Book review: The Financialization of Housing

The Global Financial Crisis was a wake-up call to the world about the dangers posed by a toxic mix of finance and housing, one that has still not been properly heeded.

The mortgage-backed securities, collaterialised debt obligations and other financial instruments that financed the expansion of sub-prime and predatory lending were the result of a wave of innovation by a finance industry that had been deregulated over the previous 20 years. Britain marked the 30th anniversary of the Big Bang in the City last month but similar things happened around the developed world.

All that innovation and securitisation led to exponential increases in the amount of credit circulating within the financial system but it still needed something to be secured against. Which is where housing came in: a mortgage finance system that had been based on long-term mortgage lending funded from savings was transformed into a vehicle for the expansion of credit. And the relationship between the price of homes and the earnings of people buying them was also transformed.

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The Financializaton of Housing: A Political Economy Approach, a new book by Manuel Aalbers, is the most comprehensive attempt I’ve seen to outline this process and its consequences. It’s part of a multinational research project based at the University of Leuven in Belgium on what he calls the Real Estate/Financial Complex in 12 different countries around the world. The metaphor is a deliberate echo of the military/industrial complex and serves to emphasise the connections not just between the real estate and financial sectors but also between each of them and the state.

The book is positioned in the space where political economy and housing studies intersect. Aalbers argues that just as political economists have not paid enough attention to housing when they study ‘housing as market’ so housing academics have underplayed economics when they look at ‘housing as policy’. This divide is starting to disappear as both disciplines recognise how central housing has become to advanced capitalist societies: houses are no longer just homes or parts of the built environment but also stores of wealth and collateral for credit.

So what is financialisation? In general terms, it’s a process that has been underway since the 1980s whereby the global economy became increasingly dominated by the financial sector, company strategies came to be dominated by the financial search for shareholder value and individuals came to see themselves as consumers and investors. As such, there are obvious links to globalisation, though the exact impact of both processes is disputed.

Aalbers defines financialisation in general as:

‘The increasing dominance of financial actors, markets, measurement and narratives at various scales, resulting in a structural transformation of economies, firms (including financial institutions), states and households.’

For housing in particular financialisation comes in different forms and is not necessarily the same process as privatisation or commercialisation or liberalisation. While it happens at the level of the economy and the market and the firm, it’s a process that also transforms individuals into financial actors or investor subjects and bricks and mortar into tradable assets.

But crucially it relies on the state to set the rules: what Aalbers calls the first global housing crisis began when the securitisation techniques invented by what were originally the US government-sponsored agencies Fannie Mae and Freddie Mac were taken up by investment banks and then used to fund sub-prime and predatory lending. As he puts it, housing was not just the object of financialisation but ‘the main collateral for the debt-driven process’.

In the home ownership sector, financialisation has meant not just an increased role for financial markets as sources of capital for mortgages but also housing acting as an investment channel. The mortgage market has been transformed from one that just facilitates home ownership into a financial market in its own right and one that operates on a global as well as local scale.

The Great Moderation, the period of apparently benign macro-economic conditions before 2007, can be seen in retrospect as the period when financialisation took hold. The result was what Aalbers calls ‘The Great Excess’ of rising inequality, credit and debt.

Within the rental sectors, the process has included the entry of private equity and hedge funds into private rented housing and what he calls the ‘secondary financialisation’ of social housing. This is not so much deregulation as ‘re-regulation along market lines’. In the Netherlands, the housing association sector was liberalised in 1993 but the largest, Vestia, became what amounted to a derivatives trading house before it collapsed in 2012. In the UK, private finance was introduced into social housing in 1988 and housing associations have become increasingly financialised businesses.

The book is organized in eight chapters: two cover financialisation and housing studies and housing’s place in political economy; two look at the Global Financial crisis and its aftermath; two present the result of cross-national research into housing and mortgage markets and different varieties of capitalism; and the final two are a look at the financialisation of public housing and the conclusion.

That breadth of scope is both a strength and a weakness. The international perspective brings out a similar process of financialisation of housing in countries with different political and economic systems. The chapter on public housing adds an important perspective to a discussion that has up to now mostly been about the housing market and mortgage lending.

