There are many reasons that housing has become unaffordable across Canada, and financialization is one of them. Most housing stock in Canada has always been a commodity that is bought and sold and has market value. However, until relatively recently, governments routinely intervened in the housing market to maintain some measure of affordability for Canadians.
Government retreat from housing oversight and regulation in the 1970s, 80s, and 90s has opened the door to financialization, laying the groundwork for the skyrocketing cost of housing that Canada has witnessed particularly over the past decade.
These days, financialization is widely pointed to as a key driver of Canada’s housing affordability crisis. In this article, we aim to demystify financialization by outlining some of its key characteristics, how it has developed over the past several decades, and its impact on housing affordability in Canada.
What is the financialization of housing?
At a basic level, when people talk about the “financialization of housing” they are referring to changes in the role of housing in the economy. Financialization is a key reason that a one-bedroom apartment that used to rent for $888 in 2005 now rents for $1,537 in 2022.
Financialization is a complex and abstract concept, and in order to understand it, it’s helpful to explore what it looks like. Three of its key characteristics are:
- More housing stock is owned by investment and trading companies such as real estate investment trusts (REITs), private equity funds, asset management companies, and pension funds. An example of this is international corporations whose business models rely on buying “distressed assets” (often older apartment buildings built in the 1970s and 80s), and renovating them. Their explicit goal is to increase revenue by upgrading buildings and then raising rents, allowing them to provide higher financial returns to their shareholders. Canada’s largest financial firms alone now own 20% to 30% of Canada’s purpose-built rental housing stock.
- Housing is understood by the public to be a smart investment vehicle (a way to extract profit from the market as rapidly as possible) and a way to grow wealth. It is favoured over many other forms of investment because of its high returns on investment. Large financial actors like REITs and corporations, but also small businesses and individual homeowners, are increasingly purchasing homes to rent out at the highest price possible. An example of this is increased speculation in the housing market by both large actors and individual “house flippers.”
- Many investment portfolios widely offered to the public include residential real estate as an investment option.
The above are expressions of the financialization of housing within the Canadian economy. The conditions that allowed for an increasingly financialized housing market in Canada have been made possible by government policies introduced over roughly the past forty years.
Towards a financialized housing market in the 1970s, 80s and 90s
Opening up new opportunities for investors
In the 1970s and 80s, governments introduced new regulatory systems which allowed investors to invest in areas that had previously been considered non-financial sectors, including housing. Investment and trading companies were allowed to access more capital (wealth used for investment), take on more investment risk and mortgage debt, and create new financial products. In the 1990s, REITs were created to allow investors to jointly purchase shares in real estate.
The weakening of rent regulation
In the late 1970s, many provinces introduced laws regulating the rents that landlords could charge, to prevent rent gouging and keep rents at reasonable levels. These laws generally allowed landlords to increase rents to account for inflation and operating cost increases, but not to excessively inflate their profits.
However, these laws were significantly weakened during the 1980s and 90s. Provinces introduced more and more exceptions to the rules, for example by allowing certain types of rental units – like high-end rental units, newer rental units, and units experiencing turnover – to be exempt from laws that place limits on rent increases.
Rent regulation is an important way that housing remains affordable over time. Inadequate rent regulation allows widespread rent gouging, which happens when landlords charge rents that are far higher than what is necessary to run a profitable business. Charging high rents and finding ways to increase them perpetually is how financialized landlords extract the high profits that their shareholders and business partners are expecting.
Renters often earn lower incomes than homeowners, and the practice of rent gouging forces lower-income households to pay higher percentages of their incomes to investors and corporations. This leads to a transfer of wealth upwards which increases income inequality.
Government retreat from investment and oversight of housing
Historically, governments in Canada acknowledged that the private market would not and could not produce housing that would be affordable to Canadians of all income levels. Acknowledging their obligation to ensure housing for everyone, for many years the federal and provincial governments were active in supporting and regulating housing systems in Canada to ensure everyone could afford a home.
