The Financialization of Housing

A political economy approach

Manuel B. Aalbers

• Publisher: Taylor & Francis
• Year: 2016
• eBook ISBN: 9781317361787
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Due to the financialization of housing in today's market, housing risks are increasingly becoming financial risks. Financialization refers to the increasing dominance of financial actors, markets, practices, measurements and narratives. It also refers to the resulting structural transformation of economies, firms, states and households. This book asserts the centrality of housing to the contemporary capitalist political economy and places housing at the centre of the financialization debate.

A global wall of money is looking for High-Quality Collateral (HQC) investments, and housing is one of the few asset classes considered HQC. This explains why housing is increasingly becoming financialized, but it does not explain its timing, politics and geography. Presenting a diverse range of case studies from the US, the UK, the Netherlands, Germany, Italy and Spain, the chapters in this book include coverage of the role of the state as the driver of financialization processes, and the part played by local and national histories and institutions. This cutting edge volume will pave the way for future research in the area.

Where housing used to be something "local" or "national", the two-way coupling of housing to finance has been one crucial element in the recent crisis. It is time to reconsider the financialization of both homeownership and social housing. This book will be of interest to those who study international economics, economic geography and financialization.

1 Introduction

Financialization and Housing Studies

In contemporary Western societies, financial activities are a defining characteristic not only of the corporate economy, but also of politics, the welfare and social security system, and general culture.

(Knorr Cetina and Preda, 2005: 1)

What is Financialization?

The term finance is often used without any explicit conceptualization of what it means. This is not necessarily problematic; terms are often used without conceptualizing or defining them, and many daily terms are not so easy to define. Yet, it may help to take a step back and ask the question: What is finance? Google this quest ion and one of the first answers is Daniel Kurt’s definition on investopedia.com:¹

‘Finance’ is a broad term that describes two related activities: the study of how money is managed and the actual process of acquiring needed funds. Because individuals, businesses and government entities all need funding to operate, the field is often separated into three sub-categories: personal finance, corporate finance and public finance.

Other websites highlight that finance was originally a French term adopted into English to mean “management of money”. Finance is sometimes also considered as the equivalent of the exchange of available resources:

Finance is not restricted only to the exchange and/or management of money. A barter trading system is also a type of finance. Thus, we can say, Finance is an art of managing various available resources like money, assets, investments, securities, etc.²

Combining these different definitions, finance can be considered as the management of funds one owns outright, raised funds (e.g. through shares) and borrowed funds (e.g. loans) for personal, corporate or public goals.

Financialization, in its most basic terms, is then the process by which something or someone is managed as a fund; thus a more elaborate definition would read:

the increasing dominance of financial actors, markets, practices, measurements and narratives, at various scales, resulting in a structural transformation of economies, firms (including financial institutions), states and households.

(Aalbers, in press)

There are many other definitions of financialization³ and I am not arguing that my definition is necessarily the best one. Other definitions can be used. Some are more precise, but often definitions tend to be too specific and narrow to capture the essence of the process. Krippner’s definition of financialization—‘a pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production’ (Krippner, 2005: 14)—is very popular in the financialization literature, but is only useful if one studies patterns of accumulation and many of the studies that use Krippner’s definition do not. Moreover, the idea of a “pattern of accumulation” has certain theoretical connotations that will be mobilized by such a definition. Many of the studies that cite Krippner seem to uncritically copy her definition, without reflecting on the meaning and use of the concept.

Financialization also has been criticized, either because the concept is considered imprecise, vague and chaotic or because the presented evidence supporting the financialization claim is disputed (e.g. Christophers, 2015). To some extent, the critics are right: financialization can be a very loosely defined concept that covers many processes, structures, practices and outcomes at different scales and in different time frames. Furthermore, sometimes financialization is the explanandum (the phenomenon to be explained), sometimes the explanans (the thing that explains) and sometimes as a mechanism intervening between causes and consequences (Aalbers, in press). In that sense, financialization is not that different from other concepts whose academic and media popularity rose quickly and which are simultaneously criticized for being imprecise and vague—globalization and neoliberalism are cases in point. Part of the intellectual journey of the use of concepts is that they problematize existing conceptualizations and understandings of what caused what. The literature on financialization thus is part of a larger attempt to understand the non-linear, multidimensional, multi-scalar complexity of contemporary societies and economies (Aalbers, in press).

In this book, I will demonstrate the specificities of housing as a central aspect of financialization. Currently, housing is a relatively minor theme in the financialization debate, and likewise, financialization receives little attention in the interdisciplinary field of housing studies—but this is beginning to change. A small but growing literature on the financialization of housing is emerging, covering financialization through overpriced and overextended loans (Newman, 2009; Waldron, 2014; Walks, 2013), through mortgage securitization (Aalbers, 2008; Gotham, 2009; Wainwright, 2009), through credit scoring of aspiring home owners (Aalbers, 2008, 2011; Hall, 2012), through land use planning (Coq-Huelva, 2013; Kaika and Ruggiero, 2014; Savini and Aalbers, 2015), of private serviced residences (Trouillard, 2013), and of subsidized housing (Fields, 2014; Heeg, 2013; Uffer, 2014).

The financialization literature is commonly divided into three strands: financialization as a regime of accumulation (Régulation Approach political economy), financialization as the rise of shareholder value (critical social accountancy), and financialization of daily life (cultural economy) (see also Chapter 3). In these different strands housing either plays a minor role or is simply seen as one of the bearers of financialization. Despite the varied analyses of the financialization of housing and the importance of housing to financialization, the relations between housing and financialization remain under-researched and under-theorized. The financialization of housing is not a specific from of financialization, as it transcends several forms.

