Sacred Headwaters #32: Financialization of Housing
The increasing role of finance in residential housing has had transformative effects across the global economy over the last few decades. What are they, and how can we work to reverse them?
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Issue #32: Financialization of Housing
This is the second issue in a series on housing that draws connections between climate policy, housing affordability, and the financialization and commodification of housing over the last four decades driven by the neoliberalization of global financial markets and housing policy.
Issue #31: “Housing Policy is Climate Policy” (Feb 15th, 2021)
Issue #32: The Financialization of Housing (Mar 1st, 2021)
This issue focuses specifically on financialization so perhaps we should start by asking, what is financialization? One of the papers included in this issue is specifically focused on this, but I’ll kick us off with a working definition from the same author, Gerald Epstein:
“Financialization” refers to the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies.
From “Financialization, Rentier Interests, and Central Bank Policy.”
It may come as no surprise that in much the same way that neoliberalism has many facets and directions of research and analysis, so too does “financialization,” as does financialization’s link to neoliberalism. Financialization of the global economy has rapidly grown since around 1980, meaning, among other things, that the value of the financial sector in the United States was nearly 5x GDP in 2015 (and is likely even higher today).
Global real estate has rapidly financialized over the same period through a variety of mechanisms. If you have a mortgage in the US, you’re probably aware of this to some degree because you may have received letters from time to time notifying you that your mortgage has been sold. The rise of mortgage-backed securities (“securitization”), real estate investment trusts (REITs), state backing and bailouts for “risky assets,” tax breaks, and international investor protections have all driven (and, in a political economic sense, been driven by) a rapid rise in the financialized trade and value of real estate. In 2017, global real estate assets were worth about $280 trillion dollars, with nearly 80% of that being residential real estate.
Financialization has major impacts on affordability and displacement through a number of mechanisms across all kinds of markets, from “targeted” global north cities (so-called “hedge cities”) to informal settlements in emerging economies. In the global north — countries where households have consistent access to credit — it does this by driving inflation in home prices, both because the use of housing as an investment vehicle drives up demand and because financial instrumentation and state policy have made mortgage debt easier to get. In the global south, or “emerging markets,” it’s often communities with no formal land titles — Indigenous communities and informal urban settlements — who are displaced as international investors buy up cheap real estate to develop. It also affects our ability to do effective, ecologically-informed urban planning, and researchers have argued that financialization has contributed to suburbanization around the globe, and thus to our transgression of a variety of the planetary boundaries.
Financialization has also contributed to escalating system-level instability: the 2008 financial crisis is the most obvious example and it’s one that was driven specifically by financialization of housing, but the world has been regularly rocked by financial crises since globalization and financialization really started to take hold in the 1980s. This is something to keep in mind as the impacts of climate change become more severe and as the long-term economic impacts of the pandemic manifest over the coming years: widespread financialization has created widespread systemic risk. The fact that more wealth is invested in real estate than any other asset means that the entire global financial system is at risk every time there is a destructive hurricane, a catastrophic wildfire season, or a deep freeze in Texas; it’s also all at risk as Miami Beach slides further into the ocean. Thus far in the US, we’ve staved off disaster by bailing out banks and insurers and bankrolling public insurance of risky assets, but it’s not hard to imagine a scenario where one incident causes the whole house of cards to collapse.
In this issue, we’ll read more about what financialization actually means, how it’s manifested in housing, and how that process is impacting people around the world. We’ll also read briefly about attempts to break free from or mitigate the harms of financialization, though we’ll also be reading about that in the next issue on public housing.
Financialization: There's Something Happening Here (15 minutes)
Gerald Epstein
The full paper is about 30 minutes. It’s a good read, but if you’re pressed for time, I’m including this primarily to define the terrain of “financialization,” so feel free to just read sections I and II. I’ll also mention another paper by Manuel Aalbers that is longer but easier to read and provides a bigger picture view of financialization as an area of research that could be read in addition to or instead of this.
The concept of “financialization” is a nebulous one that’s been defined differently by different authors over the years, much like neoliberalism. Some of those authors even argue that financialization is in fact “part and parcel” to neoliberalism, arguing that neoliberalism and financialization arose concomitantly by necessity, not coincidence. The concept could probably be its own newsletter issue, but for now, this paper does a good enough job introducing it and contextualizing it in the broader political and economic dynamics of the late 20th and early 21st centuries. Today, after the 2008 financial crisis, the subsequent decade of relative economic stagnation, and the growing public discourse about financial actors, I think we are more or less all aware that the financial sector has far-reaching impacts across our economy including but not limited to the risk of large-scale instability. What many of us may not realize is that this was not always the case: finance as we know it today, and the integrated financialization of all sectors, is a relatively new phenomenon, and as Epstein writes, it’s one that is still far from being well understood.
