Canada Has a Broken Housing System and It Has Fucked Over Millennials
Damn, it was good to be a Boomer.
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I am required by law to include at least one reference to “avocado toast” in any article about millennial housing in Canada. With that out of the way: why don’t more millennials own houses? Why are the ones who do own homes so dissatisfied? And why are we constantly pressured to buy real estate in the first place?
As it turns out, these questions are at the heart of a potential bottleneck in the Canadian housing market. Our thrumming economy may need more young people to start picking up mortgages, but it also requires housing prices to stay as high as possible. It’s hard not to get the sense that Canadian real estate is a house of cards built from a stacked deck.
According to an April 2018 Angus Reid-CIBC poll, significantly fewer millennials own homes compared to the same age cohort in 1981. While 65 percent of millennials either rent or live at home, 94 percent intend to buy a home someday—although less than half have started saving for a downpayment. (Meanwhile in the same poll, roughly 40 percent of those renting or living at home said they don’t think homeownership is realistic or even desirable anymore. Yes, the numbers are somewhat at odds with each other, but such is the social pressure of owning a home.)
At the same time, many of the 18-37 year olds able to purchase a home have discovered that the grass is not any greener if you own the lawn. Fifty-eight percent of millennial homeowners worry that rising interest rates will affect their ability to manage household expenses, and 75 percent reported that being a homeowner has “downsides,” including “significant social costs.”
(These results are pretty consistent with past polling about millennial homeownership. In the 2017 edition of the Angus Reid-CIBC housing poll, many millennial homeowners expressed regret about buying a house because of the financial difficulties, and about half of them said they never expect housing prices to go down.)
That so many of the few millennials who own homes feel ambivalent and anxious about it doesn’t bode well, especially since interest rates are rising, and mortgage regulations have been tightening up. In January 2018, the federal government made passing a mortgage “stress test” mandatory for all home buyers. (According to the government, “the [stress] test is based on qualifying for either the Bank of Canada qualifying rate or the buyers’ contracted interest rate plus 2 percentage points.” Human English: in order to buy a new house, you need to prove you could pay for it even if interest rates climb.) The Bank of Canada's 5-year benchmark rate has climbed to 5.34 percent from 4.62 percent the year before.
AVERAGE HOME PRICES ACROSS CANADIAN CITIES, SEPTEMBER 2018
(From the Canadian Real Estate Association)
Canadian average: $486,917
Greater Vancouver: $1,070,600
Greater Toronto: $765,400
Montreal CMA: $347,700
St. John’s: $327,476
Not only is this expected to freeze many first-time buyers out of the housing market, but it may bust some young homeowners out of the property game altogether. The 2016 census found Canadian homeownership declining for the first time in decades, and from all appearances housing will remain inaccessible to most millennials—certainly those who can’t avail of inherited wealth or financial support from relatives.
(With Bank of Canada interest rates recently ratcheting up from 1.50 to 1.75 percent—with more increases set for the coming year—the squeeze is already hitting many young homeowners.)
This is a lot to absorb for anyone for any young person looking to buy a house of their own someday—all the more for those who already have their skin in the real estate game. Yet the Canadian housing market thrums away, seemingly no worse for wear. What does it mean when a generation is priced out of a key pillar of middle-class status and identity? How can we reconcile the social and economic pressure to own a house with its increasing inaccessibility?
To find out, I spoke with Dr. Kristjana Loptson, a political scientist at the University of Saskatchewan whose dissertation focused on the political economy of housing in Canada.
VICE: Hi, Kristjana. Could you tell me about your dissertation work?
Kristjana Loptson: My research was initially looking at housing security. I wanted to understand why housing was becoming so unaffordable, and why governments weren’t doing anything to deal with that in a more effective way. It increasingly became focused around about home ownership, and examining what's changed in terms of the political and economic significance of home ownership. And the more I got into it, the more I was like, "oh my God!"
Basically, [Canada has] developed into a housing economy. Housing has become one of the key pillars of our entire economic and financial system.
