The Political Economy of Housing

by Flo Schade - Housing commodification and mortgage debt play a huge role in the current political economy. Particularly true in the Canadian context, financialized speculation of housing plays such an outsized role that it results in the contradiction that housing serves a function very different than providing shelter for people.

Let’s start with a broad three-point assessment of bourgeois economics and then specify how that relates to the housing crisis. Economics is a field that operates almost exclusively by using terminology that is designed to be confusing and obscurantist. Bourgeois economic commentary on the housing market is no different; it is propaganda apologizing for the capital class.

To this end it is instructive to review a recent statement in the Bank of Canada’s 2024 Financial Stability Report (FSR).

The Bank of Canada (BOC) starts with a seemingly innocuous declaration:

“A stable and resilient financial system means people can access credit and manage their assets safely and predictably in good times and in bad. It also reduces the need for authorities to intervene in periods of financial stress. In short, a stable financial system is critical to Canada’s economic well-being.”

What does this really mean? When they speak about the financial system as the economy, when they use financial system health as a placeholder for overall economic health, understand that this is a distortion, a sleight of hand that hides the true class interests and material dynamics involved. The financial system is not in fact commensurate with the economy.

Over the decades, and in large part thanks to an anti-communist right wing reaction post-WW1, neoclassical monetarist policies took hold in governments that increased state reliance on so-called private capital markets, and working-class austerity came with it. This imposed reliance on private capital to fund public operations dictates the working masses must be taxed hard and the government must scrimp and save to stay afloat. This Austrian-school thinking inevitably led to the neoliberal liberalization of capital markets across national boundaries in the nineties, inviting the plunderers to extract wealth and resources from the global south in order to sell cheap goods and buoy the consumer habits of those in the imperial core.

Neoliberal financialization and the hollowing out of commodities almost entirely from their use-value to replace it with market-value is at the root of the bifurcation of what’s often called the ‘two economies’: the financial economy on the one hand, and the real resource or material economy on the other. The financial system acts as a parasite, extracting the wealth and degrading the real use value of real goods and services. This has manifested in widespread degradation and obvious material decline in quality, size, efficiency of goods and services. All while GDP is supposedly going up. How is this possible? Because these firms do not operate for industrial profit anymore, the modern rich man's bread and butter is speculation-driven value inflation via capital gains. Commodities are transformed into equity-holding assets that appreciate in price and can be leveraged or sold to liquify into cash. These valuations are based on how much the banks or shadow banks are willing to lend, not on any material improvement. This is what Marx referred to as“fictitious capital” because its value is based on something that doesn’t exist in the real economy. This can also be defined as economic rent. When a speculative asset is sold, that fictitious capital transforms to liquid but flows back up to capitalist pockets and does not enter the real economy in any large scale meaningful way.

You could say we live in an Apartheid Economy, with the working class (plus the petty bourgeoisie) on the one hand, subject to oppressive tax structures, extortive credit access, and means-testing rules that serve to maintain an underclass in perpetuity. On the other hand, the rentier owner class, whose material sustenance relies on extractive methods and whose accumulation of unproductive capital is facilitated by the State in every way.

What all of this means when it comes to economic double speak on the housing market is this: they measure the health of the economy on whether the financial creditor class can maintain itself. They define systemic risk based on whether aggregate suffering and strain risk impinging on the Capitalist class. Ultimately, so long as the top crust is left unaffected, the swirling masses down below and their degrading material conditions don’t matter and the economy is said to ‘remain strong’.

Secondly, a corollary is that the ruling class, acting though bourgeois government, will only bend towards worker demands insofar as NOT doing so would threaten “systemic” risk the whole house of cards comes crashing down. This is the entire line around which orthodox bourgeois economics, even of the ‘progressive’ kind, operates and uses to define ‘good’ versus ‘bad’, ‘responsible’ vs ‘irresponsible policy. The working class, individually or en masse, suffers as poverty deepens. We experience deteriorating conditions, and a declining quality of life. But that is not a relevant metric for economic health according to this paradigm. What remains paramount to constitute economic well-being is rather keeping the system intact -- a system which overwhelmingly benefits the owner class at the expense of labour by increasing wealth inequality and buttressing an aristocratic class characterized by the circular flow of access, privilege, power, and material wealth at the top.

