Dr. Dan Cohen, Assistant Professor of Geography at Queen’s University and member of the Just Recovery Kingston Housing Working Group
In 2007, a relatively small story related to Kingston real estate hit the news. A Real Estate Investment Trust (REIT) named Skyline closed an $11.7 million dollar deal that marked its first investment in Kingston’s real estate market through the purchase of three properties (266 units) on Compton Street.
This purchase on its own was unremarkable but was part of a wider trend that illustrates a common word that has been thrown about as people have debated the housing crisis in Canada: ‘financialization’. Because as a REIT, Skyline was not just buying these buildings for themselves, but as an intermediary that could link housing in Kingston to a financial sector that is increasingly interested in purchasing real estate as an investment strategy (Skyline, for example, now owns 1121 units in Kingston). In this blog post, I break down what this type of ‘financialization’ means for people concerned about housing affordability.
Financialization: What is it?
The term ‘financialization’ has gained popularity as a way of describing a shift in how our economy works. Over the past several decades, the financial sector (banking, investment funds, etc.) has grown both in size and in the power it holds over the rest of the economy. Notably, as manufacturing (aka building things) has increasingly moved offshore, finance has become a larger source of profits for Canadian companies. In Ontario, for instance, the financial services sector employs 365,000 people and generates $63 billion (CAD) per year. As described below, this growth has correlated with both an increased debt load for Canadians and a re-orientation of our economic system towards producing investor profits. I explore each aspect below.
Increased debt: Beyond simply a shift in what Canadians do for work, financialization describes a shift in how our lives and the things we rely on (e.g. housing) are managed. When people talk about financialization, they may also be referring to the fact that our everyday lives have become increasingly entangled with financial networks. Through things like credit card debt, mortgages that are bundled together and re-sold to investors, and the pension funds that provide for our retirements, our individual lives have become defined by our reliance on the financial services industry. While in 1980, the ratio of household debt to personal disposable income (how much the average Canadian owes compared to how much they earn) was 66%, by summer 2022 it had risen to a shocking 183%; or, as put by the CBC, “there [is] $1.83 in credit market debt for every dollar of household disposable income.” Clearly, more of our lives are funded by accessing money through the loans we get through the financial sector, and more of our income and time goes to paying those debts.
Producing investor profits: Financialization has not just shifted things at the individual level but also in how corporations have oriented themselves to profit from the creation of debts and to produce returns for investors. The most telling example is in the vehicle industry. While car makers like General Motors and Ford established themselves through making cars, more recently their most profitable activities have been in loaning money to people buying their cars and gathering the resulting interest payments. As documented in a recent study, General Motors has a profitability rate of 5.1% from selling a car and of 45.9% from loaning the buyer of that car money. Trends like this attract businesses into investing in owning people’s debt rather than more productive exercises like building things. On the flip side, access to such loans allow individuals to make purchases they would otherwise not be able to afford, thereby sustaining high prices and driving up household debt levels.
The type of investor, and the strategies they use, has also shifted over this time. The same study found that in North America, the ownership of car companies reflects the growing power of large-scale investors like asset managers (pension funds, mutual funds, etc.) over other industries. This includes the increased presence of massive investment funds like Blackrock ($10 trillion USD in assets under management) and the Vanguard Group ($7.2 trillion) that control huge swaths of the economy. For instance, the Vanguard Group is the largest shareholder of both Ford and General Motors. This type of ownership pattern is not specific to car companies but, as we will explore below in relation to housing, highlights how loosely regulated parts of the financial sector have come to dominate other industries with an eye to extracting the most possible profit. For example, in Canada, the Bank of Canada notes that the asset management industry grew from $2.4 trillion (CAD) in 2008 to $5.7 trillion in 2020, causing a “structural shift” in our economy.
Ok, what does this mean for housing?
Understanding financialization is important to understanding the housing crisis because it has shaped how housing is built and managed in places like Kingston. This is because, under processes of financialization, housing has increasingly become an asset to be bought and sold on financial markets.
Housing as an asset to be bought and sold
From the point of view of an investment manager, the goal of an investment is to maximize the amount of money that investment returns; or, in other words, make the most profit possible. What exactly is being invested in, is therefore secondary to the potential return they can get. This means that as housing has become a financial asset to be bought and sold by investors, its management and production is oriented to producing housing as an asset that produces the most profit.
In practical terms, this means that rents, mortgages, housing units and so forth must be converted into something that is easy to buy and sell by financial investors. In Canada, for instance, the country’s largest pension funds have increasingly sought methods to shift their investment portfolio into real estate while leaving the direct management of housing to others.