Everything that's happening in Canada is not unique to Canada, though, and I think that's something that's important. It’s a symptom of a broader international story.
So what does it mean to have a society premised on buying a house if it becomes increasingly prohibitive to buy a house?
So there's a catch-22. The reason why housing is unaffordable is because property values are high. But the wealth of this country requires that property values are high, which makes it unaffordable for people not already in the game.
And our financial system now is built on having high property values, so governments have to pursue two different tactics, in a sense. On the one hand they have these affordable housing initiatives, and some social housing, and they're giving rental assistance. So they're pursuing this one line of policy to try and deal with the fallout of really high housing values.
But they also don't want to fuck with that, because anything they do to really aggressively deal with the affordable housing issue will cause a financial disaster. So... one of the major things that was a takeaway for me in this research was that housing policy has become subsumed or subservient to macroeconomic objectives, and it's mostly dealt with now through the central bank. An unelected, independent body is now basically the driver of all this. Housing is less influenced by 'housing policy' per se as by monetary policy.
So, we no longer think of housing in terms of 'people need a place to live'. Housing is conceptualized as one of many commodities or financial resources that need to be manipulated in order to hit a given macroeconomic goal.
Yeah. And I think a key aspect of understanding this is thinking about debt as now the major driver of how the economy continues to churn. You can think of this as almost a post-Fordist economic model. We're not manufacturing shit, we have a service-based economy, most people's wages are totally stagnant, but somehow people keep spending and spending and spending. How are they spending? Well, they're spending because they're getting tons of credit access, generally because they use their house as collateral at an inflated value.
So the biggest financial product now is home equity lines of credit. Every year, [household] debt just goes up and up, and it's mostly mortgage debt. And the totally bonkers thing about it is that we have this crazy socialized insurance system, which basically leaves us all on the hook in case something goes wrong. So we're collectively gambling in this stupid game, where if it all goes well then governments benefit from it, the Canadian Mortgage and Housing Corporation benefits from it, banks benefit, homeowners benefit, speculators benefit…
But if it doesn't work out? The banks walk away, they have no skin in the game. They have nothing on the hook. The federal government is obligated to pay for every defaulted mortgage that is insured by them.
It's such a crazy system. And the more that I read, the more I kept asking, "how did this happen?!"
How did this happen?
Housing was always used as an engine of economic growth, ever since about the 1930s. But it didn't become disconnected from the use of housing as homes until later.
Home ownership becoming an aspirational thing for people in Canada was completely engineered by the government. In the 1930s, people rented at the same rates in every income bracket. It wasn't that “poor people rented and rich people owned houses.” Tenure didn't really reflect wealth at all.
Then the government developed a home-building industry as a way to create jobs, and boost the economy. So you could only get a CMHC mortgage if you bought a newly constructed house. So middle class people would have access to these mortgages and they all buy these single detached houses that were newly built, and it just sort became this key feature of middle class identity, right.
You still see that basic attitude replicate itself now.
Yes. But now housing has become a major investment product, and that really undermines the capacity for policy action. You can't even develop housing at affordable rates anymore, because urban land is zoned for whatever its highest property value is, that's how the land is costed.
So governments have shot themselves in the foot, because there isn't much about they can do about it either way. There's so many people with entrenched interests that it makes it politically untouchable. No politician anywhere is going to say "you know, I'm not sure about this home ownership thing..."
The other thing that is really key to understanding this is that we have policies that completely promote homeownership. They reward homeowners; they give legal and financial advantages to homeowners. So it's not like this is just a "cultural" norm. It's a real financial risk to buy a house, but it's also kind of stupid not to, because there are not a lot of good alternatives available.
So it's not that us spoiled millennials want all these single detached homes. No! We don't have... in most provinces, a lot of this stuff is provincial, but in [e.g.] Saskatchewan you have no tenants’ rights. You could be evicted at the drop of a hat. There is no security whatsoever. Most of the money set aside for these programs have been flowing to homeowners to develop suites.
