Canada: a nation of renters?

Canada’s housing crisis has become the defining issue of the 2021 federal election.

This may be surprising given all the other issues we are facing: a pandemic, an ecological emergency and growing geopolitical tensions.

But spiraling home costs beyond Toronto and Vancouver — where they have been a political hot potato for over a decade — have made housing a central issue for many voters.

Why are house prices spiraling upward, apparently out of control? Is it a bubble? Toronto has waited 20 years for its bubble to pop, so is it really a bubble or something worse? What is the nature of the crisis that we are in? Most importantly, what role does the federal government have in it?

The average cost of a single-detached home has increased substantially in all parts of Canada, irrespective of incomes, reaching new peaks last spring above $700K.

In light of this, all major political parties have made announcements about housing, most promising new construction — as though the rising cost of housing has to do with the relative scarcity of housing, generally.

It is not.

Since Spring 2017, Canadian builders have completed 840,940 housing units according to Statistics Canada and the CMHC.

Over the same period, Statistics Canada estimates that the population has grown by 1,733,064. The average household size according to the 2016 census data is 2.47, meaning the new construction that has come onto the market is more than enough to meet population growth (though some spot markets may be tighter, notably Toronto).

The massive increases in housing do not, primarily, have anything to do with supply and demand of houses.

The important component of supply and demand here is credit and the regulations governing it.

Before the 1987 and 1992 Mulroney-government reforms of the Banking Act, Canada’s financial regulations required that banks, insurance companies, and equities traders (the folks who sell stocks and bonds), operate separately from one another.

Mortgages, therefore, were held by one institution, and not sold as commodities by others.

By the 1980s, Canadian bankers wanted to compete with rapidly globalizing American banks, which were experimenting with new forms of “securitization,” especially selling debt derivatives backed by fixed assets.

One of the most significant innovations was the rise of the Mortgage-Backed Security or MBS. MBS pool mortgage loans originated by commercial banks, split them into revenue-generating securities (or units of ownership over a pool of mortgage debt), and then sell them to investors who are paid out of mortgage income.

MBS may be obscure to voters, but it is having a major impact on how bankers end up with more of workers’ money.

The advantage of selling off MBS for the mortgage originators (commonly commercial, or chartered banks in Canada, but also private equity firms) is that it removes debt from their balance sheets, enabling them to “leverage” their money, and originate yet more loans, which in turn can be packaged and moved off-balance sheet at each “turn.”

Because commercial banks traditionally make money on the spread between the money they borrow (from depositors or other sources) and the money they lend (for instance mortgages), lending out more money means much higher returns for Canadian banks, and, ostensibly, lower interest rates for borrowers (because there is more capital available).

As Canadian banks sought to compete with international banks, especially American ones, mortgage securitization played a key role. However, there was a very limited private market in the early 2000s for Canadian MBS, which would allow banks to increase their leverage. So the federal government created a market for them.

In June 2001, the Chrétien-Martin government authorized the CMHC to create the Canada Housing Trust, a special purpose vehicle to buy banks’ mortgage debt, and repackage them to large investors in the form of Canada Mortgage Bonds. This helped move mortgage loans off the balance sheets of banks, and onto that of the CMHC/Government of Canada.

It effectively also nationalized risk in a potential housing collapse, leaving the profits in the hands of private corporations and banks.

Canada Mortgage Bonds are guaranteed by the Canadian government at fixed rates and terms, essentially pump-priming the supply of available bank credit for mortgages, while nationalizing all the systemic risk.

In the low-interest environment of the 2010s — during which time central banks could not increase interest rates for fear of sparking the collapse of highly leveraged and indebted firms (especially banks) — Canada Mortgage Bonds became very popular securities for institutional investors to hold, because they were guaranteed by the Bank of Canada, and because they offered interest rates substantially above zero. They became a key component of most balanced portfolios.

The impact on Canadian housing, however, has been dramatic.

There is no easier way for Canadian bankers and private equity firms to make money than to initiate mortgage loans, because the debts will in most cases be bought and guaranteed by the government of Canada.

While various federal governments have taken measures in recent years to “reign in” home price inflation (especially in Ontario and Vancouver), it has not made any substantial attempt to divest itself of its role in buying MBS, and indeed, it is difficult to see how it can without harming the housing market.

Anything that hampers the leverage of mortgage originators — especially chartered banks — will lead to higher borrowing rates.

But in the absence of this type of action, Canada has the potential to be turned into a nation of renters.

Many Canadians now hold out hope that the housing bubble will burst. They think it may be the only way that they will be able to afford a home.

Their faith in free markets will not be repaid.

The housing market is rigged by federal financial legislation, which finance ministers from Paul Martin, Jim Flaherty, Joe Oliver and Bill Morneau — all of whom grew up amongst the financial elites of Bay Street and Montreal — have helped to craft.

The securitization of mortgage debt has transformed homes from places people live into a financial asset, and that is consequential for what comes next.

Since 2008, a growing number of property management firms and private equity investors have discovered that passive income from housing provides good returns on investment. Whereas the foreclosure crisis in 2008-09 saw banks holding sizeable stocks of housing with no one to buy them, that is unlikely to recur in the 2020s.

Property management firms and private equity companies are now ready to “buy the dip” in housing prices. Houses are now being bought by private firms, who are renting them out to people no longer able to afford to buy.

Though the process is more advanced in the U.S. than Canada, it is also happening here. In the process, workers are paying more and more of their savings to the financial classes and increasing wealth inequality in ways we do not yet comprehend. That will have political as well as economic implications.

Unless there are substantial reforms to the National Housing Act and the Banking Act, wealthy elites will continue to use our financial system to game the housing market and take more workers’ money.

Whatever government comes to power today will have to confront this situation and the powerful political cocktail it will unleash. One study by the Washington Post showed that nearly 60 per cent of people arrested for the January 6th riots had a history of financial trouble and home foreclosure.

Do similar problems underpin some of the distrust in established political parties and scientific authorities during the pandemic in Canada?

There are real causes and real injustices behind the Canadian housing crisis. But as it continues to spiral out of control, there is no certainty that those affected by it will grasp these complexities and find a way to fix it without first breaking many other things.

Matthew Hayes is Professor of Sociology and Canada Research Chair in Global and Transnational Studies at St. Thomas University in Fredericton, NB. 

Image: Tierra Mallorca/Unsplash