One key argument of this book is that housing and finance are increasingly interdependent and that the financialization of housing is the general mechanism through which we can analyse this growing interdependence. This mechanism has different drivers, including the “wall of money” (Chapter 5) and wider tendencies towards globalization, neoliberalism, privatization and “regulated deregulation” (in particular Chapters 4 and 7) but also include financial-technological changes such as credit rating, credit scoring and the construction of new financial markets (Chapter 3). The mechanism of the financialization of housing comes in different empirical forms: the securitization of mortgage loans (in particular Chapter 3), the rise of subprime and predatory lending (Chapter 3), rising mortgage debt for households (in particular Chapter 6), the entry of private equity firms, hedge funds and publicly listed real estate firms in subsidized rental markets (Chapter 7), and finally the reliance of non-profit housing associations on social housing bonds and complicated financial derivatives (Chapter 7).

The relationship between privatization and financialization is a complicated one. In some cases privatization directly created the conditions for financialization (e.g. the privatization of social housing, followed by rising mortgage debt and securitization). In other cases privatization itself was financialized (e.g. the sale of entire public housing companies to private equity firms—“financialized privatization”). Finally, financialization can be an indirect consequence of earlier rounds of privatization (e.g. the use of social housing bonds or derivatives by privatized housing associations). More generally speaking, markets first need to be created before privatization and financialization can be fully developed. Through a process of “regulated deregulation” (Chapter 7) markets are not so much deregulated or liberalized, as is often argued, but created and re-created— markets need regulation to make them work.

This book contributes to the debate in at least three ways. First, there are still very few studies that focus on the financialization of housing per se, with financialization often lingering in the backstory. Housing is a key field to witness, research and understand the financialization of non-financial firms and industries, that is traditionally non-financial firms and industries are increasingly partaking in practices that have been the domain of the financial sector and are being dominated by financial narratives and practices. This book places housing in the centre of the financialization debate, but also places financialization in the middle of housing and urban debates.

Second, this book contributes to the small but growing literature on the financialization of the semi-public and public sectors, by focusing on the role of states in financialization processes in general and by presenting evidence of the financialization of subsidized housing in particular. While some authors conceptualize financialization in terms of “less state and more market”, I argue that states and semi-public institutions are increasingly dependent on financial markets and are also evaluated using similar tools applied to firms. The state is often the driver of financialization processes, for example by pushing families into housing debt, by enabling financial institutions to buy up subsidized housing, or by simply withdrawing from providing or regulating the housing sector and opening up the field to rent-seeking financial institutions. All these forms of financialization are investigated in this book. The financialization of and through the state is one of the research frontiers to be explored in the coming years.

Third, the financialization literature is dominated by studies from the UK and particularly the US. This book discusses how the financialization of housing takes place in sometimes similar and sometimes quite different ways. Examples from the US, UK, the Netherlands, Germany, Italy, and Spain illustrate not only the emergence and commonalities of housing financialization but also the key and persistent influence of national—and to some extent also local—histories and institutions. Some cases show how financialization takes place in the context where states that were traditionally deeply involved in regulating the housing market, to safeguard affordable housing for all (rather than only the very poor), are increasingly transferring social responsibilities, either actively or passively, to financial actors and financial markets.

This book aims to reach not only academics and libraries, but also students, housing sector practitioners and politicians. Some academics may find the tone of the book too journalistic or essayistic and not theoretical or methodical enough. They may consider the examples too simple, perhaps even simplistic, for an academic book, but I hope these examples and descriptions will help the other readers to understand what the financialization of housing really implies. Theoretical, conceptual sections (in particular Chapter 2 and parts of Chapters 3 and 5) are mixed with more descriptive and essayistic chapters. The real-world descriptions in Chapters 6 and 7, for example, serve to make the more abstract reasoning in earlier chapters clearer and more accessible. Chapter 4 is written in a more essayistic style and aims to bring together the conceptual with the more descriptive chapters. The concluding chapter is largely non-theoretical and may disappoint those readers expecting a big, sweeping conceptual conclusion—I hereby refer those readers to Chapters 2–5 of the book. Instead, the concluding chapter questions the idea of housing wealth and discusses a possible politics of de-financialization of as well as beyond housing.

The following questions will pique the interest of academic readers: Why has the financialization literature paid so little attention to housing, and why has the field of housing studies demonstrated relatively little interest in financialization? The next section will look at one type of studies within the interdisciplinary field of housing studies: comparative housing studies. I will present a sympathetic critique that suggests that, despite the label “comparative”, a great deal of these comparative studies focus on explaining differences between national housing systems, rather than coming to an understanding of the remarkably common trajectories (but not necessarily convergence) shared between countries. These pathways are partly driven by globalization processes, not only in the economic sense but also including different ideologies (Doling and Ford, 2003; Ronald, 2008). In recent decades, these were in particular incarnations of neoliberal ideology that naturalize not only housing commodification and privatization but also financialization.

The financialization literature is primarily embedded in the wider interdisciplinary field of political economy, where social scientists of all stripes come together to discuss economic issues. The term is used widely by a range of different traditions, including political scientists, sociologists, geographers and other social scientists. It is not always easy to define political economy in its entirety, but it is possible to define political economy as op...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Figures
• List of Tables
• Credits and Acknowledgements
• 1 Introduction: Financialization and Housing Studies
• 2 Centring Housing in Political Economy
• 3 The Financialization of Home and the Mortgage Market Crisis
• 4 The Great Moderation, the Great Excess and the Global Housing Crisis
• 5 Financialization and Housing: Between Globalization and Varieties of Capitalism
• 6 Mortgage Lending and House Price Developments in Germany, Italy, Spain, the Netherlands and the US
• 7 The Financialization of Subsidized Rental Housing
• 8 Conclusion: The Twenty-First Century Housing Question
• Index