Finally, this economic apartheid runs along class lines and it is NOT a two way street.

The fact that to a large extent the fate of the majority of the working class is tied to the vagaries of the stock market and the success of parasitic equity firms was a political maneuver. It was designed to secure widespread support for the so-called “Socialism for the Rich” programs that entrench the exploitation of labour. It reinforces the myth that our economy depends on the governance and continued good fortunes of the rich. Yes, a financial market collapse would hurt the working class, as it would result in job losses and devaluation of investments used for fixed incomes. But isn’t it interesting that the opposite is not true -- starvation and stagnation of the working class in itself is not a concern to the bourgeoisie, but only once our pesky problems become so great and widespread that it threatens the holdings of the 1% does it become an issue that needs to be addressed by the political puppets in office. Beyond that, they do not care about working people.

Returning to the Bank of Canada statement and their assessment of the housing market: The first message is that Canada’s financial system remains resilient……

Let me touch on each of the sectors we cover in the Financial Stability Report (FSR).

Start with households. So far, most households have proven resilient in the face of higher interest rates and inflation. Overall, we’ve seen households adjusting to higher debt-servicing costs.

This does not mean the adjustment has been easy. Clearly, there are individuals and families who are feeling very stretched.

What we’re evaluating in the FSR are the indicators of overall stress in the system.

Some of the indicators of household financial stress that fell during the pandemic are back to normal, or above normal levels. Survey data suggests renters are experiencing the biggest increase in financial stress. After hitting historical lows during the pandemic, the share of households without a mortgage that are behind on credit card and auto loan payments has come back up to—or surpassed—typical levels. And over the past year, the share of borrowers without a mortgage who carry a credit card balance of at least 80% of their credit limit has continued to climb.”

The proactive “adjustments” mentioned include market reforms to keep the debtor-creditor / worker-owner relationship intact, including new rules around amortization of mortgages that allowed big banks to extend repayment periods well beyond 35 years and sometimes decades beyond that. At its peak, this constituted 25 per cent of the three big banks’ portfolios, while currently about 20 percent of mortgage payers are experiencing negative amortization; that is, their payments do not cover the principle.

The new Liberal Housing Plan is full of such ‘proactive steps’ including allowing workers to draw from their future by putting more of their RRSP towards a down payment, softer regulations around non-bank financial lenders and ability to provide mortgages and even lend for down payments. The Liberal government's program not only buys back their own guaranteed mortgage bonds; it pitches direct funding to the banking system to support provision of low-cost mortgages. The only time they will consider direct market intervention is when it is on behalf of the capitalist class -- because new mortgage debt and home sales have been slowing over the past year. People are getting priced out. This is a problem for the big casino because it needs to keep growing. These bourgeois solutions are paraded around as if they serve the interest of the working class homebuyer when in reality they act on behalf of the mortgage lender to ‘stimulate the market’.

Back to the report:

“Overall, the evidence suggests that households have the flexibility to continue servicing their debt at higher rates. We will be watching the data closely for signs of increased financial strain among households, both mortgage holders and non-mortgage holders. We’ll also be watching how the labour market evolves, since the biggest factor that determines whether someone can service their debt is if they have a stable income.

Higher interest rates are also affecting businesses. Higher rates are slowing demand for the goods and services that businesses sell, while also increasing their financing costs. So far, the financial health of large businesses appears solid. But smaller businesses are showing more signs of financial stress. Insolvency filings by smaller firms have recently jumped after several years of below-average filings. There is some indication that this recent increase could be a catch-up or normalization, and the timing could be driven in part by the expiry of government support programs put in place during the pandemic.

Turning to Canadian banks, overall, credit performance remains strong. Banks are proactively contacting customers who are facing payment increases at renewal and working with them on a payment plan. They have also been putting more money aside to cover future loan losses, and they continue to maintain healthy capital and liquidity buffers. This means that even if financial conditions and credit performance deteriorate, banks are positioned to absorb losses and continue to provide credit.”

