In the four years since the financial crisis of 2008 brought a North American-wide collapse in housing prices, the Canadian government has successfully taken measures to bring real-estate prices back to their pre-crash levels. Following in the tracks of the American effort to rescue financial capital, the past four years have seen a joint effort by all levels of Canadian government to re-inflate the housing bubble by deregulating finance, extending new lines of direct investment into real-estate and lowering interest rates. The Canadian government has effectively called on the real-estate industry to lead the economy out of the recession, facing down typical historical patterns in which real-estate is the last industry to recover from system-wide crisis. Next to resource extraction, the only real growth industry in Canada since 2008 has been real-estate.
Yet today, as in 2008, the real-estate bubble is reaching a “tipping point,” according to a recent report by Canada’s Royal LePage. In cities like Vancouver and Toronto, housing prices have climbed to unprecedented levels, with Vancouver prices reaching up to 11 times the city’s average family income. The Bank of Canada has identified the Vancouver market as “ground zero” for the coming financial crisis. From its perch at a distance, The Economist observes Canadian housing is “more overvalued than it was in America at the peak of its bubble.” All forms of debt are multiplying, but household debt in particular is currently higher in Canada than it was in the United States prior to the subprime crisis with debt-to-income ratios reaching 153 per cent.
Federal exit from recession
In the two years following the global recession, federal banks across the world lowered interest rates in an effort to loosen the credit crunch and stimulate new rounds of investment. In September 2010, Mark Carney and the Bank of Canada lowered interest rates to 1 per cent, where they have stayed since. By the summer of 2011, the Canadian housing economy was showing obvious signs of escalation, and by June local prices moved well above their pre-recession peak. Having not only stimulated but “over-stimulated” the housing economy, Carney began issuing strong warnings about the unprecedented risk-exposure of Canadian mortgages. In reality, the central bank actually did everything in its power to continue the growing flow of cheap, low-interest money into the real-estate economy. Out of fear of exacerbating the underlying weakness of the recovery itself, the Bank of Canada took the position of searching out ways to buoy housing finance.
More recently the government has taken measures to restrict the market, introducing slightly-altered mortgage refinancing rules. Homeowners, for example, can now extract up to 80 rather than 85 per cent of their home asset as a line of credit. For those not personally versed in contemporary finance — renters, for instance — “refinancing” essentially means that a person can take out a new loan to pay interest on an old one. The bank allows a borrower to do this because both parties make a wager that the new value of the same underlying housing asset will allow the payments to be made in the context of a climbing market. Essentially this is the logic behind the now-famous tale of the American refinance game which precipitated the 2008 crisis, in which existing mortgages were eternally re-leveraged, either by traders (securitized mortgages, Credit Default Swaps, etc.) or by homeowners themselves, in the form of re-mortgaging and new borrowing against old debts (known in Canada as the home-equity line of credit).
By restricting the refinancing threshold to 80 per cent, the government is attempting to bring “calm” to the real-estate economy, now higher than the pre-crash American market. With the exception of these few belated measures, however, the same government has pursued a broad and contradictory strategy to re-finance the faltering bubble. Recent term-limitations and minor lending restrictions pale in comparison to tax credits to first-time buyers and new deregulations opening up Canadian finance to domestic and foreign sovereign-wealth funds, all against the backdrop of a massive pre-emptive bailout of the big five Canadian banks beginning in 2008. The bailout targeted housing in the form of a public buyout of unstable mortgage papers and an injection of state-backed insurance on new loans, allowing private banks to continue lowering lending standards.[1]
Provincial and municipal responses
Taking federal policy as a cue, local and provincial governments have responded to the crash of 2008 with a strong dose of neoliberal reform, using public money for a massive round of direct state investment into the private real-estate market. This strategy has included bailouts, tax exemptions, rent vouchers, micro-loans, rezoning discounts for developers, fee-waiver incentives and public-private partnerships to fund massive redevelopment schemes. All of those measures have help the real-estate climb back up to its astronomical pre-recession levels.