The most famous (and disastrous) example of this process of converting housing into an easily tradeable asset was the lead-up to the 2008 financial crisis where mortgages were bundled together and resold as packages for investors to speculate on. This involved a variety of accounting techniques and the creation of new financial instruments that turned these mortgages into an product that could be sold to investors (see this clip from The Inside Job for a digestible explanation). While this process involved complex terminology, what’s important to understand is that it resulted in insatiable demand from investors for mortgages they could purchase. This ultimately led to the issuance of more and more mortgages, resulting in an unsustainable increase in housing prices until the bubble popped with disastrous effects for the world economy.
This process of turning housing into an asset to be bought and sold also occurs in the rental sector. One of the biggest changes in Canadian housing recently has been the growth of Real Estate Investment Trusts (REITs) since the mid-1990s (alongside other financial vehicles for investing in rental apartments). REITs are financial entities that gather money from investors like pension funds that they then use to buy up real estate, like rental apartment buildings. Following this, they take the gathered rents and turn them into returns for those investors. Why this matters (returning to our initial description) is that REITs are competing with other financial products for investor cash. This means they must reorient housing in a way that ensures they get the highest return possible on their initial investment in order to make real estate more attractive than other potential investments. As documented by Martine August, this puts great pressure on renters, as REITs and other financial firms undertake processes of what they call ‘suite turnover’ to gather higher rents; a process often associated with displacement as the turnover of suites can mean prioritizing new, wealthier renters over existing tenants.
And what does this mean for Kingston?
Below I’ll briefly expand on how this discussion of financialization of housing relates to Kingston’s housing crisis.
Cheap money and single-family homes in Kingston
For single-family homes, the connection between access to low rates from the financial sector and increased housing debt has been the rocket fuel driving rising house prices until recently. This happens in several ways.
The most obvious is that when money can be borrowed cheaply (e.g. low interest rates) the amount of debt a home buyer can take on increases. This results in rising prices as large sums of borrowed money are used to bid up housing prices. As I’ve published with colleagues elsewhere, during the pandemic (while rates were low) Canadian banks were eager to lend to home buyers. From March 2020 to August 2021, Canadian banks added $200 billion in uninsured residential mortgages to their balances (growing from 33 percent of their holdings [$729 billion] to 37 percent [$912]) while housing prices skyrocketed.
This included not only lending to people seeking homes to live in but also people purchasing multiple homes as investment. Indeed, banks were quite eager to have existing homeowners pile new debts on top of their current mortgages to fund down payments on a second (or third) home. Through issuing a home equity loan (HELOC), homeowners could borrow money using their existing home as collateral and use it to purchase further housing. This second or third home served as an investment with hopes of profiting from continually rising housing prices. In Toronto, ‘multiple’ home buyers recently became the only group of buyers with a growing share of the housing market, making up 29 percent of all home purchases. As the Bank of Canada acknowledged in late 2021 this “sudden influx of investors likely contributed to rapid price increases.”
This influence of investors as a driver of housing prices can clearly be seen to those paying attention to Kingston’s housing market. As an illustration you can take a tour of realtor.ca and keep track of how many local listings are described as the ‘ideal investment property’ compared to described as a house for some to live in. With housing prices falling as interest rates rise, how these years of increased speculation of housing will play out now is something to watch, with ramifications for the future of housing in the city.
New large-scale developments and financialization
Another effect of financialization seen in Kingston is a change in who housing is developed for. With more and more homes, condos, etc. bought by investors who have no intention of living in them, we’ve seen an increased marketing of new housing units to investors rather than residents; and a resulting increase in the types of units that are most attractive to investors. This has especially been the case in tight rental markets, like Kingston’s, where a housing crisis ensures that investors have a steady supply of renters who are in desperate need of housing and will rent any property. In the case of Kingston, this includes new housing oriented towards investors seeking to rent to students.
Take, for example, the Frontenac Condos in Williamsville. A close look at their website reveals their marketing is geared towards investors rather than owner-occupiers, explicitly listing the housing crisis as a guarantee of profits. As they state “[Queen’s] enrolment statistics prove to grow at a steady rate year over year, ensuring the demand to secure housing will only rise in future years.” This is by no means limited to Frontenac, but instead characterizes much of the new development in Kingston, especially along Princess Street.
Summing it up
The financialization of our economy has meant shifts in how we organize essential services like housing as it becomes more oriented towards producing value for financial investors. This is not just an abstract reality that exists at the level of the global or national economy, but one which shapes our everyday lives in cities. In this blog post I hope to have demystified the concept and shown how it helps us understand the contemporary housing crisis.