Here’s an example. My husband built his house on a lot, and he got a big bonus from the city to develop... to help gentrify this low income neighbourhood basically. And then we have this basement suite that we got like a $10,000 grant to develop. And the only thing you need to do to have that 10k exempted from taxes is just to make sure that we don't charge more than $900/month for five years. For a shitty basement suite.
And it's like, that's where the affordable housing money is going?! It's just going to help homeowners. It's crazy.
Yeah. We've structured this whole system... like you said, you are heavily incentivized to become a homeowner.
Yeah. But I also want to say that while it is set up that way to force people to make that decision if they can, I also don't necessarily think it's a smart idea. I don't think people should be buying houses, because I think in places like Toronto, or Vancouver, or the Prairie cities, there's a real risk that people will get bit in the ass. Housing prices are always cyclical, they're prone to any kind of downturn, and people can easily lose everything.
And I think that's something that's very glossed over in Canada. There's so much propaganda around from the real estate industry, like, "this is a safe investment, this is what you should be doing."
But no one really talks about how actually risky it is, and what a stupid financial choice it often turns out to be, if there are alternatives. We just need to develop some alternatives, and then it will no longer appear like the only choice.
Yeah. CIBC did some polling in the last couple of years, and in 2017 they found something like 60 percent of people in [the 18-37] age bracket that did own a home expressed buyer's remorse about both the financial and social costs of home ownership. And the fact that nobody is going to be able to make their mortgage payments after the interest rates go up a tiny bit more.
The interest rate thing is important because right now, housing actually is affordable. At least to the extent that people are still buying it, it must be. But it's also a false idea of affordability because of the interest rates. There was a time in the 1980s where the interest rate was up to 21 percent. That's not going to happen now, but you can just imagine. nobody would make their mortgage payments.
That's a good point. I also don't know whether the rules on down-payments have changed? I always understood that it was supposed to be 10 percent of the sale value, and then someone else told me it was 20 percent, and then someone else told me it's actually only 5 percent, at least in Newfoundland and Labrador.
OK, so, this has actually changed over time. Mortgage lending criteria is set by the federal government, and the minimum down payment is now 5%. That is for insured mortgages, which means that the federal government is guaranteeing the lender that they will be paid back if you default on your mortgage. If you don't get your mortgage insured, and you are borrowing from a federally regulated lender, the minimum down payment is 20%.
With uninsured mortgages from non-regulated lenders, it is like the wild west basically. But generally most people who can’t afford a 20% down payment would want to have an insured mortgage because it enables the banks to give a lower interest rate because it is risk free. But if you don't get your mortgage insured, the minimum is 5%.
But in Stephen Harper’s first budget in 2006, and this is hilarious, the government put it down to 0 percent with a 40-year amortization period.
Yeah. If he had done that even a few years earlier, oh Jesus…
They were just giving mortgages to anybody. But by 2008 the Bank of Canada's was like, clearly we have this debt crisis and housing is in a bubble. So the federal government is like... "holy shit, we're fucked."
So they've been trying to tighten up mortgage lending criteria. But the problem is, if you want to maintain these high property values, you have to make sure that demand stays high. And the only way for demand to stay high is if people can get mortgages.
So they are tightening it up. But this is the catch-22 again: there's all this risk building, and as the risk builds and builds and builds, the fallout is going to be increasingly disastrous. But to do anything to address the risk also risks creating the problem you are trying to resolve.
So they are very carefully trying to tinker at the edges and tighten things up. But what's been happening, as they tighten up insured mortgage lending—regulated mortgage lending—there's been sort of a growth in unregulated mortgage lending, which creates other kinds of risks.
It's such a clusterfuck, seriously. It's such a broken system. It's bonkers.
Yeah. I have been thinking about millennial home ownership both for work purposes and because I am now at the age where people are buying houses. And the more I try to understand real estate, the more I think, Oh my God, what is happening?
You need to think about in terms of the way finance has changed everything. We have a mortgage securitization program that basically expanded right when housing values took off. So if you want to look at why housing prices increased so much after 2000, that's right around the time the government massively expanded their securitization program.