Recently, however, the local market has again shown signs of system-wide crisis. Between June 2011 and June 2012, residential property sales, including apartment properties, have declined 28 per cent. Since May alone, the local market has dropped 17 per cent. Despite its constant invocation of the need for housing affordability, however, the local political elite under the governing Vision party is not likely to welcome the news. On the contrary, Vision’s version of the US-style growth coalition, built on a class alliance of financiers, developers, policy elites and politicians, can be expected to push for measures to re-finance the bubble, either by injecting municipal state funds directly into the real-estate market or by using planning tools to help the market discover ever-new sources of financial investment in the built environment of the city.
A brief recount of recent history is necessary for understanding why and how the local government under Vision Vancouver can be expected to aim towards re-mortgaging the housing crisis, deferring the current crisis of value underlying overinflated housing assets citywide. When the market crashed in 2008, many saw an opportunity for the city to meet its promised housing goals, including its promise to take actual concrete measures to end homelessness. After years of land speculation and high prices created by unprecedented consumer debt, properties finally started showing signs of affordability, with housing activists calling on the municipal government to buy newly-priced lots throughout the city.
In effect the opposite occurred, with sections of the property elite buying up land from the province in private deals, like at Little Mountain in 2009, or selling land back to the government at inflated pre-crash levels, like the land trading of Robert Wilson, who bought dozens of buildings and sold them back to the public. Fundamentally, Wilson and Holborn’s extraction of public funds and assets represents the spirit of the broader post-2008 period. From the STIR policy to the massive shock doctrine-style bailout at the Olympic Village, the examples are diverse, but in each case the neoliberal state has prioritized its role as stimulator and ‘lender of last resort’ for the real-estate industry, stepping in to prevent price correction and to restore pre-crash finance.
Financing the real-estate bubble: Vision’s neoliberal wager
In the wake of the global crash and on the heels of an election victory, Vision and Gregor Robertson passed the STIR policy, framing it as an economic stimulus package for the sagging real-estate industry. The policy was positioned as a short-term effort (“Short Term Incentives for Rental”) to stimulate the downturn and bring an end to the temporary credit crunch. Beyond kick-starting the condo economy, however, the municipal government continued using the program well into 2011, when the city then transitioned to a new but identical program called the Secured Market Rental Housing Policy (SMR). After economic recovery in 2009, STIR continued to pour public money into the private real-estate industry, forcing councillors to reposition the rationale for STIR as being about incentives rather than stimulus, geared towards producing “affordability” through incentives for added housing supply. In a massive transfer of wealth from public to private hands, STIR’s notorious fee exemptions and tax breaks for developers have helped make Vancouver known for having the lowest corporate tax rates in the world.
In addition to STIR and SMR, the city’s Ten Year Plan for housing shows the city will spend $42 million in land and grants for 20,000 private condos and 11,000 market rental units. The size of the subsidy will in fact be far greater when property tax and fee exemptions are calculated (this week alone the city has made the decision to forego $35m in fee exemptions to property giant Aquilini Investment Group). A close reading of the Ten Year Plan — part of the revamped Homelessness and Housing Strategy — shows that the city itself does not believe that STIR will stimulate supply and affordability. The housing goals of the Ten Year Plan anticipate a zero-level growth in the rate of housing construction, given that 31,000 market units over ten years is equal to the already-delivered yearly average for the city. Planners probably know that the monopolistic development industry will add as little supply as possible in order to keep prices high, preferring the current stable growth rate of roughly 3,000 units per year.
The strategy of channeling public funds into the private real-estate industry is not limited to the use of taxpayer money or foregone tax revenues. Public housing tenants, who pay rents directly to the government, are now having their accumulated rent capital converted into financial schemes for private redevelopment. In high-profile cases like Heather Place, public renters are having their rents used for initiatives that will result in displacement. The public owner of Heather Place, Metro Vancouver Housing Corporation (MVHC), has been putting rents from its tenants into a $11m special fund, earmarked for redevelopment projects. Already $0.5m of that money has been used to subsidize the up-front “soft costs” of a rezoning application process, normally paid for by the private developer. Once the rezoning takes place, the housing will be demolished and the land sold to a private developer in a massive property renoviction. Market rents for “replacement” units will be doubled, according to Vision’s Geoff Meggs, the councillor responsible for Heather Place at the MVHC.
