Category Archives: Housing Policy

Affordability, Supply and the Rental Market

Awhile back I was asked what policies cities should be pursuing to ensure an adequate supply of rental units. Here is what first came to mind.

Context is important. Five things stand out.

First, housing is a social determinant of health and wellbeing in society. Affordable housing is a contributor to better population health. A population that is adequately housed is healthier than a population that is inadequately housed or precariously housed. For instance, affordability is an important indicator of the risk of homelessness. Cities with affordability problems generally experience a higher incidence of homelessness. Homelessness is terrible for your health.

Second, when we talk about housing it is more constructive to refer to the housing system rather than the housing market. When we talk in terms of the housing system we acknowledge that both market and non-market mechanisms are used to allocate housing. In Canada, a vast majority of us obtain housing through the private market by buying housing but a significant number of us rent. Non-market housing tends to be the source of housing for low-income groups who cannot purchase or rent housing at market rates. The important thing to recognize is that this Canadian system is one kind of housing system. In other parts of the world, Europe in particular, there are much higher proportions of renters and a greater diversity of non-market forms of housing.

Third, housing affordability is shaped by wider economic and social trends. Population growth, household formation (how many singles versus families are seeking housing), and migration all affect the demand for housing. When demand rises quickly, too quickly for developers and home-builders, prices rise. This is exacerbated in regions and cities with high incomes. The cost of land, labor and construction materials can also cause prices to rise.

Fourth, housing affordability is affected by government regulation and policy. Governments at all three levels – Federal, Provincial and Municipal – play a role in the housing system. The Federal government influences lending rates and securitizes mortgages, the provincial government operates housing programs, and the municipal government oversees urban development and home-building.

Fifth, when it comes to analyzing housing affordability it is crucial to settle on a clear and measurable definition of ‘affordable housing.’ What kind of affordability measure is best suited? A common definition of affordable housing is housing that costs a household no more than 30% of their income. This is the definition used by Statistics Canada. It is also measurable (albeit recent changes to the census aren’t helping work in this area!).

But to your question…the private, rental market is a vital part of the housing system when it comes to affordable housing. Unfortunately, two trends have shrunk the supply of affordable rental units in the private rental market.  First, inadequate government policy in the area of rent control (or lack thereof) have made it too easy for rental property owners to raise rental rates during periods of high demand and low vacancy. Second, the high demand for housing coupled with high incomes and cheap, easy credit from banks has fueled the conversion of rental units into privately rented condos removing a significant proportion from the private rental market. This was particularly pronounced in Edmonton beginning in 2007.

In the meantime there is a significant population who need to rent in the private market to stay housed. What to do?

There are a range of policy options available but unfortunately no magic bullet solution. In practice, a combination of different approaches involving private and public stakeholders and all three levels of government is required.

One traditional approach has been to build social housing consisting of units that are subsidized at below market rates. But this form of housing brings with it a whole host of issues not least of which is stigmatization of tenants and, relatedly, their overconcentration within inner city neighborhoods (as they generally receive stiff resistance in wealthier suburban neighborhoods).

A more recent approach has been inclusionary zoning. In this approach a municipality mandates that a developer allocate a certain percentage of units in a development to be not only rental units but also made available at affordable rates. This generally requires not only the buy-in of developers but also governments and in some cases charitable organizations who must step-forward to subsidize these units so they can be offered at below-market rates. In most cases it is a matter of finding the right incentives. It is also a matter of carefully considering neighborhood location and context.

Third, there are some recent urban planning approaches that encourage creative forms of infill housing. Here I am thinking about ‘granny suites’ (secondary suites) above garages or separate dwellings at the back of lots. Some cities offer homeowners incentives (in some cases it has been cash) to develop these suites with the understanding that they would be rented at below market rates for a set period of time.

Finally, there is the more classic welfarist approach that involves giving low-income individuals and families a stipend (or voucher as they are called in the U.S.) to purchase rental housing in the private market. The challenge in places like Alberta is that there are examples of working individuals and families who are not low-income but nonetheless cannot afford rent in the average apartment (especially single parents with children who require multi-room dwellings). Another challenge is that when vacancy rates are near zero a housing voucher does not do a family much good.

