy canuck]

More risk to everyone.  More risk to lenders because they have not been able to judge risk appropriately, certainly more risk to borrowers and more risk to the general health of your economy.

Then why not protect the health of the economy by not allowing any interest to be deductible? From your line of thinking that would reduce risks to the health of your economy.

To many double negatives in there.  I think you are actually agreeing with me that mortgage deductability is a bad idea.

[Admiral Yi]

Sorry, should have said rental property developer loan instead of commercial property loan.

[crazy canuck]

People who rent cannot be trusted and vote Socialist.

Its funny because the reason often stated for US policies to encourage home ownership was the fear of a non land owning population moving toward socialism.

[crazy canuck]

Sorry, should have said rental property developer loan instead of commercial property loan.

Ok, I am not sure about the answer to that.  Rental property development has not been profitable for years so I am not sure that anyone actually does it anymore.

The typical rental model in large Canadian cities is that a developer will build muti-dwelling units and sell them to the public.  Some of those who buy will purchase the units as an investment and rent them while they wait for the market to increase so they can then sell and make their profit.

A recent requirement of developers is that they also build something called "low cost housing" as part of their developments.  Those are units that are specifically built for renters at regulated prices but they are not financed separately.  It just reduces the profitability of the over all project.