On the one hand, this is a clear-cut case of public money being used to subsidize a private developer; on the other hand, it is a case of a public body morphing into the role of private landlord and shrewd speculator. Indeed, meeting-notes from recent meetings of the MVHC board show that board members have been actively considering using the public housing corporation as a private entity, stating, “MVHC should operate as a for-profit organization so it could expand its services.”[2] Instead of renovations and repairs, cumulative rents paid by the tenants of a place like Heather Place are being used to extend a line of credit for the development industry — a line that now doubles as a noose for those same tenants. There is an expression that says, ‘give your opponents enough rope and they will hang themselves.’ The developer-backed version of MVHC is more proactive, because it says: hang them with their own rope. But the calculation is precarious, because it includes the assumption that tenants will not fight for their rights and that the market will continue its upward climb. Both assumptions are hardly a given.
In many ways the MVHC is proving to be the epicentre of neoliberal approaches to refinancing the real-estate bubble. Currently MVHC is entertaining the idea of promoting the “UK model” of home ownership, using its money to “focus on working poor families [and] provide them with financial assistance that would enable them to get into entry level ownership (such as the UK model).”[3] This move would not be unprecedented. The City of Surrey has established a fund under the Home Ownership Assistance Program to assist first time homebuyers by providing them with second mortgages. The Surrey example is striking in its willingness to bring cities on board to play the role of private banks. What should be stressed is that this form of private refinancing replays the remortgaging that precipitated the American crisis, basically mirrored by Canada’s HELOCs (home-equity lines of credit) but now carried to the municipal level.
Across the board, from Surrey to Vancouver, the goal has been to erase the historic role of public housing authorities as non-market entities. When recently asked about the concept of the Whistler Housing Authority (WHA), Mayor Roberston alarmingly re-positioned the WHA as a market institution, grounded in “new models of home ownership.” Rather than acknowledging the potential for much-needed non-market interventions by cost-based Housing Authority models — something the WHA actually provides through its rental housing program — Robertson zeroes in favorably on a restricted-covenant property-investment model, since “people can park their investment there.” The restricted-covenant model sells housing at market rates but puts limitations on owners’ ability to freely play the property market by selling. The problem with this type of approach is that it entertains the idea of market restrictions only as a means to expand the inflated real-estate market and bring new buyers into the game, rather than restrict its precarious reach. From this perspective, there is no fundamental difference between a housing authority and a private developer: each are tasked with getting new buyers into a flagging market.
Other examples include Vancity’s social purpose real-estate initiative. Vancity has recently been offering low-interest mortgages to private buyers, but has also acknowledged that the private lending market is becoming maxed out. In order to keep the market buoyed and find new players, the ‘social purpose real-estate’ initiative aims to lend mortgages to non-profit organizations who normally rent their spaces in the city. From a financial perspective, Vancity’s goal is to expand the market to more buyers in an attempt to keep the market going and prop up declining demand.
Another final example is the widely-praised Rent Bank, promoted in the city’s Housing and Homelessness strategy as a way to ease the social impacts of the housing crisis. The program is basically a micro-loan program for renters who, in the context of a skyrocketing housing costs, stagnant wages and unemployment, cannot make their next month’s rent. Again, this approach does only what neoliberalism decrees, adding more and more layers of debt and finance to the private housing economy. Instead of concretely attacking the actual underlying problem — the commodification of housing and the deregulation of mortgage finance — the rent bank will only defer and ultimately worsen the crisis.
Looking back on the past half-decade, what stands out is that since the onset of the financial crisis of 2008, no effort has been made in policy and elite circles to re-evaluate the fundamental contradictions of state-backed housing privatization, despite the rampant inequalities produced by Vancouver’s real-estate market, and despite the volatility of that system. The market, towering over an exploitative rent-extraction economy, has only been the recipient of ever-new supports from the neoliberal state. The only decisive action taken by politicians has been made to add more layers of finance to the teetering system of debt and precarity. The recent experience in Vancouver has shown that while elites continue to prolong the system and extract super-profits, radical change can only come from below. Only a movement led by renters will be capable of taking action to halt the circuits of the exploitative real-estate economy and replace it with something new.
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Notes
[1] Alan Walks, “Bailing Out the Wealthy: Responses to the Financial Crisis, Ponzi Neoliberalism, and the City,” Human Geography Vol. 3, No. 3 (2010) pp. 54 – 84
[2] Minutes from meeting of MVHC Board, March 11th, 2011 p. 95
[3] Ibid. p. 93