We need to start thinking of it as a housing emergency.
The price of a home in the metropolitan areas of many countries has so far outstripped incomes that a generation is left without a reliable pathway to secure long-term tenure. In the Vancouver area, an average house now costs 12 times the combined salaries of an average employed couple; in Toronto, it’s nine times – meaning those couples would typically have to spend 60 to 80 per cent of their paycheques on house payments alone. Below 30 per cent is considered affordable housing.
Even if you erase the pandemic-era price bubble and the recent period of ultra-low interest rates, the discrepancy between house prices and incomes has been dangerously wide for a decade and a half.
Housing has become similarly unaffordable in the major cities of Britain, the United States, Australia and New Zealand.
And that has led to talk of urgent solutions. You would think that most of those solutions involve removing obstacles that prevent organizations from putting up apartments and houses at prices that people are able to pay.
Unfortunately, there is a competing theory, which holds that house-price increases have nothing to do with insufficient housing, but by something vaguely termed “financialization.”
As described in a United Nations agency report and a European documentary that popularized the theory, financialization involves big investment firms buying up units of housing and converting them into ever-higher-priced rentals as a source of profit – thus causing overall prices to rise.
It certainly is true that the investment industry has moved into private housing in the last few years as more funds – desperate to find secure places to put our retirement savings – have found that housing offers rare above-index growth. Most controversially, the U.S. firm Invitation Homes, of which the investment firm BlackRock owns a stake, has bought up about 80,000 foreclosed houses and converted them into rental units.
In Canada, according to reporting by my colleague Rachelle Younglai, about 20 per cent of home purchases during each of the past three years have been “investor buying” (that is, when a buyer already owns at least one other house). One company, Toronto’s Core Development Group Ltd., plans to buy $1-billion worth of single-family houses over the next five years and turn them into rentals.
But the “financialization” theory has the logic of these investments upside down. These companies have switched to investing in existing housing because supplies are so short and demand is so high that prices are bound to rise. The investment firms are simply riding an existing wave.
Investors make no secret of this. Invitation Homes says in its own stock prospectus that the one thing that would destroy its business model would be “excess supply of homes” and the resulting lower prices.
Despite the headlines, investor buying is too minor to be a driver of market price increases. In the United States, investment-company ownership of housing stock is estimated at less than half of one per cent. In Canada, where the practice isn’t as entrenched, it’s probably less.
In reality, the truly disturbing thing about investor buying is that existing housing is a desirable market at all. Until about 2000, Canadian homes generally didn’t rise in value by any investment-grade margin. Affordable-housing activists should be welcoming pension-fund investments in housing – as long as they are creating new housing, not simply churning existing stock.
There is plenty of new-housing investment, in both rental and owner markets – it just doesn’t offer quick returns, because new apartments and houses have become so difficult to get approved and built in numbers anywhere close to Canada’s population-growth rate. When new supply does manage to get built in decent numbers, prices stop rising. For example, average rents declined in Toronto during 2020-21, a period in which a lot of new rental towers were coming online.
Unfortunately, some “financialization” theorists go as far as arguing that housing policies actually ought to limit new housing construction through restrictive price regulation and outright investment bans, because they don’t see supply as a problem.
Quite the contrary. A new analysis by Scotiabank economists found that Canada has the worst housing undersupply among G7 countries, with only 424 units per 1,000 people (France and Germany have more than 500). If Canada wanted to match the slightly higher housing supply of Britain (433 units), it would need to build about 250,000 new homes.
But Canada has only built 188,000 new homes over the last 10 years – and its population is growing. Our “chronic insufficiency of home supply,” as the economists put it, is what’s making housing expensive. And every time a city government, a development-approval board or a misguided politician stops a new development from going up, it’s adding to the emergency.
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