Now, I’ve only outlined a few, there are many, many more. And I’ve really only captured the more conventional approaches. There are some very interesting and important models being developed in the cooperative sector (co-op housing) aimed at meeting the housing needs of a diverse range of people. I think approaches such as those being developed in the cooperative sector are really important to profile because in many regards it is there where ‘new ground’ is being broken.

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Why there is nothing good about Canada’s housing bubbles


Canada has been receiving attention as of late for its overheated housing markets. I recently read, with interest, Don Pittis’ latest editorial entitled, “Why a housing bubble is good (but may be bad for you).” Pittis argues that when viewed in ‘the long term’ through ‘rose-colored glasses’ housing bubbles are good because when they pop the economy, in its most general terms, benefits. As Pittis explains:

During bubbles, a country grows its housing stock, over-investing in the construction of new properties so that the supply is more than sufficient, allowing prices to fall relative to income. At the end of a bubble, finally and for quite a while afterwards, there is enough to go around.

Essentially, Pittis understands a ‘housing bubble’ as “just a rising market driven by rising demand.” In his estimation it is the undersupply of housing that causes price increases which in turn spur building frenzies that eventually result in oversupply which at a certain point cause the bubble to pop resulting in a significant, downward correction in housing prices. Pittis suggests that in this scenario the individual pain suffered by some is outweighed by the societal benefits of an adequately stocked housing system. A simplified, utilitarian argument.

I think the significance of this editorial lies not in the actual argument as in the story it tells (or does not tell) about housing bubbles, housing systems, and Canadian political decisions leading up to and in the wake of the U.S. housing crisis. In his over-simplistic portrayal of housing bubbles as ‘demand driven’ and in his utilitarian logic the real causes and social consequences are completely overlooked by Pittis.

The editorial reminded me of the important work of Alan Walks, a geographer at the University of Toronto. In a paper entitled, “Canada’s housing bubble story: Mortgage securitization, the state, and the global financial crisis” Walks offers a deeper analysis of the Canadian case. He traces the growth of Canada’s housing bubble to the securitization of mortgages in Canada and the accessible, cheap mortgage credit this securitization engendered.

In Walks’ analysis the demand creating Canada’s housing bubbles has been made possible by the availability, for buyers and banks, of state guaranteed credit. In other words, the central character in the whole story is the state, but not for the reasons generally repeated in the mainstream media. Walks’ analysis shatters many commonly held myths, not only about housing bubbles in general but also myths about the soundness of Canada’s banking sector and the prudence of recent government policies.

Walks shows how Canada is in many respects more similar to the United States then portrayals of Canadian exceptionalism might have us believe. First, in the early 1980s the Government of Canada began building a secondary mortgage market similar to the United States. This began with the Mortgage-Backed Securities program which allowed government-insured mortgages to be packaged together and traded on the open market by financial institutions. Later, in 2001, the Government of Canada started the Canada Mortgage Bond program in an effort to stimulate the growth of this secondary mortgage market. They used the money acquired through selling these bonds to buy Mortgage-Backed Securities from Canadian banks. Now that banks no longer had these Mortgaged-Backed Securities on their books they were free to provide more mortgages to buyers. Moreover, they could package these mortgages and sell them back to the Government of Canada.

Second, in the years immediately prior to the U.S. financial crisis the Government of Canada was doing its best to emulate the U.S. mortgage market. In 2006, the National Housing Act was changed to allow foreign firms into Canada’s mortgage insurance market (prior to 2006, only the Canadian Housing and Mortgage Corporation and private insurer Genworth operated in Canada). The Government of Canada offered a 90% state guarantee of mortgages to private insurers willing to come to Canada. The Government of Canada also extended mortgage terms to 40 years, reduced the minimum downpayment eligible for Federal insurance from 5% to 0%, and began insuring interest-only mortgages.

In this context of expanding, easy credit housing prices ballooned, household indebtedness increased, and the Government of Canada’s liability in terms of its insured mortgages and securities exploded. Moreover, as Walks (2012, 10) explains:

the financial institutions now had even less of an incentive to worry about borrowers’ ability to pay back loans, since they were not planning on holding the notes. With the federal government providing guarantees of both principal and interest, the lenders that originated new mortgages and packaged them into NHA mortgage-backed securities were able to secure guaranteed cash flows, risk free, from the Canadian state, merely by signing up new homebuyers.