Up until the 1980s, the federal and many provincial governments funded a variety programs and projects that supported the development of affordable housing. Government interventions included subsidies and tax breaks for companies that developed and managed affordable housing such as co-operatives, non-profit and social housing providers. From the 1940s to 70s, governments invested directly in the development of publicly owned (or social) housing and routinely provided tax incentives and exemptions to developers who created purpose-built rental housing. However, beginning in the 1980s, both orders of government progressively retreated from these important interventions in housing, and since then, Canadian governments have relied almost exclusively on the private market to meet Canadians’ diverse housing needs. This retreat from supporting Canada’s housing systems has directly contributed to the current affordability crisis and growing homelessness since the 1980s.
Consequences of the financialization of housing in the 2000s, 10s and 20s
Loss of affordable housing stock
The number of housing units that are affordable to Canadian households is rapidly dwindling. Homes that used to have affordable rents have been subject to excessive rent increases in recent years due to rent gouging, which has been permitted by lack of rent regulation and competition due to a low stock of affordable housing. At the same time, existing affordable units are being systematically demolished and redeveloped by investors who see an opportunity to profit from charging higher rents in new developments. Still other former homes are being converted to even more lucrative businesses, such as AirBNB short-term rentals. Some formerly affordable rental units are even allowed to sit empty by investors speculating on the market.
Lack of new affordable housing
In recent years, various governments have introduced policies and funds they hope will encourage private developers to build more housing. While efforts to increase Canada’s housing supply are very important, new housing built by private developers tends to be built for investors; it is often not large enough to accommodate families, and more importantly, it is simply not affordable for most Canadian households. And research indicates that for every new affordable unit created, 15 existing affordable homes are lost to redevelopment and rent gouging.
Importantly, the long-standing lack of government support and investment has led to a very stark shortage of deeply affordable housing that is affordable to Canada’s lowest income households who are the most vulnerable to homelessness. It is important for governments to acknowledge that this housing will never be produced by the private market.
Increased rates of displacement, eviction and homelessness
In today’s housing landscape, where rents and the cost of living have skyrocketed, more and more families and individuals are losing their homes due to rent increases that they simply cannot afford. Many households are struggling to get by, which is reflected in increased use of services like food banks since the pandemic.
Others are losing their homes to investors whose business plans rely on regular rent increases facilitated by unit turnovers. Investors can evict tenants in a variety of ways, including by renovating a unit or claiming to need it for their or their family’s own use. These types of evictions have become so common in recent years that the term “renoviction” has come into common usage. Some investor landlords refer to these strategic unit turnovers explicitly in their business plans.
Because of the dwindling supply of affordable housing, displaced households have fewer and fewer options. As a result, more and more people are experiencing homelessness.
Geographic segregation
When rents increase in certain communities, those communities become inaccessible for lower income households. This process is sometimes called “gentrification.” As housing prices increase, communities that had previously lived in certain neighbourhoods are gradually pushed out, often into areas that are far away and have lower quality services and opportunities. As a result, a type of income-based segregation is perpetuated.
Poorly maintained housing
In addition to rent gouging, investors can also realize excessive profits by reducing services in buildings. Renters often report that buildings are not being adequately maintained, leading to substandard living conditions. Poor maintenance is particularly prominent in buildings that investors intend to redevelop, and deteriorating conditions can be used as an incentive to force renters to give up and leave, and to make the case that the building requires such substantial repairs that current residents must move out, or the building must be demolished.
Disproportionate impact on historically marginalized groups
Members of historically marginalized and equity-deserving groups are disproportionately lower-income than the general population, and more likely to live in inadequate and unaffordable housing. By relying on the private market to solve a problem that it is not designed to solve, governments are not respecting the right to housing of historically marginalized groups including Black, Indigenous and racialized communities, people with disabilities, seniors and youth among other groups.
The path forward
With the passage of the National Housing Strategy Act (NHSA) in 2019, for the first time in nearly half a century, the federal government re-acknowledged the important role it must play in housing. Crucially, the NHSA affirmed the federal government’s commitment to advancing the right to housing for everyone in Canada. The NHSA acknowledged that Canadians’ right to secure housing must be prioritized over other concerns, including those of real estate investors. This was a significant step in the right direction, but there is a lot of work that needs to be done to ensure this commitment translates into effective actions, programs and policies that will address housing affordability and mitigate the impacts of financialization in Canada. Federal, provincial, and municipal governments all have important roles to play to restore housing affordability and ensure everyone in Canada has a secure home.