Financialization of the Housing Market

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In recent years the number of developing countries has increased significantly and with that the global population. In all countries but even more so in developing countries, housing and real estate have been traditionally seen as a place to live but that is fast changing with the financialization of housing. Financialization of housing means using real estate as a commodity which can be bought and sold as securities rather than a place to live.

Financialization of housing has created a system of “mortgage-backed securities” where mortgages are bundled together and sold to investors as securities. The fragility and volatility of such system was revealed in the crises of 2008 along with the potential for catastrophic outcomes for lenders, investors, and homeowners.

The crisis of 2008 was expected to act as a wake-up call for governments and financial authorities of the world to reassess the working of the housing market and the effect it had on millions of lives. However, instead of curbing the activities of the financial housing market to a healthy and stable pace, the governments made it harder for people to get loans than it needed to be. This combined with the rising demand for real estate as an attractive investment leads to an increase of as much as 50% in many cities from 2011.

Housing and real estate have become the preferred commodity for investors and a “safety deposit box” for the wealthy.

Emerging economies like India where the standard of living and incomes are increasing at a healthy pace are facing a common problem. The problem of housing. In India, more than 60% of the population is rural but most of it is quickly migrating to cities in search of a better job and better lives. Though they may be able to find better jobs, the same cannot be said for housing since most of the land is already bought as an investment or a security. What that does is raise the price of land. In major cities like Mumbai and Bangalore, it is impossible to buy a 1BHK apartment for a middle-class person and impossible to find empty land which someone is willing to sell.

Steps have been taken by various governments around the globe to combat this problem. Countries like India have been introducing lower interest rates on home loans and USA and some European countries have made substantial cuts to their housing programs after the financial crisis of 2008. Many countries have addressed the problem of excess capital flows and financialization.

The amount of money that is being poured into the housing sector is so hard to swallow because hardly any of it is being used to do anything productive. In Melbourne, one-fifth of investor bought real estate lies empty. In multiple cities of London, the number of vacant houses increased by 40% from 2012 to 2013. The fact that 58% of all housing purchases in the United States in 2015 were made by limited liability companies rather than named individuals only tells us more about what the current situation of the housing market is. If only a tiny portion of the hundreds of billions of US dollars was used towards improving the inhumane housing conditions that millions live in and access to credit, the living standards, and productivity levels would increase around the world.

Despite the efforts of the authorities after the 2008 crises, the housing market is still less regulated than it should be. The lack of adequate and affordable housing is a basic human right that should not be denied to anyone. The governments must take more steps in order to shift the excess global capital from unproductive uses to the most productive uses.

About the author

Prakhar Singh

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