Understanding Canada’s State-Backed Real Estate Crisis – The Mainlander

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Introduction

Our goal in writing this article is to provide a comprehensive overview of the historical evolution of government subsidies provided to Canada’s real-estate sector. State-backed financing and mortgage insurance for the big banks have cost the public billions over the course of several decades – but it’s not the only way to do housing. 


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A broad history of the last several decades paints a familiar picture of austerity and funding cuts. Since the advent of neoliberalism in the 1980s, federal and provincial governments have steadily eliminated funding for co-ops, social housing, and other alternatives to the private market, alongside the elimination of rent controls. The number of social housing units built per year across Canada decreased from 32,000 in 1972 to less than 12,000 in the last half of the 1980s, until effectively dropping to around a thousand in the late-90s, when the federal cooperative housing program was also canceled.[1]

Despite sharp austerity measures implemented since the 1990s, however, Canadian governments have consistently demonstrated a willingness to allocate funds towards private homeownership. In this context working-class families have been forced into the homeownership rat race for lack of other options. Housing is now provided to most Canadians through the byzantine networks of secondary mortgage markets, credit default swaps, and debt instruments that enrich financial institutions while fueling housing inequalities. Bank profits have soared,  while Canadian homeowners are now the most heavily indebted in the world, according to the IMF.

Low interest rates have historically been a key means to keep this system afloat, but everything is now being perilously thrown into question especially for those who gambled on variable-rate mortgages amidst interest rate hikes. If a mortgage-holder reaches a breaking point and defaults, the Canadian state gives full financial insurance to the banks and financial institutions while the homeowner ends up on the street. This has translated into multi-billion dollar bank bailouts whenever the precarious debt-ridden and crisis-prone system gets into trouble. 

Competing Frameworks

Among the many culprits of high housing prices over the past several decades, few observers and critics have pointed the finger at inflationary government policies and subsidies for the private banks and real-estate sector. These have included bank bailouts, developer tax cuts, artificially sustained low interest rates, ever-growing homeowner subsidies, and the systemic deregulation of credit and mortgage financing since the 1980s. These measures have not only subsidized banks and private ownership – in some cases at the expense of direct investments in social and rental housing – but have also fueled bidding wars, bloated real-estate valuation, and led to the creation of a quasi-permanent speculative bubble. This has led to ever rising housing prices and record levels of household debt with high risk of default. 

Yet time and again we are told that immigration and foreign investment are the key culprits of housing unaffordability. In 2011, the media stayed largely silent after one of the largest bank bailouts in Canadian history, perpetuating the myth that Canada side-stepped a US-style post-2008 bailout. Instead they went searching for a better scapegoat, namely foreign investment, with newspaper headlines declaring, “Asian cash is housing’s ‘main driver’”; “Asian investor wave hits Vancouver housing”; and “Canadian real estate – a piggy bank for Chinese investors.”[2] By 2015, a full 64% of Vancouverites considered foreign investment the “main cause” of high housing prices. 

While foreign investment certainly contributed to rising prices, it was far from the only factor. Vast sums of money were freed up locally by soaring corporate profits, deregulation, and tax cuts, creating what researcher and organizer Geordie Dent and others have termed colloquially a “giant pool of money.” Rising real estate values also enriched Canadian homeowners and led to growing intergenerational wealth transfers. According to CCPA, between 1999 and 2012, “the average gain in the value of principal residences was $339,500 (83%) per BC household in the top 20 percent, and $205,300 (85%) for the next 20 per cent.” In Vancouver, gains were even higher, and have climbed ever since. Was it any surprise this surplus money found its way back into housing, Canada’s most high-return fixed asset? 

The years prior to the pandemic showed clear signs that foreigner-targeted measures to combat soaring real-estate prices were having little impact. COVID-19 and the temporary closure of borders would offer a striking lesson, inadvertently revealing the genuine local roots of housing demand and price increases in BC. Investor immigration – the supposed engine of the housing economy – was stopped in its tracks, according to provincial government statistics. Despite these unintended brakes, housing prices continued to climb to ever greater heights

Mortgage Deregulation Ground Zero 

The roots of rising household debt can be traced to the 1980s, when the Canadian federal government initiated a system-wide deregulation of standards for mortgage lending. These changes were made in the context of the deep economic recession of the 1980s, at a time when neoliberal ideas began gaining traction and legitimacy. 

The ‘80s were a time when right-wing think tanks like the Fraser Institute and CD Howe Institute used the mounting state deficit to push for cuts to social programs. Instead of building social housing or implementing rent control, policymakers increasingly looked towards market-based approaches to provide “affordable” housing, including measures to promote homeownership. Most significantly, from 1985–1987, the federal government introduced the NHA Mortgage-Backed Securities (MBS) program. Under this program, all mortgages insured by the Canada Mortgage and Housing Corporation (CMHC) could be securitized and marketed to investors.

