OPINION: Very little about the housing situation is the result of a free market

When people invoke free-market principles to push back against policy changes what they really mean is the current environment is working for them, says Michael Wilson.

Agricultural Land Reserve next to high-priced housing
Why don’t the free-market defenders ever suggest developing more of the ALR?

The most common argument I’ve heard against recent suggestions that we should tax real estate speculators and/or limit foreign buying goes something like this, “We shouldn’t make any changes to existing policy because that would be interfering with the free market."

This argument is completely disingenuous. Very little about the current situation is the result of a free market.


Most Canadian mortgages issued today come with a taxpayer guarantee from the Canada Mortgage and Housing Corporation (CMHC). According to their 2014 Annual Report, CMHC insures $543 billion worth of mortgages, which is 42.7 per cent of the outstanding residential mortgage market. They also guarantee another $422 billion, which is 32.8 per cent of outstanding residential mortgages. Combined, CMHC insures or guarantees just over 75 per cent of the entire Canadian residential mortgage market.

In a truly free market economy, the lender — not the taxpayer — would take the risk of default. If that were the case, mortgage rates would probably be significantly higher. How many intelligent investors would loan someone a million at 2.75 per cent to buy an East Vancouver teardown?

Why don’t these free-market defenders ever insist we abolish CMHC?

Tax Policy

Gains on principle residences are tax-free. Why does real estate enjoy this favourable tax treatment when most other asset classes don’t? Sounds like the government is using tax policy to steer the market towards buying real estate as an investment. Free market?

Agricultural Land Reserve

As pointed out in this Vancouver Housing Blog post, the current return on the average farm in Richmond is extremely low. Any rational free market would be developing that land to create enough housing to meet current demand, and generate higher returns.

Why don’t the free-market defenders ever suggest developing more of the ALR?


The flood of foreign capital pouring into the Vancouver real estate market is mostly coming from Mainland China. Many seem to have forgotten that China is still a communist country that plays by different rules than democratic, free-market western countries.

The Chinese government has deliberately — and dramatically — lowered the value of its currency to gain an unfair advantage over other countries. Since 1981, the yuan has been devalued 75 per cent.

USD:CNY Exchange Rate - VO

The result of this currency manipulation has been a large and persistent trade surplus, which exploded after 2004 and is still growing.

In a free market system, China would convert that surplus back to its own currency. This would cause the value of the yuan to rise and diminish the Chinese advantage — something their government clearly doesn’t want.

Therefore, to maintain their undervalued currency, China must take those trillions of dollars and recycle them back into Western countries. They do so primarily by buying foreign government bonds. (This is also one of the reasons mortgage rates are so low). But increasingly, they are also buying foreign companies and residential real estate.

Other motivations?

I have yet to hear these believers in free-market economics ever express concerns over any of these other policies which distort the market and cause real estate values to rise. They only seem concerned when actions are considered which would make housing more affordable.

In my experience, when people invoke free-market principles to push back against policy changes what they really mean is the current environment is working quite well for them. That seems to be their real motivation for keeping the status quo.

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