John Belec is professor emeritus of geography and the environment at University of the Fraser Valley.
In his November update on key vulnerabilities and risks to the financial system, the deputy governor of the Bank of Canada focused almost exclusively on the Canadian housing market.
Among the trends highlighted by Paul Beaudry was the “sudden influx of investors in the housing market [which] likely contributed to the rapid price increases we saw earlier in this year.” Data supplied by TransUnion Canada show that the number of “investor” buyers has doubled in 2021, compared to 2020. Globe and Mail columnist Rob Carrick used the term “financialization of housing” to describe this growing trend.
Prepare to hear a whole lot more about the financialization of housing in 2022. My prediction is that this term is about to make the leap from academia, where it has percolated in the world of critical urban theory amongst nerds like me since the financial meltdown of 2007, into popular parlance. As one example, the Canada Mortgage and Housing Corporation recently announced funding of a Financialization of Housing Solutions Lab to examine the phenomenon and its implication for housing affordability. The recent mandate letter from Prime Minister Justin Trudeau to Housing Minister Ahmed Hussen doesn’t use the term, but asks him to look for ways to curb excessive profits on investment properties.
The literature on financialization of housing draws attention to the increasing importance of the housing sector as a major source of growth within the global economy, especially as it occurred in the early decades of the 21st century. In general terms, the financialization of housing refers to the expanding role that housing plays as a market commodity as distinct from its provision of shelter. As a commodity with a solid track record as an economic asset, housing is attractive to investors of all stripes. The outcome is a vicious circle of demand escalation, and ultimately greater mortgage indebtedness by people who just need a place to live.
It’s useful to think of a residence as providing two types of value: use and exchange. Use value, as the name implies, refers to the shelter and locational attributes of a structure to its occupants, whereas exchange value refers to the market value of said structures. These two attributes of housing have always existed in an uneasy relationship and pose a key question to Canadian federal public policy: If a roof over our heads is necessary for survival, shouldn’t these roofs be publicly distributed on the basis of need rather than left to the vagaries of a private market?
Canada’s housing market was at a crossroads when this question was examined by R.B. Bennett’s Conservative government in the Dirty Thirties. His Special Committee on Housing met for two months in 1935 to formulate a response to the widely documented decrepit state of the country’s housing stock. The committee heard from a diverse array of interests, including reformers, construction councils and financial institutions. The outcome was the Dominion Housing Act (DHA), presented as an attempt to stimulate employment in the construction trades rather than explicitly address the housing problem.
While the DHA proved ineffective at either, it unveiled an innovation that would come to define the practice of residential consumption for most Canadian households in years following: the modern institutional mortgage. More specifically, this meant long-term (20-year) mortgage amortization and high (80 per cent) loan-to-value ratios. Most importantly, the DHA mortgage came with support from Ottawa. In practice, this meant federal assistance to lenders in the event of foreclosure, from a DHA fund. This was replaced by the current program of mortgage insurance in 1954. In addition, DHA loans were actually joint loans – institutional lenders provided 60 per cent and Ottawa provided 20 per cent.
Mortgaged home ownership is the bedrock upon which Canada has built its housing market. According to the 2016 census, almost two-thirds of Canadian households were homeowners, and the majority of these were paying a mortgage. Canadians owed $1.73-trillion in mortgage debt as of June, 2021, according to Statistics Canada, and this figure has been increasing at near record amounts during the pandemic.
It is a bit fanciful to suggest that it need not have turned out this way – though alternative housing futures were also on the table in 1935. One of the most intriguing was penned by Humphrey Carver on behalf of the League for Social Reconstruction, an affiliate of the Co-operative Commonwealth Federation, forerunner of the NDP. Mr. Carver’s proposal called for a national public housing program and slum clearance. The road not taken could have resulted in an expanded role for nonmarket housing in Canada – perhaps something resembling a European model, where some countries have lower rates of home ownership and co-operative housing is more widespread.
Ottawa’s resistance to these voices for reform was evident from the outset, largely owing to the cost of the proposals. But more significant was the cozy relationship that existed between Ottawa and the lending industry. The terms of the DHA were drafted by the deputy minister of finance, W.C. Clark, and the lending industry (represented by Thomas D’Arcy Leonard, solicitor for the Dominion Mortgage and Investment Association) and presented to the housing committee as a fait accompli at the close of committee hearings.
The mortgage innovations introduced in 1935 have survived for nearly 90 years, with only minor tinkering. Recent efforts at disruption have focused on efficiencies at the retail end, including speeding up lending decisions with the application of artificial intelligence and algorithms, rather than fundamental change in what is being offered.
This is not surprising given that the finance sector – and, by extension, the Canadian state – has too much skin in the game. In the words of Belgian scholar Manuel Aalbers, “Increasingly, mortgaged home ownership is there to keep financial markets going, rather than being facilitated by those markets.” This will continue as a major constraint for changing the models of housing in Canada.