Securitization describes the process by which a bundle of debts (in this case, mortgage debts) is repackaged into a ‘security’ that can be bought and sold by investors. The value of this financial product is created by the collective promise of future debt repayments on thousands of mortgages. In short, the person or companies which buy the ‘debt securities’ make money from the interest that households pay on their mortgages. The securities are backed by a mortgage agreement that requires the borrower to pay back their loan and, in the case of default, by the CMHC which has insured the mortgage. 

For mortgage lenders, securitization reduces their risk because after they issue a loan it can be ‘securitized’ and bought by other investors who assume and share the risk. Securitization frees lenders from the typically long repayment periods associated with mortgages and improves their liquidity (cash on hand), thus allowing them to issue loans at much faster and lower rates.

The MBS were risk-free for investors, since both the principal and interest were insured by the federal government through CMHC. According to housing researcher Brian Clifford, MBS “allow banks to lend more mortgage funds, increase rates of homeownership, and stabilize the mortgage finance system without needing direct government subsidies.”[3] The federal government introduced the MBS program with the aim of promoting homeownership. By securitizing mortgages and insuring losses in the market, homeownership costs were effectively reduced – not by reductions in the price of housing but by reductions in the cost of mortgage loans.

Demand for the MBSs slowed, however, after the ‘90s recession, prompting the Liberal-led federal government to introduce the Canada Mortgage Bond (CMB) program in 2001. Ironically, the CMB program aimed to simplify the process of buying MBSs by adding a new intermediary in the MBS market. The CMHC, which up to this point had just provided mortgage insurance, now began directly buying MBSs. In turn, they repackaged these MBSs into fully guaranteed Canadian Mortgage Bonds (CMBs) and threw them back onto the market. In other words, to finance their purchase of MBSs, the CMHC created a new financial product (CMBs) that would attract even more investment to further inflate the housing market. 

The purpose of the program was to stimulate more demand, attracting very large-scale and risk-averse investors who had tended to be cautious about putting money into the existing MBS program. With the option of a 100% guaranteed government bond now in front of them, large investors naturally took advantage. At the end of the day, the CMB program added yet another fully insured investment scheme to attract big money and ramp up demand for MBSs at a time when the market had cooled off. According to geographer and housing scholar Alan Walks, “even before the financial crisis erupted [in 2008], the CMB program, more than any other factor, was responsible for driving up house prices for new buyers.”[4]

All of these changes increased and cheapened the credit available to households. But it also signified a tightening interdependence between the state, finance and real estate. This new arrangement created by the CMB program allowed private banks to shift a large and risky part of their portfolio onto the balance sheets of a public body. By absorbing the risk of mortgage lending, the Canadian state and economy has become highly sensitive to changes in housing prices. This overall process is important to grasp in order to understand the changing political economy of Canada and subsequent government actions. 

Harper’s Offensive 

When CMB was introduced in 2001, lending standards were still relatively high in Canada, and in order to qualify for mortgage insurance, loans required a 25 year amortization and at least 5% down payment. Subprime and interest-only loans (i.e. loans without the requirement of a down payment) were rare if non-existent. However, this all changed in 2006 when the new Conservative government amended the National Housing Act (NHA), allowing private competition in the mortgage insurance market. At the same time the government significantly lowered lending standards by increasing amortization limits from 25 to 40 years, lowering minimum down payments from 5% to 0%, and eliminating additional fees on high Loan To Value (LTV) mortgages.[5] 

Despite the increased risk, the government continued insuring all mortgages, including loans issued by private insurers and interest-only loans. In case of a default, the federal government even guaranteed it would cover 90 percent of private insurers losses up to $200 billion.[6] The National Housing Act made it possible for homeowners who would never have qualified for a mortgage before to access mortgage credit. For the Conservative party who introduced the NHA reforms, this was exactly the point, blissfully ignoring the fact that the underlying asset would continue to climb to record-high rates. Conservative MP Dean Del Mastro described the benefits of private competition in the mortgage market as follows:

…what happens when people are competing for market share is that … new entrants tend [to be] termed “hot buyers,” which means they approve things that otherwise were not getting approved, which means that people with shorter job tenure, worse credit ratings, and higher-debt-to-service ratios are suddenly being approved.[7]

To clarify, these measures did not create housing affordability. On the contrary, lowered lending standards only created the illusion of credit accessibility in a cruel game of financial seduction. Not surprisingly, we are now in the midst of a decline in rates of homeownership with the rise of large investment actors and Real Estate Investment Trusts (REITs). 

