The Financialization of Housing
Is Housing a Right or a Commodity?
Human Rights and the United Nations
In March 2017, Lailani Farha — the Special Rapporteur on the right to adequate housing — presented to the UN General Assembly a report on the “Financialization of Housing” and its impact to human rights. Farha argued that residential financialization (in the form of mortgage-backed securities) caused housing prices to spike, resulting in a crisis of unaffordability, displacement, and homelessness across the globe.
In that same session, Farha shared her observations of the widening wealth gap in two countries: India and Portugal. Farha noted that in India (a country with 1.3 Billion residents), over 58.6 Million households did not have adequate housing. She also stated the lack of affordable housing in Portugal was exacerbated by that country’s austerity measures in response to the Great Recession.
Farha’s report to the United Nations made these assertions:
- Financialization undermines democratic governance and community accountability.
- Financialization of housing exacerbates inequality and social exclusion.
- Financialization detaches housing from its connection to communities and to the human dignity and security that are at the core of all human rights.
Farha urged governments to “redefine their relationship with private investors and international financial institutions” to provide housing for all their citizens, with the goal of eliminating homelessness by 2030.
“Housing has been financialized: valued as a commodity rather than a human dwelling, it is now a means to secure and accumulate wealth rather than a place to live in dignity, to raise a family and thrive within a community.”
Property Rights: from Serfdom to Ownership
Real Estate is a legal term used in jurisdictions derived from English common law, including India, England, Wales, Northern Ireland, United States, Canada, Pakistan, Australia, and New Zealand. The history of English Land Law can be traced back from Roman times, to Anglo-Saxon Law, to Feudalism, and ultimately to Modern Land Law.
The evolution of English Land Law mirrored the diminishing political power of the aristocracy. Changes in property rights reflected the ascendency of individuals from serfdom to land tenants (or owners). In the 18th century, the philosopher and economist Adam Smith declared that the “right to property” was an acquired right, in contrast to the natural rights of “liberty and life.” In 1776, Smith published The Wealth of Nations in which he described both the landlord-tenant relationship, and the rent expected from a tenant in exchange for occupying the landlord’s private property.
Today, real estate is the largest ownership class on the planet. In 2015, global real estate had total value of USD $217 Trillion — nearly 60% of all assets. Residential real estate accounted for USD $163 Trillion, or 75% of this total. Land ownership is a lynchpin of capitalism and is absolutely a source of wealth.
“As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce.”
Financialization, Liquidity, and Regulation
Adam Smith couldn’t have imagined the financial instruments we have today which include Collateralized Mortgage Obligations (CMOs) and Collateralized Debt Obligations (CDOs). These investment vehicles allow portfolios of mortgages to be bundled together and sold to investors in the form of bonds or other financial instruments on the secondary bond markets.
CMOs are mortgage-backed securities with pass-through cash flow organized into tranches (“AAA”, “AA”, etc.) by maturity and prepayment risk. CDOs are backed by fixed-income assets and divide their cash flow in tranches, based on maturity and risk of default.
The securitization of mortgages promotes liquidity. Most lenders are in the loan origination business, and unless they can resell mortgages through CMOs (or CDOs), they will eventually run out of capital until their loans are repaid over time. If lenders resell their mortgages, they recover their working capital quickly and can lend it out again.
But financialization only works if the risk of underlying obligations is properly assessed, and “AAA”-rated securities are actually high-quality investments. During the Financial Crisis of 2007–2008, not enough scrutiny was placed on the subprime mortgage market in the United States. This led to upheaval in the banking sector with the bankruptcy of Lehman Brothers, and the acquisitions of Bear Stearns and Merrill Lynch (by JPMorgan Chase and Bank of America, respectively). These failures started a chain of events including a 770-point drop in the Dow Jones Industrial Average (its biggest single-day decline), the Federal takeover of Fannie Mae and Freddie Mac, and the government bailout of the Big Three U.S. automakers.
In the aftermath of the Financial Crisis, the United States enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Dodd-Frank reorganized the financial regulatory system, assigned new responsibilities to the Federal Deposit Insurance Corporation (FDIC), and created the Consumer Financial Protection Bureau (CFPB). Also codified in Dodd-Frank are protections against systemic failure of the international financial system, so called macroprudential regulations.
“[February 1997 to October 2006] was a period of intense speculative enthusiasm — for houses and for financial instruments based on mortgages as investments — and it was also a time of great regulatory complacency… That boom ended disastrously.”
Government and the Welfare of Its Citizens
The financialization of homes should not be summarily condemned. Capital Markets have a positive impact in global property development. Mortgage securitization promotes liquidity in lending, which results in private sector improvements to real estate markets.
However, a purely market-driven approach to real estate will not provide housing to all citizens. The 2017 report by the UN Human Rights Council describes some outcomes of unconstrained housing markets:
- Housing removed for speculation: “A significant portion of investor-owned homes are simply left empty.”
- In Australia: “average-income single female workers can afford to live in only one suburb of Melbourne and cannot afford to live anywhere in Sydney.”
- In Manhattan: The High Line “attracted wealthy investors to a mixed income neighbourhood, radically transforming it with luxury housing units costing in the multimillions, and displacing longer term residents.”
- In Vancouver: new public transport facilities in Burnaby, “led to the development of expensive condominium towers” and displaced longtime residents.
The most troubling result of unchecked real estate markets: increasing wealth inequality. Rich households that own property in prime urban locations will become richer. Lower-income households will spend an outsized portion of their paychecks on rent, and become poorer. If these conditions endure, the population will ultimately become polarized into a wealthy aristocracy and a struggling lower class. In the limit, society will devolve back to resemble the Feudalism which prevailed in the Middle Ages.
Capitalist societies thrive when there is a vibrant middle-class. Governments can allow wealth generation to occur, but should also enact regulations to provide affordable shelter for those at the lower end of the economic spectrum.
“Most of the crimes which disturb the internal peace of society are produced by the restraints which the necessary, but unequal, laws of property have imposed on the appetites of mankind, by confining to a few the possession of those objects that are coveted by many.”
Holding Nations Accountable
In March 2019, Lailani Farha followed-up her 2017 report with letters to six nations expressing concern about policies which “undermine the enjoyment of housing as a human right.” These letters were a plea to regulate investment in residential real estate in support of adequate housing:
- Letter to the Czech Republic
- Letter to Denmark
- Letter to Ireland
- Letter to Spain
- Letter to Sweden
- Letter to the United States of America
Examples of government policies to ensure inclusive housing, from Farha’s 2017 report:
- British Columbia, Canada: “introduced a 15% foreign homeowner tax.”
- Vancouver, BC: “1% tax to both foreign and domestic investors, on vacant homes.”
- London: “builders will be required to ensure that 35% of new homes that are built are genuinely affordable.”
“Let us be clear at the outset that the liberty of individuals to carry on their business should not be abrogated unless the larger interests of the many are concerned. It is the purpose of government to see that not only the legitimate interests of the few are protected but that the welfare and rights of the many are conserved.”