Yahoo Finance Peter Shawn Taylor: No, Ottawa, Marxism won’t solve Canada’s rental housing crisis
For centuries, housing has been a commodity traded between interested buyers and sellers in an open market. The federal Liberals want to change all that.
In 2019, as part of its National Housing Strategy, the Trudeau government passed legislation declaring “the right to adequate housing is a fundamental human right.” In addition to this new “right to housing,” the Liberals created a bureaucracy to entrench it, including the watchdog position of Federal Housing Advocate. Now we’re finding out what this shift in philosophy actually means for the economics of housing.
Marie-Josée Houle, Canada’s first Federal Housing Advocate, recently announced that transacting rental housing on the basis of free-market principles — what she calls the “financialization of housing” — is “denying people their fundamental human right to affordable, dignified, and safe housing.” In other words, it’s a bad thing.
In September, Houle released a series of little-noticed reports and recommendations blaming Canada’s rental housing affordability problems on investors who “profit from rent increases” — a condition that captures essentially all privately-owned rental housing, since rent increases are a necessary component of any market-based business model. Houle also blames greedy landlords for “worsening conditions and a rise in evictions.” The apparent solution is to banish the private sector from the housing market entirely.
Among the recommendations: regulating banks and pension funds to prevent them from lending to profit-making rental firms; denying these firms access to federal mortgage insurance and other government programs; placing a cap on how many rental units such firms can own; and expropriating any “affordable” housing units they might be planning to buy. Other demands include a call for coast-to-coast, iron-clad rent control and an end to Real Estate Investment Trusts’ (REITs) special tax status.
All this has the goal of making it impossible for profit-seeking private investors to continue to participate in Canada’s rental housing market. With 89 per cent of the country’s approximately 4.8 million rental units already in private hands, such an extreme policy agenda would push the entire sector towards government ownership or control.
This Marxist-style animosity toward the private sector cannot be dismissed as the dusty political fixations of an obscure federal bureaucrat. Rather, the concept that there’s something illegitimate or immoral about entrepreneurs making money in the rental market is gaining ground throughout the machinery of Ottawa. Beyond Houle’s efforts, the “Supply and Confidence Agreement” between the federal Liberals and NDP also commits the government to “tackling the financialization of the housing market by the end of 2023.” The 2022 federal budget made a similar promise. Not only is this campaign against private-sector landlords grossly misplaced, but efforts to rid the housing market of “financialization” will inevitably do great harm to tenants.
REITs, which have been actively buying up apartment buildings across Canada over the past several years, come in for the most biting criticism. One of Houle’s researchers claims REITs should be stripped of their trust status because there’s “no social justification” for such a thing. In truth, REITs are required to distribute their profits directly to unit-holders — who then pay personal taxes on that income. This avoids double taxation. Investors in corporations are provided with a dividend tax credit to achieve the same end.
The research also claims REITs have concentrated the ownership of rental housing, raising the spectre of anti-competitive behaviour. It is an easy contention to test. The standard measure for industry concentration is the market share controlled by the five largest firms. In Canada’s heavily-regulated banking sector, that figure is 85 per cent. The five largest Canadian telecom companies account for 87 per cent of sales. But in rental housing, the top five firms comprise less than five per cent of the market. Canada’s rental housing market is extremely unconcentrated.
Contrary to the Federal Housing Advocate’s many outrageous claims and accusations, financialization is a benefit to all tenants. And it is not a new occurrence. Up until the mid-1970s, life insurance companies and syndicates of doctors and lawyers were frequent buyers and builders of apartment buildings because of the reliable income streams they produced. During this era, the private sector built over 75,000 apartment units a year. This huge (and welcome) addition to the housing stock eventually dried up as federal tax changes and provincial rent control scared off private investors. By the 1990s, Canada was seeing a mere 6,200 new units a year. Sporadic government funding was never enough to replace the private sector’s contribution.
Only recently have conditions improved sufficiently to lure back large “financialized” investors, with purpose-built rental construction now around 60,000 units per year. But the long absence of private capital means it will take many more years to bring the market back into balance — if the entrepreneurial sector isn’t scared away again by the threat of new government intrusions.
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In addition to building much-needed new units, corporate real estate firms have been pouring money into fixing up the buildings they already own. Improvements of this sort ought to be considered a great advantage, since they keep the nation’s housing stock in good repair. Yet activists repeatedly criticize the process as “renoviction,” since newly improved suites typically come with higher rents. Another report from the Federal Housing Advocate’s office argues that landlords who evict tenants for not paying their rent are discriminating against vulnerable populations and hence violating their human rights. But a landlord who can’t remove a non-paying tenant won’t be a landlord for very long; they’ll soon be the bankrupt owner of a derelict building.
Calls to banish private capital from Canada’s rental housing market via rent control, expropriation or other restrictions on landlords’ ability to charge or enforce market-based rents implicitly assume government is capable of replacing everything done by self-interested entrepreneurs. If the private sector is violating the human rights of tenants by upgrading apartments and raising rents, then collective ownership must be the solution. But the fact a housing project is operated on a non-profit or community basis is no guarantee it serves the best interests of its tenants.
Consider Toronto’s Swansea Mews, a 114-unit housing complex owned by Toronto Community Housing that was abruptly closed this summer because its concrete roof collapsed. How did the buildings fall into such a state of disrepair? While housing activists complain about private landlords’ habit of pouring money into the upkeep and enhancement of their own buildings, Swansea Mews’ tenants experienced the damage done by the opposite condition: Toronto Community Housing faces a capital repair backlog of over $1.5 billion. Then there’s Grenfell Tower fire in West London, England, in 2017 that left 72 tenants dead; it was also publicly-owned.
According to the federal government, Canada needs to build an additional 3.5 million homes by 2031. With community and social housing comprising a miniscule four per cent of this country’s total housing stock, it is beyond impossible to imagine the non-profit sector could deliver new housing on such a scale. There’s also the matter of finding the trillions of dollars necessary to put all those shovels in the ground. Taxpayers are already tapped out; investing their own money is what capitalists do best.
In the same way that activists and unions have tried to eliminate profit-seeking firms from the child care and seniors’ care sectors on moral grounds, housing activists are now trying to seize public control of the rental housing industry on the basis that housing is a human right. Such a collectivist urge may be satisfying to existing tenants facing rising rents. But blaming Canada’s housing affordability problems on the private sector obscures the fact that only the market can permanently solve a lack of supply. Any reduction in the private sector’s essential role in the rental housing market will doom the country to a sharp decline in new apartments and a steady deterioration in the existing stock of housing in coming years. Neither would be good for tenants over the long term.
Peter Shawn Taylor is senior features editor of C2C Journal.ca, where a longer version of this story first appeared.