While the great financial crisis in 2008 forced the government to tighten lending standards slightly, reinstating a minimum 5% down payment and making it harder to insure interest-only loans, it ramped up the sale of CMBs. These changes to lending standards were supplemented by measures to stimulate demand during the financial crisis. Interest rates were reduced and tax credits for first-time homeowners were implemented.[8] 

In 2009, the federal government also established the Insured Mortgage Purchase Program (IMPP) to keep real estate markets afloat and prevent bank defaults. Under IMPP, the government gave the CMHC $125 billion to buy mortgage securities from Canadian banks. This was a clear post-2008 bailout, even if few used that term. That same year, federal spending on “social housing” (using the most loose definition of that term) barely surpassed $1 billion. Banks scrambled to increase lending to take advantage of IMPP and while many banks and homeowners across the world were on the brink of insolvency, Canadian banks reported decent profits in 2009.[9]

Conclusion: From Post-Keynesian Stimulus to Class Power 

Driven by ever-easier access to mortgage credit, housing prices in Canada were back to their pre-crash levels by late 2009.[10] Since then housing prices have only continued to mount. Astonishingly, housing prices are not included in the federal CPI calculation for consumer inflation, which means that recent GDP inflation figures would be even more severe if housing price inflation was included in the matrix. Even before the recent trends of inflation, the seemingly stable 2% inflation-control target set by the Canadian Central Bank since 1991 would be thrown out the window if housing prices were factored in. 

All of this begs the question: why is the government less concerned by rising housing prices than other goods and services? And why continue subsidizing homeownership through deregulation, bank bailouts, and mortgage subsidies when it has proven to be a failed strategy to create housing “affordability”? The answer is that affordability was never truly its aim. Part of the answer lies in the state’s regulatory capture by real-estate capital, including significant donations made by banks and real-estate corporations to the political parties. Developers and the big banks are in the drivers’ seat and regulators speak openly about the role and scale of these subsidies.[11]

However, this is not the full story. As we can see from the earliest days of deregulation in the 1980s, housing market reforms have functioned more as a strategy of class power and a realpolitik of elite consolidation. In a context of flat real wages since the 1980s, adjusted for inflation, debt-financed consumption has been the only means to keep profits up — not only for developers and banks, but all capitalists. It has functioned as a demand-side post-Keynesian version of state spending, but always through the mediation of the banks and financial actors. GDP and economic growth are increasingly an alibi and an afterthought in the overriding strategies of class power and elite consolidation. This aspect of class power helps us better understand the simultaneous assault on social and affordable housing in this same period, including the virtual elimination of the social and cooperative housing program. 

There is nothing natural about rising house prices. They are the product of a long and deliberate policy to sustain housing asset values and maximize profitability in the banking and real-estate sector. The result has been an overinflated economic bubble that is “too big to fail.” For decades, each successive crisis has been used as a pretext for more state subsidies and bailouts to this sector. COVID-19 was the later chapter in this story, when new rounds of IMPP were quietly released in March 2020, again showing that the government willingly will open the coffers in times of crisis to stabilize the savings of investors who have money parked in real estate. And again, it was the banks and their CEOs who were the real winners, breaking new profit and dividend payout records. Yet, another alternative is possible: one based on housing according to human need instead of profitability. 

Since the beginning of the Canadian state, homesteading and settler-colonial property have been imagined as an alternative to public involvement in housing as a social good. Yet the “free market” in land has inexorably led to the creation of land monopolies, developer concentration, and the manipulation of property-owning interests. These interests in turn have captured the state, creating what urban geographer Samuel Stein calls the “real-estate state.” In markets like land and housing, where value is inherently premised on scarcity and rent extraction, private homeownership always means the exclusion of those at the bottom and the creation of a permanent renting class (or worse, homelessness). This tendency has only accelerated with the entrenchment of neoliberalism and the growing power of finance and property. Only decommodification can break the finance-property nexus.

References

We owe a great deal of the article to the excellent research of Alan Walks and Brian Clifford, and highly recommend reading their articles for more in-depth analysis of the neoliberalization of Canadian housing policy.

[1] Walks, A., & Clifford, B. (2015). The political economy of mortgage securitization and the neoliberalization of housing policy in Canada. Environment and Planning A, 47(8), 1624-1642. https://doi.org/10.1068/a130226p p. 1632.

[2] Maria Wallstam, The making of a middle class housing crisis: the ideology and politics of foreign real estate investment in Vancouver 2008–2018, MA Thesis, Simon Fraser University (August 2019) https://summit.sfu.ca/item/19464  

[3] Brian Clifford, Mortgaging the Future: The Financialization of Affordable Housing in Canada, 1984–2008, MA Thesis, Simon Fraser University (December 2014) https://summit.sfu.ca/item/14785 p. 46 

[4] Alan Walks, “Canada’s Housing Bubble Story: Mortgage Securitization, the State, and the Global Financial Crisis,” International Journal of Urban and Regional Research, Vol. 38, No. 1 (January 2014) p. 264 

[5] Walks, “Canada’s Housing Bubble Story” (Ibid.) 

[6] Clifford, Mortgaging the Future, p. 70

[7] Standing Committee on Finance June 1, 2006 cited in Clifford, Mortgaging the Future, p. 66

[8] Walks, “Canada’s Housing Bubble Story,” p. 262

[9] Hilliard Macbeth, When the Bubble Bursts: Surviving the Canadian Real Estate Crash

[10] Walks, “Canada’s Housing Bubble Story,” p. 275

[11] Hilliard Macbeth, When the Bubble Bursts. p. 90

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