Packing that much content into 150 pages will inevitably leave some readers wanting more theoretical discussion and others wanting more empirical results. And within such a huge field, some may still find things missing: for example, buy to let is not really considered despite its growing importance across the English-speaking world. It is surely a prime example of innovation in finance transforming housing systems. That said, the fact that the book raises so many avenues to explore about housing and political economy and the relationship between the two is also an indication of its value.

Another potential problem concerns the data available for the cross-national comparisons and how you go about measuring the impact of financialisation. For example, as Aalbers points out, rates of home ownership or mortgage debt can reflect the maturity or otherwise of the housing and mortgage markets – not just financialisation. However, in a chapter jointly written with Rodrigo Fernandez, he argues fairly convincingly that a process is at work across different developed economies. The trajectories vary from country to country because of different institutional filters – the tax treatment of housing finance and the extent of commodification in the welfare state and openness in the financial sector – but the process is similar.

A key chapter compares developments in mortgage lending and housing finance in five different countries: Germany, Italy, Spain, the Netherlands and the US. The central argument is that it’s the demand and supply of finance that is the primary driver of house prices, not the demand and supply of housing units.

Aalbers compares the number of housing units and housing per 1,000 inhabitants to house prices across the five countries and finds no correlation. In fact, the only constant trend is that prices increased the most in years when the stock increased the most. He also compares housing completions per million inhabitants and finds a similar lack of correlation. He concludes that: ‘The empirical evidence invalidates the economic truism that oversupply must lead to declining prices and that rising prices are a result of undersupply.’ Rather:

‘In the age of financialised capitalism, house prices are primarily, but never exclusively, driven by the supply of housing finance.’

I accept his point about ‘supplyism’ and agree that the supply of credit must be at least as relevant to house prices as the supply of housing but does the empirical evidence really demonstrate this argument? The figures are for total housing numbers and completions but these will include categories such as holiday homes, social housing, student housing for particular markets that may have no direct impact on prices. He does not attempt to account for time lags in construction or the procyclical nature of housebuilding either: it’s not a complete surprise that output rises when prices are rising. And are the housing statistics of different countries strictly comparable? Establishing exactly how many homes we are building in just one part of one country (England) is fraught with difficulty.

Two other quick quibbles. First, the book is a combination of new material and chapters that were previously published as papers in journals. Sometimes the joins are visible. Second, a familiar one about the pricing of academic books: £95 for the hardback or £35 for e-book will put off all but the most determined readers who have to pay for it themselves.

That’s a shame because this is a book that deserves a much wider readership than the academic one it is likely to get. Search on google and you will find some material that is freely available (for example, this joint paper that covers the Vestia scandal in much more detail than in the book) but the great strength of the book is the way it draws together the impact of financialisation across different markets, countries and tenures.

The conclusion poses what he calls ‘The Twenty-First-Century Housing Question’. The need for high quality collateral for a global wall of money has combined with neoliberal ideology, discursive tenure practices that favour home ownership and government policies that use the financial sector as a key engine of economic growth to inflate mortgage finance bubbles that in turn inflate prices and rents.

Answering the question will involve something that reaches far beyond housing to ‘the de-financialisation of society’. For housing, that means that activists and researchers must consider the politics of financialisation rather than meekly accepting what he calls ‘the build more agenda’ (something also familiar in the UK in claims that all our problems would be solved if only we could deregulate planning). His alternative agenda is only sketched out in broad terms but includes a tenure-neutral housing policy, maintaining social housing, legalising squatting, regulating mortgage markets.

Otherwise, the financialisation of housing will continue. It’s a process most visible in countries like the UK and US but it is happening in different ways in different countries across the developed world. The question is not whether your housing market is being financialised but how and where. The process ‘does not create wealth, just the illusion of it – the shifting of wealth between families, classes and locations’.

The Fincialization of Housing: A Political Economy Approach by Manuel Aalbers is published by Routledge in hardback and as an e-book. More details are available here.

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