All REIT: An Intro To Financialized Housing

I’m going to start this week’s article on the financialization of housing by reproducing a graphic from the recent report from the Nova Scotia Affordable Housing Commission — a graphic I just can’t get enough of because it really does say it all:

scale with "human rights" on one side and "economic driver" on the other


The man on the right side of the scales, the one with the bag of money almost as big as he is, represents the financialization of housing. Unlike the people on the left hand of the scale, who see housing in terms of shelter — you know, protecting them from wind and rain and sleet and hail — this gentleman views housing as an alternative asset class, one that will bring him outsized returns.

How — or perhaps, why — housing became “financialized” is a question worth asking and I ran across the beginning of an explanation during this TVO panel discussion which pitted Martine August, an assistant professor in the school of planning at the University of Waterloo whose research focuses on “housing, urban redevelopment, financialization and urban social justice” against three people whose sympathies lay with the financializers: CIBC economist Benjamin Tal, realtor Shaun Hildebrand and land development researcher Diana Petramala of the Centre for Urban and Research and Land Development at Ryerson, an institute that seems to be almost entirely funded by developers.

The discussion preceded the airing of Push, a documentary that follows Leilani Farha, the UN Special Rapporteur on Adequate Housing, “as she’s travelling the globe trying to understand who’s being pushed out of the city and why.”

All four panelists began by claiming to have loved Push, a film that paints a damning picture of the financialization of housing, before three of them began waving their hands and making all the problems discussed in the film disappear — there’s nothing here that the private sector can’t solve; yes, we need government to build some housing for the most marginalized people, but otherwise, the private sector can handle it. Petramala even mentioned Vienna’s social housing — which I wrote about last week — only to dismiss it as a possibility, saying that Austria devotes 3% of GDP to housing and she was (for reasons not explained) “not sure that was realistic” for Canada. As for the question of “financialization,” they didn’t actually come to grips with it at all. August politely pushed back against all of this but she was one against three. People who watched that discussion and then went on to watch Push must have felt a bit of whiplash.

As did people who watched that discussion when it aired — on 3 March 2020 — and then plunged into the COVID pandemic which made the cracks in our housing system so obvious that even the most determinedly pro-investor panelist would be hard pressed to wave them out of existence.


GICs ‘won’t do’

But back to the “why” of financialization — the bank rep on that panel, CIBC economist Benjamin Tal, explained that for the past 20 years, with interest rates going down, all the “big financial players” have been looking for returns and “GICs will not do.” (GICs are guaranteed investment certificates, “safe, fixed-term” deposits sold by Canadian financial institutions. They come in a number of flavors, but what they all have in common is modest returns.)

TVO Financialization Panel 3 March 2020

This search took those “big financial players” to some interesting places — like sub-prime mortgages — and crashed world financial markets in 2008, and yet, it continues. In the housing sector, as August wrote in this August 2020 Journal of Urban Affairs article, finance has “moved from home ownership and mortgage loans into increasingly niche areas, including multi-family housing, social and non-market housing, co-operatives; seniors’ housing and care homes, and student housing.”

August’s focus, in the articles I’m referencing, is multi-family housing and she says government policy helped make it attractive to investors by “generating a crisis in rental housing affordability.”

In the mid-1990s, the federal government canceled involvement in social housing and downloaded responsibility to the provinceseffectively putting an end to new construction and reducing the supply of affordable housing going forward. Federal efforts turned to financializing homeownership, by securitizing and guaranteeing mortgage loans with risk-free returns for finance capital. These policies attracted (and indebted) borrowers, and drove housing price increases. For renters, the effect has been a pricier milieu with fewer subsidized options, resulting in cost burdens and declining wealth.

This crisis for renters was a “lure for investors” — particularly in Ontario where the province “double downloaded” responsibility for social housing, passing it on to municipalities. Two REITs — CAPREIT and ResREIT — promised in their late ’90s IPO prospectuses that “state withdrawal from social housing would ensure steady demand for their product from low-income families (and new immigrants in particular) who lacked alternative options.”  And this state of affairs, writes August “persists today” as Daniel Drimmer, CEO of one of the country’s largest financialized landlords, Starlight, explained in 2019:

…we think there is a definite housing shortage, or almost a crisis level in Canadaand the good news for investors is there is no easy solution in sight. This is not good news for consumers.