Walks provides the following numbers. From the end of 2005 until the beginning of 2008 outstanding mortgage credit grew by roughly 33% from $628 billion to $838 billion. Record bank profits were made and house prices shot skyward. And then the U.S. housing bubble burst.

This is where Walks’ story gets interesting and Pittis’ story falls apart. Contrary to popular belief Canada’s banks were as precarious as U.S. banks. Furthermore, the Government of Canada did, like the U.S., bail out its banks. Walks reports the ratio of tangible assets held by banks to their tangible common equity (where a higher ratio indicates greater exposure to changes in asset values). According to this measure, Walks finds that the top 5 Canadian banks, with ratios of 32:1 in 2007, 37:1 in 2008, and 31:1 in 2008 were more highly leveraged than the top 10 U.S. banks (26:1 in 2007, 35:1 in 2008, 20:1 in 2009). Thus the drop in Canadian house prices during the global financial crises significantly impacted the tangible assets of Canadian banks and the lax lending standards introduced in 2006 raised concerns about the quality of their mortgage assets.

To avoid a credit crunch the Bank of Canada responded by sending over $44 billion dollars to the banks. In addition, the Canadian Pension Plan purchased $4 billion worth of mortgages from Canadian banks. As the U.S. crisis intensified in 2008, the Canadian Mortgage and Housing Corporation was authorized to purchase $137.55 billion worth of mortgages from Canadian banks. This corporate welfare continued in spurts over the following two years. As Walks (2012, 16) details:

All told, approximately $510 billion of liquidity, stimulus, bailouts and guarantees had been summoned up for potential injection into Canada’s banking system by the end of 2009 representing roughly 33% of Canada’s annual GDP (with about $280 billion eventually drawn upon). Even at its most restricted definition (excluding the US Fed TAF loans, and the CMB program, and funds not drawn upon), the minimum total Canadian ’emergency’ bailout comes to $179 billion, or 11.6% of Canada’s 2009 GDP, not dissimilar to the combined costs of the direct federal bailout/stimulus programs in the US.

This contradicts the widely held perception that Canadian banks were resilient going into the crisis and were able to weather the storm on their own. In fact, if it were not for government intervention the Canadian banking system could have crumbled.

Setting the political consequences aside for a moment, it is also important, as Walks explains, to consider the social consequences of Canada’s housing and mortgage markets. State orchestrated mortgage markets enticed new, young buyers into the housing market garnering enormous profits for banks in the run-up to the global financial crisis. This buying frenzy had social consequences – wealth inequality. Rising house prices place enormous burdens on the middle class. Walks cites evidence showing that young families and immigrant families have the highest debt levels and household debt is disproportionately concentrated among low-income families. Thus housing bubbles are accompanied by massive growth in household indebtedness, a point Pittis ignores. Moreover, as Canadian society ages, ‘boomers’ retire and the age-dependency ratio shifts the burden on younger generations will only increase. Walks rightly points out that in the wake of these bubbles we should expect generational conflicts at a time when solidarity and resilience is needed.

Returning to the political consequences, one of the most poignant facets of Walks’ story is that the securitization of mortgage markets in Canada and the bailout of Canadian banks has shifted the private risks and liabilities of banks onto the shoulders of ordinary Canadian citizens, all while bank profits and executive bonuses reach record levels. In addition, the costs of the bailout to government balance sheets has yet to be addressed. Given the aversion to tax increases among conservative governments the austerity agenda – cuts to government services – becomes the vehicle for balancing the books. To make matters worse, as Walks explains, bubbles have the perverse effect of shifting capital away from productive investments into the speculative housing market hampering long term economic growth. Housing bubbles, therefore, have deleterious effects to everyone insofar as they thrive upon moral hazard, incur the socialization of private risk, intensify government austerity, and misdirect investment capital.

Pittis cites Stanley Kubrick’s film “Dr. Strangelove (how I learned to stop worrying and love the bomb)” as inspiration for his editorial. Perhaps he has forgotten that Kubrick’s film is not only a cutting satire of cold war politics but a tragedy. In the end everyone gets blown up.


Walks, A. 2012. ‘Canada’s Housing Bubble Story: Mortgage Securitization, the State, and the Global Financial Crisis.’ International Journal of Urban and Regional Research. 1-30. DOI 10.1111/j.1468-2427.2012.01184.x