Canada keeps repeating it’s spending billions on new housing, but with who, and how does it help? Earlier this week, Deputy Prime Minister Chrystia Freeland announced $1.2 billion worth of investments to build rentals in Toronto. It turns out over a third of those funds are going into one project—373 Front St East, which are rentals planned years ago. Toronto-based Tricon Capital is one of the owners of the 855 unit project. They are best-known for buying and owning tens of thousands of single-family homes in a short time.
Canada Providing Funds To A Company That Buys Hundreds of Homes Per Month
Canadians may only be vaguely familiar with Tricon, especially outside of Toronto. However, the firm is a multi-billion dollar company, traded on the NYSE and TSX. The company treats single-family homes like Pokemon—gotta catch em all. Their target is to buy 800 homes per month, and they currently have around 38,000 in their portfolio. Most of them are in a single-region (the US Sun Belt), concentrating the stock. Canadians may not know who they are, but they’re infamous across America. Especially after CEO Gary Berman was on 60 Minutes, and earned the title of “internet villain.”
The episode was titled, “Would-be home buyers may be forced to rent the American dream, rather than buy it.” It focused on the increasing presence of Wall Street firms, outcompeting end-users. Post-Great Recession, institutions used cheap leverage to scoop up hundreds of thousands of homes. They would then rent them back to the demographic that can no longer afford those homes. Cheap pandemic funds pumped money into these companies to rapidly expand. However, that’s not how Tricon explained the trend.
Toronto landlord who owns 30,000 houses explains why young people don't want homes pic.twitter.com/S5ahrjPZ2D— Housing Crisis Watch (@HousingCrisisW) March 27, 2022
“If you asked a lot of millennials…they would probably tell you they don’t necessarily desire to own a home,” explained Berman, before explaining the turnkey, hotel-like properties they operate.
Can’t fault a company for operating within its regulatory limits. It’s not exactly clear why Canada’s government feels the need to help them though.
Canada Is Helping A Well Leveraged Company Ready To Buy Homes
Canada’s reasons for providing the funding is a mystery, especially considering Tricon’s success. The project was planned years ago, and it’s far from the only project they are working on in the City of Toronto. It’s not exactly hurting either, with revenue growth so robust they announced a $315 million share buyback.
Glancing at their press releases, raising capital isn’t a problem either. Blackstone led a $300 million investment into the firm. The Canada Pension Plan Investment Board (CPPIB) announced a $500 million joint venture, providing most of the cash. At the end of last year, the firm said they’re sitting on $3 billion in powder (cash set aside) to buy more homes. Just last week, they announced a new single-family rental venture is coming.
It’s clear why investors have been flocking to lend them money. Canada’s federal government? Not so clear.
Canada’s Excessive Borrowing Helps Push Inflation & Rates Higher
Canada’s investment as a low cost loan doesn’t obviously present an issue. Governments borrow for cheap, and new housing is good, right? If you believe the supply-side narrative, more rentals mean more competition, and thus lower prices. Most don’t consider market dynamics apply to the whole value chain, including credit.
Governments borrow whatever spending revenue doesn’t cover via bonds. Borrowing is a normal part of governance, and expected. Excessive borrowing is not, since it drives excess demand and crowds credit markets. This results in higher inflation and/or borrowing costs.
Free markets throttle excess and have corrections. If credit consumption is too high, lenders require a higher rate, throttling excess. State intervention in credit markets stimulates non-market activity, increasing demand. This results in inefficiencies, such as excessive demand for input costs. In plain english, it inflates the cost of building making housing more expensive.
Those bonds are also sourced at market. If they flood the market with too much issuance, it leads to falling prices and higher yields. This only has two paths—higher borrowing costs or the central bank absorbs the excess. In the latter scenario, inflation rises ultimately resulting in higher costs anyway.
This is an issue I’ve previously explained as a witness in Parliament. At least one MP countered the take, but with the belief it’s just a theory. Luckily the Bank of Canada’s recent deliberations made it clear, stating excess government spending will prolong higher inflation and thus interest rates.
All of this isn’t to suggest governments shouldn’t spend, they should just consider the impact. The non-partisan Parliamentary Budget Officer (PBO) previously warned these loans don’t create supply, and raise the cost of housing. In addition, the PBO also failed to see how it created any more housing. They found the funds were given to projects already underway, only making them more profitable. It also provides more leverage, concentrating an industry.
So it’s not that the government doesn’t understand the issue. It’s been explained in detail to them. They know the average voter doesn’t understand, and the appearance of doing something is more important than not.