In this 2019 Spacing article, Gordon Perks invoked the work of French economist Thomas Piketty to help explain what’s going on from an investor’s perspective:

Some of us work for a living; others invest. Those who invest, protect and expand their wealth by ensuring that the rate of return on their investments (their profit) is bigger than the rate of growth of the overall economy. One of the leading economists of our time, Thomas Piketty, summarizes this as “r > g,” where “r” is the rate of return for investors and “g” is the overall growth of the economy.

He then turned to another economist, Hugh MacKenzie for a “visceral” explanation of how most of us experience this financialization of housing:

Imagine that each of us who works to pay rent or a mortgage is chugging around a race track every month. Up in the stadium, thousands of investors bet on whether or not we get over the finish line. They are the people who own the financial instruments that underpin the private housing market. Every time we make a lap, we pay them and they profit. Thanks to the dynamic of r > g, those of us labouring around the track have to pay more and more for the same amount of home. Each lap gets harder. Because those investments are speculative, if enough of us fail at the same time, the global economy crashes.

For Perks, the solution is clear, we must “take the stadium full of investors out of the picture” and replace them with social housing.

Think Medicare, but for housing.


You’re Killam me

Financialized landlords have two main options for making money out of an apartment — reduce expenses or raise revenues. Reducing expenses, says August, may be accomplished by “cutting costs, finding efficiencies, purchasing in bulk, reducing staff (such as superintendents), harmonizing property management, leveraging credit, and so on.” To raise revenues, “there is only one source, which is tenants.” Revenues are raised by “imposing rent increases or applying new charges (for storage, amenities, parking, laundry, sub-metered utilities, etc.)”

Researchers who study financialization in the global economy describe how such firms operate with a single-minded focus on delivering investor profits. This leads them to subordinate other objectives, including social, environmental or equity-related goals, as a result. When it comes to apartments, finance capital values high revenues over preserving affordable, high-quality apartments for all residents.

Push documentary poster

In all but two of Canada’s provinces and territories — PEI and Manitoba — there is no limit on how much a landlord can increase the rent when a tenant moves out (this is called “controlled vacancy”). And financial landlords make no bones about it, as August notes in this 2021 article, the biggest financial gains are made when an apartment is “turned” — when a tenant paying low rent is replaced by a tenant paying “top-of-the-market” rent.

So financialized landlords are buying up existing rental stock and “squeezing” it for all its worth.

August has tracked the rise of Canada’s “financial landlords” (Tal’s “big financial players”) — including private equity firms, asset managers, publicly listed companies, REITs and financial institutions — with a particular focus on REITS which, as she said in that 2021 article, have gone from owning 0 suites (units in apartment buildings) in 1996 to owning nearly 200,000 suites in 2020. In all, she says, the country’s 25 largest financial landlords held about 330,000 suites last year, or 20% of the country’s “private, purpose-built stock of rental apartments.”

Among the country’s Top 10 financialized landlords is a familiar face to Atlantic Canadians — Killam Apartment REIT, which ranks eighth in the country with 16,000 suites. As August explains, Killam “began as a small company with a few buildings, went public in 2002, and converted into a REIT in 2016.” (Killam also owns a number of trailer parks, another popular target for financialization.)

Killam's Manufactured Home Parks

Killam’s Manufactured Home Parks

There’s an “uneven” geography to housing financialization and, as August demonstrated in that Journal of Urban Affairs article, it seems to map quite closely to the lack of effective rent controls.

Five Canadian provinces have rent control — Manitoba, Quebec, British Columbia, PEI and Ontario. In three of these — Manitoba, Quebec and British Columbia — the share of REIT-owned suites is lower than would be expected, given their respective shares of the country’s total stock. August singles out Manitoba for mention, noting that the province is home to 3.22% of Canada’s apartment units but only 0.05% of REIT-owned suites:

Manitoba has been virtually ignored by REITs, save for one 77-suite property. Manitobas rent control is especially strong, as it is tied to apartment units and not to tenants, preventing the increases enabled elsewhere by vacancy decontrol.