Financialization manifests significantly at an individual level in global north countries through, among other things, rising consumer debt. Epstein notes that the financialization of housing led to the “massive loss in housing wealth experienced by poor people and minorities in the US” during the financial crisis, but the process also drives an ongoing crisis of housing affordability that is accelerating the growth of inequality and has similar but distinct impacts in global south countries where there is less access to consumer credit.
The risks of the financialization of housing (5 minutes)
This is short and glosses over the mechanisms and manifestations of financialization, but I wanted to include it as something easy to read that introduces the idea of financialization of housing and why it’s important. The author points to the massive amount of capital invested in real estate (his number is $160 trillion in residential real estate which is lower than the one I cited in the intro, but still mind-boggling) and explains how liberalization of finance and the massive power of wealth accumulation have converged to transform the housing market through securitization, real estate investment trusts, trans-border real estate purchases, and more. He concludes by asking, how can we escape the affordability crisis and economic instability of financialization, and looking to some European examples that have maintained vibrant social housing sectors for inspiration.
UN Special Rapporteur Report On the Financialization of Housing (40 minutes)
Leilani Farha, UN Special Rapporteur on the Right to Housing
This report from 2017 explains what financialization is, what its status as a process is in different areas of the world (global north vs. global south), and how financialization impacts human rights and specifically, the right to adequate housing. It draws important links between the neoliberal degradation of public services and liberalization of financial markets, the coercive international financial institutions that propagate these policies, and the growing crisis of housing affordability across the whole world. The mechanisms by which the poor are affected by housing financialization in the global north and global south differ, but the outcomes do not: international financial interests and investment drive displacement and create homelessness. Farha argues that while there have been haphazard attempts to rectify these problems in a number of countries, the only truly effective way to mitigate the harm of financialization is to restructure the relationship between states and financial actors in a way that holds both finance and the state accountable for human rights outcomes. Farha also makes it abundantly clear that states have been complicit partners in the rapid financialization of housing over the last thirty years.
What is lacking is for States to reclaim the governance of housing systems from global credit markets and, in collaboration with affected communities and with cooperation and engagement by central banks and financial institutions, redesign housing finance and global investment in housing around the goal of ensuring access to adequate housing for all by 2030.
Podcast: Real Estate Capitalism and Gentrification with Samuel Stein (two hours)
The Dig, Daniel Denvir
This podcast does a great job connecting some of the global and macro scale trends in financialization with the real impacts on a variety of actors at a micro level. It opens with some rather shocking US-based statistics about how bad the housing crisis is:
…homeownership is at a 50-year low. A record number of homes are being sold to absentee landlords––we hit 37 percent a couple of years ago. We have two million people homeless in this country, and another 7 million precariously housed.
…in mostly white neighborhoods, rent burdens are about 33 percent. In mostly African American neighborhoods, they’re 44 percent. In Latino neighborhoods it’s 47 or 48 percent.
The interview talks about some of the history of how we got to where we are today through the systematic dismantling of public housing and how financial interests leverage their power to force cities to deregulate, allowing them to extract more value in a process that’s remarkably similar to the structural adjustment programs of international financial institutions like the IMF. In a clear example, Amazon’s HQ2 “invitation” kicked off a “race to the bottom” of cities offering tax breaks and financial incentives; unfortunately this type of thing is the norm, not the exception, even if it doesn’t typically catch the public eye.
One thing I really appreciated, which may help ground the more abstract concepts of financialization, is Stein’s close attention to the political economic effects of the system of financialization at all levels, from individual actors to municipal governments and on. As an example, he points out that residents of a neighborhood today may actually advocate against public amenities like parks or public transit because they correctly realize that these will lead to an influx of capital, gentrification, and their ultimate displacement. It doesn’t take much thinking to realize how problematic this is both from a generic social good standpoint and from a climate standpoint: if, within the existing structural constraints of financialization, our most commonly deployed tactics for building resilience and mitigating emissions in an urban environment actually work against both of those goals, then perhaps we need to take action at a more structural level. Stein closes with some ideas about steps that municipalities are able to take within the current system including a vacancy tax, broadening rent controls, urban community land trusts, and tenant organizing.
From a great visualization of global wealth on Visual Capitalist.
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