A Different Perspective: On the Financialization of Housing
In June 2018, I wrote this short essay on the financialization of housing for a Coursera course called Financial Markets by Dr. Shiller, Sterling Professor of Economics at Yale University. I have reproduced this essay word for word below. If you would like to learn more about finance (just as I did), take a look. I wholeheartedly recommend it.
On 1 March 2017, the Special Rapporteur on the right to housing of the UN Human Rights Council, Leilani Farha, issued a report on the financialization of housing. The report discusses a paradigm shift that has occurred over recent years in global housing markets. Particularly, it covers the growing disconnect between housing as a human right, and housing as a financial vehicle for investment. From the the effects of the ‘golden visa’ in countries like Spain and Portugal to the thousands of foreclosures per day in the United States during the global financial crisis in 2008, the rapporteur paints a bleak picture, with the financialization of housing at its heart. However, while the argument that the financialization of housing “undermines democratic governance”, “exacerbates inequality”, “dehumanizes housing” and causes displacement and homelessness, is not without merits, the report does miss some nuance. In particular, it assumes that financialization, and thus finance in general, only has negative impact. By covering examples of different financial products that are essentially part of the ‘financialization of housing’, this essay will provide a bit of that nuance, demonstrating that innovation in finance may in fact effect positive change.
If we think of finance, most people will not consider the incredible amount of positive change in society that financialization and particularly financial innovation (i.e. new financial products) has brought about. However, many such examples exist. Consider for instance the invention of insurance policies; insuring your house and its contents against loss in the case of fire was not possible before the 16th century. Or think of the invention of inflation-indexed debt (first established in Massachusetts in 1780) which protects investors from the devaluation of government-issued debt due to inflation.
With regards to the housing market, examples of financial innovation with positive impact are also manifold. First, consider the concept and innovation of ‘short selling’, where an investor borrows a share, sells it to someone and hopes to buy it back for a lower price. Ofek and Richardson have demonstrated a link between restrictions on short selling and the dotcom bubble, arguing that when investors are restricted in their ability to short sell a stock, they are unable to “bring markets back to reasonable price levels”. While short selling in the housing market is still difficult, certain financial products like Exchange-Traded Funds (ETFs) that track the inverse of a portfolio of REITs, may provide some opportunity for investors to do so. Evidently, new financial products that allow investors to short sell the housing market, will make the markets more efficient and the advent of a bubble less likely.
Second, while mortgage-backed securities have a negative image due to their tie to the onset of the global financial crisis of 2008, they have also had positive effects. Particularly, they have ensured a higher supply of capital to potential lenders, making housing more affordable. In addition, “securitised mortgage debt […] makes people’s consumption considerably more resilient to the ups and downs of the business cycle”. The underlying theory is that when banks could sell parts of their mortgages, they could “continue to provide credit to consumers even in downturns”
And third, home equity protection may provide protect homeowners against declining housing prices. Home equity protection may come in different forms, such as an insurance, where a homeowner would pay a regular fee and receives a pay-out when house prices fall below a certain level. So while the report argues that “financialized housing markets have caused displacement and evictions at an unparalleled scale”, financial products like home equity insurance may in fact counteract displacement and allow homeowners to protect themselves against events like the global financial crisis of 2008.
So from inflation-indexed debt to home equity protection, these examples show a different side of financialization. They demonstrate that financialization is not inherently bad or good. Rather, in the housing market and elsewhere, financial innovation can have both positive and negative effects. And while the need for additional regulation to counteract the negative effects of financial innovation (as the report recommends) is clear, we should not forget that new financial products may effect positive change in global housing markets, possibly making this human right more affordable and accessible to people across the globe.
- Statement by the Special Rapporteur on the right to adequate housing, Leilani Farha, during the Interactive Dialogue at the Human Rights Council (2017): https://www.ohchr.org/en/NewsEvents/Pages/DisplayNews.aspx?NewsID=21264&LangID=E
- Report of the Special Rapporteur on adequate housing as a component of the right to an adequate standard of living, and on the right to non-discrimination in this context (2017): https://documents-dds-ny.un.org/doc/UNDOC/GEN/G17/009/56/PDF/G1700956.pdf?OpenElement
- The Early History of Fire Insurance (Evans, 1987): https://www.tandfonline.com/doi/abs/10.1080/01440368708530888?journalCode=flgh20
- DotCom Mania: The Rise and Fall of Internet Stock Prices (Ofek & Richardson, 2003): http://pages.stern.nyu.edu/~eofek/DotComMania_JF_Final.pdf
- Financial globalisation and securitisation in mortgage markets (Hoffmann & Nitschka, 2009): https://voxeu.org/article/macroeconomic-benefits-mortgage-backed-securities