August contrasts Manitoba with neighboring Saskatchewan, which “scrapped rent control in 1992” and has half the suites as Manitoba but “70 times more REIT ownership.” She draws a similar contrast between Quebec and Ontario:

Quebec is subject to rent control and has 42% of Canadas apartments, but only 14% of Canadas REIT-owned suites. Only 3% of multi-family rental units in the province are REIT-owned. By contrast, Ontariowith vacancy decontrol and weak tenant protectionhas fewer of Canadas suites (33%) but 42% of its REIT-owned suites, and three times more than Quebec. This disparity is striking, and rent controls likely play a role.

August concludes that:

While other factors have contributed to the varied REIT penetration across provinces, the general pattern is clear: provinces that are over-represented in terms of REIT ownership have weak or no rent control, including Ontario, Alberta, Saskatchewan, the North (Northwest Territories and Nunavut), and parts of Atlantic Canada (Nova Scotia, New Brunswick, Newfoundland and Labrador).

Which brings us back to Killam, which, in 2017 reassured investors that the “majority” of its portfolio was not subject to rent controls and even in jurisdictions where there they existed — like PEI — it would still “maximize rental rates because the markets are extremely tight.”

Which makes it all the more flabbergasting that Jeremy Jackson of Killam REIT was a commissioner on Nova Scotia’s Affordable Housing Commission. Why would you turn to a REIT for solutions to a crisis from which it benefits?


Home ownership

Let me repeat: financialized landlords can’t be relied upon to solve the housing crisis because they benefit from the housing crisis.

Here’s Ottawa-based Minto REIT, promising investors in its 2020 report that “the favourable fundamentals that existed pre-COVID-19 will return,” forecasting that “the housing crisis that existed prior to COVID will reassert itself” and that “the housing affordability gap continues to grow and will ultimately benefit the multi-residential sector.”

That question of “housing affordability” is worth discussing for a moment. Here in Canada, “home ownership” is basically synonymous with “house ownership” even though a home is not, by definition, a house:

definition of the word home

But the part of the phrase “home ownership” that may really be in need of a rethink  is the “ownership” part. Housing advocates like Catherine Leviten-Reid say we have to change the way we think about renting — we have to see it as a viable option to owning a house. We have to stop saying, as one of those TVO panelists did, that part of the strain on the rental market right now is from people who “should be” in the housing market. We have to stop making people feel like renting after the age of 35 represents some sort of failure.

And frankly, we may have no choice but to change the way we think about renting, given that even the CIBC economist on that panel said that Canada — at 70% — has reached peak home ownership. America has apparently already peaked and has started falling back. What’s more, commentators — like Danny Dorling writing in the Guardian in 2015 — are starting to remember that our societies weren’t always majority homeowning.

But we also have to make renting a better proposition for tenants. Governments need to assist them, the way they now assist homeowners and do more to protect their rights. But mainly, government must get back into the provision of social housing because, as another Guardian columnist, Zoe Williams pointed out in response to a study by the UK’s Residential Landlords Association (RLA):

The study contends…that a shortage of housing equates to a “shortage of investment”, which must be tackled by removing hurdles for people who want to invest. It’s cynical and absurd. There is a shortage precisely because the only people investing are doing so for returns, and very few are investing for the sake of housing people.

We need to ensure that housing people — not generating returns — is the  primary goal of the entities supplying the housing, which means government, non-profits and cooperatives, not REITs.

Easy peasy, right?

(I’m kidding, I sense a vacation in my future and I’m getting a bit giddy.)

It won’t be easy and it will have to be done carefully, because the “big financial players” are like cats — bear with me, I’ll explain. I live with cats but I occasionally forget that if you leave food they like on a counter, they will eat it. That’s because cats NEVER forget to be cats.

Likewise, the big financial players are always looking out for their own best interests and if you leave the smallest loophole in your housing regulations, the smallest opening through which they see an opportunity to generate returns, they will jump up on the counter and eat it. Or something. You know what I’m getting at.

It won’t be easy, but it must be done, because, as August writes:

Canada doesn’t need landlords that bank on an affordability crisis as their business model. To rebuild inclusive cities post-pandemic, housing must be treated as a home and not a financial asset.