The BOC has advised banks to add to their capital reserves against the risk of losses on loans and they have listened, heeding the call for more vigilance and scrutiny against ‘shock’ or collapse. Fine. The banking system being resilient has little bearing on the material conditions of the working class. You may be able to stave off an economic collapse on the scale of the Great Financial Crisis (for now), but that in no way means things will not be getting worse over time for the worker. It’s a “soft landing” for the 10%. It’s “resilience” for the sectors that provide financial instruments to the already wealthy as a way to park their money and further exploit people who are not privileged to have access to that lane of capital.

Even when it comes to small businesses closures and insolvencies which are spiking while unemployment and exit from the labour force are on the rise; this is inconsequential to the BOC unless it impacts the creditor class. So long as the debt servicing continues, as long as the aggregate overstretch doesn’t lead to a snap crackle pop at the top– it’s all good as far as the ruling class is concerned.

In the Canadian economy, real estate IS the financial market, and therein we see its true utility, identity, and function in a political economy controlled by big Capital. As of 2019, pre-pandemic, 68 percent of Canadian bank lending was for mortgage loans; since then it must have only increased due to the low rate buying frenzy. As of 2023, household debt was an astounding 107 percent of GDP, while Canadians are the most highly indebted households in the G7, and in 2022 Canada had the 8th least affordable housing market in the world.

Real estate has long been vulnerable to rentier exploitation as a way for wealth to accumulate for nothing and explains the close ties between housing and finance. Last year, OSFI, the Canadian banking regulator, warned that the housing market is a risk to the greater economy as ‘contagion’ of risk and default in one area can lead to another, and since Canadians are so over leveraged through housing and surviving on credit as it is, it is a big risk indeed.

Once we understand the real role of housing, as our political rulers see it, as a speculative tool for capital gains, as a ‘secondary market’ to satisfy the wants of the rentier class, then the treatment of housing, homeowners, renters, lenders, and housing policy generally begins to make more sense. We can see how market reforms advanced by Capital apologists in Parliament are fundamentally not changing the accumulation of capital forces, but are participating in a crucial mechanism that perpetuates the apartheid economy. They allow the big capital players to maintain their systemic position at the expense of those who do not have excess capital with which to gamble and open up the casino to the basic need for housing.

This has had clear implications for renters as costs that landlords should rightfully incur as an operating expense are passed off to tenants, whether lawfully or otherwise. This notion that Landlords are entitled to a ‘free lunch’ through economic rent-seeking is rampant and reinforced by the ruling class while the majority of tenants must navigate through inadequate, insufficient, bureaucratic legal systems for any element of justice or accountability, forget about protection from exploitation.

The chickens may be coming home to roost on one contradiction of the housing market, however. All the overleveraged households are scaring away foreign capital investment, which is now leaving Canada in droves. So Deputy P.M. Chrystia Freeland and the propagandists’ job now is to manipulate data and tweak the system just so, to paint the picture that Canadian households are strong and healthy and not at risk of mass mortgage default. The aim is to have as many working class Canadians paying back mortgages as possible, regardless of how that materially affects their quality of life.

Rising unemployment puts a wrench in this wishful thinking, and investors are not buying it. The long term projections are bleak and current economic growth backs up the long term forecast, not the rosy short-sighted government press releases. One of the most poignant reports came last year from the OECD which put Canada on track to be tied with Italy as dead last in the OECD for per capita GDP growth. The politicos will be clapping like trained seals about how great things are, moving heaven and earth to make sure that if one more red cent can be squeezed out of the worker then by god the capital class will get access to it and therefore everything is fine. The definition of good, bad, healthy, weak, etc. is itself a function of capitalist class propaganda. The way housing is treated in our society is a prime example of how neoliberal financialization is parasitic. It is a drain that depletes the real economy of human needs resources; it must be stopped. Nothing demonstrates this absurdity more clearly than the Canadian housing market.