Financialization of Housing

Financialization refers to the increase in size and importance of a country’s financial sector relative to its overall economy.

Previously open to only the filthy rich, vehicles like REITs (Real Estate Investment Trusts) and easing of FDI (Foreign Direct Investment)and FII (Foreign Institutional Investment) regulations have led to what can now truly be called the ‘Financialization of Housing’. Affording lower income groups to add real estate properties or part thereof to their overall investment portfolio.

Historical data shows that real estate represents one of the most lucrative assets to invest in. However, the statistic varies when you distort the underlying range of years.

The study below was conducted by Prof. Robert Shiller of Yale University in 2015(revised) and updated concurrently to show prices of houses in USA from 1890 to 2015. There was a 100 year period between 1890 and 1990 where there was virtually no increase in the prices of housing. The only similar event to the 2007–08 mortgage crisis, was the ‘baby boom’ in the post World War — 2 era that can be explained away for obvious reasons. However, the steep curve noticed around the beginning of the 21st century was largely fueled by overzealous lending and incompetence in part of credit agencies, banks and other lenders.

Real Home Prices Index, 1890–2015

It is clear that the huge rise in residential properties (which make up 60% of global assets; according to the report on Adequate Housing presented at the United Nations in 2017) is purely for speculative purposes. An agenda for the rich to get richer and for the poor to get homeless if they aren’t already so. Leilani Farha’s report on adequate housing highlights the many issues faced by people in countries around the world, from India to Portugal and can be similarly graphed for many states in the USA. Foreign investors hoarding land and selling it at prices that people living in the city cannot fathom to afford is an issue that greatly hampers human rights relating to security and dignity.

The Declaration of Human Rights is a milestone document in the history of Human Rights movements, drafted by over 50 representatives of different socio-cultural and economic backgrounds and approved by the United Nations Council in Paris in 1948. Article 1, 22 and 25 outline rights to equality in dignity, social security and to a standard of living adequate for health and well-being.

Financialization of housing creates unnatural inflation in the price of real estate, namely residential housing properties. Treating houses as commodities rather than a means to a living creates a cesspool of portfolio management opportunities for the rich but disregards the people who might need the house to stay and run their families in. It is a conundrum between allowing abundant people opportunity to have even more profitable investments and providing a roof for a family with kids that otherwise may have to live on the streets. Such a situation first requires state and domestic laws that govern investment in such housing properties. This entails strict laws to curb foreign independent and foreign institutional investment in residential properties in a locale. Local governments may impose taxes on unoccupied homes to discourage the rich from owning multiple houses purely for the reason of up-selling. Another way that local governments can curb steep rise in real estate prices is by taxing luxury homes in-order to subsidize housing for low-income families. It is the obligation of the states to the financial sector to ensure housing prices do not reach a level unexplainable by financial logic. It is a duty of the government to ensure that private players do not misuse liberal laws to benefit themselves unnaturally. An economy crumbles if left unregulated and completely in the hands of capitalistic drivers.

The New Urban Agenda — the output document from Habitat III Conference (The United Nations Conference on Housing and Sustainable Urban Development.) aims at adequate housing for all by 2030. This provides a goal to be reached. A target that all state and local governments must strive together to achieve. The New Urban Agenda has been translated to more than 30 languages, including the six United Nations official languages, as well as the most widely spoken languages in the world such as Hindi, Bengali or Portuguese. These translations reach more than eighty percent of the world’s total population calculating the languages by total number of speakers. Once local governments and policies and programs in place for their local real estate markets, inter-state and cross-national treaties can be opened to deliberate more on real estate then. This shall continue a trend that has already worked well with trade and other economic activities. This will further ensure that rise and fall in real estate prices is a cumulative result of multiple factors rather than just on the whim of few rich.

Notice of Foreclosure

Another major issue that needs to be handled in order to ensure adequate housing for all is foreclosure and eviction laws. States should review the laws and policies regarding this. Tenants and mortgaged borrowers should only be evicted as a last resort and the banks and local government should ensure suitable alternatives prior to that to minimize the number of families pushed to the streets for not being able to pay the loans on their mortgage. Re-financing such loans is one of the very easy options available to banks. This method allows the repayment period to be extended by slightly increasing the effective interest rate on the mortgage. This gives second life to the borrowers and can possibly correct Non-Performing assets (NPAs) showing up as bad debts in the balance sheet of such banks.

Overall, financialization of housing mounts a three-fold assault on Human rights by undermining democratic governance, exacerbating inequality and social exclusion and detachment from community and social exclusion. Correcting this is the fundamental duties of states and their governments, not just for local citizens but to ensure global sustainability and accountability. Today markets are global and move concurrently with markets in other parts of the world. Assets are regulated by institutions that control and monitor the rise and fall of prices of those assets as is seen in the case of company stocks, commodities like oil and sugar, bonds, etc. A similar governance on the fluctuations of housing prices is called for and long overdue. The housing bubble of early 21st century that ultimately led to one of the biggest recessions in recent history cements that notion.

References:

  1. Farha, Leilani. Statement on the right to adequate housing, at the Human Rights Council. 2017.
  2. Habitat III. The United Nations Conference on Housing and Sustainable Urban Development. Quito, Ecuador. 17–20 October, 2016
  3. Shiller, Robert J. Irrational Exuberance: Revised and Expanded Third Edition. 2015
  4. The Declaration Of Human Rights. Paris. 1948.

A student of masters in finance at Frankfurt, Germany, and the co-founder of a medical healthcare startup.