To break it down: a mortgage is essentially an income-generating financial product. So, I give you a mortgage, and over time you're going to pay interest to me, and that interest will be the income. Traditionally, banks would need to have the actual money to lend out for each mortgage. You could only lend out as many mortgages as you actually had the money to do.
To get around that problem, what they did is they started selling these debt-markets to investors. So it could be hedge funds, or mutual funds, or whatever. They basically put all these income-generating products together, which a lot of them are mortgages or other income-generating products, and then they tell investors that they can buy these income-generating products and get their return-on-investment over a period of time.
So then they get all these private investors to buy these things, and then they can give out as many mortgages as they want. If banks want to loan mortgages to people that aren't insured, they have to make sure those people actually have the money income. That's a regulation for the big banks, you need to have the deposits. But if it's an insured mortgage, because the government guarantees every single dollar to those investors, you can loan out as many as you want.
That's why banks are pushing mortgages like crazy. They have nothing to lose.
So basically the government has created a moral hazard for banks to push mortgages on people who may not necessarily be able to afford them and if/when it all goes tits up they get their money back and we have to eat it?
If you wanted to point to an extreme example of where we could be heading, look at Japan.
Japan in the 1980s was one of the richest countries in the world, and property prices in Tokyo were bananas. People would get these 100-year mortgages, intergenerational mortgages just to buy a little tiny piece of land. It was such a bubble economy. They had both a housing bubble but also stock bubbles. Just crazy money.
And then the whole thing just came crashing down in like 1989-90. Japan got thrown into a really deep recession they’re still recovering from, and the whole economy transformed.
I don't know how cleanly you can draw a connection between that and what the reality is now. But the reality now is that young people don't get married, none of them are having kids, people live with their parents for all of time. It has destroyed the social fabric of that entire society, partly because people can't afford houses. So people live with their parents until they're in their 30s.
There are a lot of reasons for that, but one of the reasons I found while research there is that men still expect women to be their domestic servants but women are forced to work now, so they're saying "no thanks, I don't want to work twice." So part of it is the domestic economy of housing, too.
The comparison that immediately came to my mind is Britain, but that's actually a very different case....
Yeah. What's really different about Britain is that they had a massive, massive social housing project. And then when Thatcher was in power she wanted to turn it into a home ownership society. So then she gave everybody in these council houses the option to buy it, and now they're all just high-end gentrified yuppie apartments. That's what happened there.
But that's not the case in Canada. All the same things that have happened in Canada have happened all around the world after a World Bank report in the 1990s drew all sorts of connections between economic growth and the privatization of housing. It was really clear that there was a connection between increased property values, promoting home ownership, and economic growth. So that model of economic growth has been taken up by a lot of countries, because it's really effective. It's really risky, but it's really effective at getting rich people building wealth.
The Canadian model is basically a debt-fueled spending model, underpinned by inflated assets. It has a lot of names: “the new financial growth model,” “privatized Keynesianism,”
“house price Keynesianism,” etc. Whatever.
But it's followed now in many countries. It used to be that home ownership was not the dominant tenure in a lot of European countries, but now the only country where it's not is Germany. And maybe Switzerland. In Germany the majority of people rent, but it is increasingly becoming a home ownership society too.
Ultimately, I don't think the problem is “home ownership” as such. You can have a home ownership model that doesn't allow for speculative home purchases. So a country like Singapore, I think they're 90 percent homeowners but they have all these regulations on the buying and selling of housing, and the housing is separated from the land ownership because the government owns the land and then you can just buy and sell houses as you see fit.
So you can have a home ownership model, that's fine, I'm not critical across the board of that. I'm just critical of using it as something that is about making profit rather than anything else.
Yeah. It's the financialization of housing, right. A house is no longer a thing that meets a human need as much it is an object that drives the circulation of finance capital. Which drives many people out of securing something as basic as housing.
This interview has been edited for length and clarity.
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