The Political Economy of Housing Financialization

By Gregory W. Fuller

The US subprime mortgage crisis, by nearly causing the collapse of the global financial system during the 2007–08 financial crisis, clearly revealed that household debt management is critical to the stability of the international economy. The configuration of mortgage finance systems of European economies, from the UK to Sweden to Spain, have profound effects on national macroeconomic and political outcomes.

In this book, Gregory Fuller reveals how national housing systems diverge in terms of their commodification and financialization: mortgages are far more common in some systems than others; some encourage families to treat housing as a tradeable asset while others do not; and certain states provide extensive social housing programmes while others offer virtually none. These differences are shown to have an impact on households’ economic precarity, macroeconomic volatility, and ultimately on their political preferences. Drawing on these comparisons, Fuller offers a number of policy suggestions intended to weaken the links between housing, economic instability, and inequality.

• Language: English
• Publisher: Agenda Publishing
• Release date: Jul 26, 2019
• ISBN: 9781788212359

Gregory W. Fuller

Gregory W. Fuller is Assistant Professor of International Political Economy at the University of Groningen, the Netherlands. He is the author of The Great Debt Transformation (2016).

Book preview

The Political Economy of Housing Financialization

Comparative Political Economy

Series Editor: Erik Jones

A major new series exploring contemporary issues in comparative political economy. Pluralistic in approach, the books offer original, theoretically informed analyses of the interaction between politics and economics, and explore the implications for policy at the regional, national and supranational level.

Published

Europe and Northern Ireland’s Future

Mary C. Murphy

The New Politics of Trade

Alasdair R. Young

The Political Economy of Housing Financialization

Gregory W. Fuller

Populocracy

Catherine Fieschi

The Political Economy of Housing Financialization

Gregory W. Fuller

© Gregory W. Fuller 2019

This book is copyright under the Berne Convention.

No reproduction without permission.

All rights reserved.

First published in 2019 by Agenda Publishing

Agenda Publishing Limited

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Bath Lane

Newcastle Helix

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www.agendapub.com

ISBN 978-1-78821-099-7 (hardcover)

ISBN 978-1-78821-100-0 (paperback)

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library

Typeset by Newgen Publishing UK

Printed and bound in the UK by TJ International

Contents

Acknowledgements

Foreword by Erik Jones

1Housing and the great debt transformation

2Housing and financialization

3Housing and macroeconomic instability

4Housing and inequality

5Housing and politics

6Housing and the future

Bibliography

Index

Acknowledgements

This book arrives at a changeable time in the political economy of developed countries. Traditional political alliances continue to fracture even as we face looming uncertainties in issues like Brexit. The challenge for a book like this is to identify political and economic relationships that cut through – and perhaps partly explain – the upheaval we see in the media every day. Such an effort would not have been possible without the support of a number of people.

First, I owe many thanks to the team that encouraged me to write this book, then shepherded it through the publication process. That starts with Erik Jones, series editor and mentor extraordinaire – without whom I would have no academic trade to ply. It continues with the team at Agenda Publishing, particularly Alison Howson, as well as Clare Owen at Newgen Publishing.

Second, my understanding of the political economy of housing – as well as financialization – has been greatly enhanced by my work with a number of colleagues. Above all, this includes my frequent partners-in-crime, Alison Johnston and Aidan Regan, with whom I have published a number of articles related to the central themes of this book. More broadly, I am deeply grateful to the fantastic interdisciplinary community of Europeanists, financialization scholars, and housing market specialists dedicated to improving our understanding of how both financial markets and housing systems interact to affect our lives. Where at all possible, my thanks are offered in citation form! I also owe a debt of thanks to the anonymous reviewers of this manuscript.

Finally, I could not complete any writing project at all without the forbearance, forgiveness, support, and love of my family. This book is for Abby and Carole – my sunshine and my unfailing anchor – and all the sacrifices they make to keep me writing. I promise I’ll take a break for a while.

Foreword

Erik Jones

At some point in the early months of 2007, the words sub-prime mortgages began to filter into the popular press. By the end of that August, they were ubiquitous. This small section of the high-risk, high-yield housing finance market in the United States sparked a global financial and economic crisis that would scar a generation. The stories that emerged to explain how this happened were the stuff of fiction or perhaps something even stranger. Banks booked mortgages to people with no demonstrable assets or income, at introductory rates that quickly reset to terms that only the most resilient of households could afford. By the time the borrowers defaulted, however, the banks had sold the mortgages to other investors using complicated securitization instruments that effectively hid the risks involved. The institutions left holding the bag were not only unaware of the dangers they faced but were completely unprepared for the consequences.

The sub-prime mortgage disaster sounds improbable after the fact and caught many by surprise from start to finish. It would be easy to assume, therefore, that the whole episode could be marked down to some horrible financial accident where the most dangerous financial market participants played with the most volatile financial instruments and nearly brought the whole advanced industrial global economy down with them. Indeed, it would be comforting if that were the case. Then all we would need to do is discipline the people and regulate the instruments.

Unfortunately, the forces that created the US sub-prime mortgage problem are not accidental; they are structural. Moreover, once you understand which are the structures involved, there is little mystery to why the crisis started in the sub-prime mortgage sector, why the epicentre was located in the United States, and why the securities created out of sub-prime mortgages found their way onto the balance sheets of financial institutions across advanced industrial economies. There is also no mystery why a crisis in the US sub-prime mortgage sector would bring the global financial economy to its knees.

This structural account is what Gregory W. Fuller brings to life in his analysis. He explains why it is that banks have come to rely on households to create assets for investment as the money that can be made from intermediating savings in the non-financial corporate sector have outstripped the revenues available from real investments. The role of securitization in this account is to provide an essential lubricant, making it easier for banks to create assets out of household borrowing and then turn those into cash that can be lent again. Moreover, the story traces back to the problem of macroeconomic imbalances where savings in one country move across borders to chase foreign opportunities for investment. In the reverse of the usual pattern, what looks like a finance and microeconomic problem on the surface quickly reveals its underlying macroeconomic foundations.

Residential real estate lies at the centre of this dynamic because housing is the most valuable asset that families have to pledge when they take on debt. In turn, this means that households can enhance their leverage when borrowing – which is another way of saying that banks can create larger assets at lower risk by convincing households to take on mortgage debt. Even the famous sub-prime mortgages are backed by residential real estate as collateral and so compare favourably to unsecured student loans or consumer debt.

This dynamic manifests differently from one place to the next. Countries that attract more savings from abroad are more powerfully affected by the hunt for yield in the financial sector and the pressure to convince households to take on mortgages; so are countries where the governments make it easier for banks to securitize new lending and so pass along the risks associated with the assets they create. The United States is the world’s leader in both attributes, as a haven for foreign portfolio investment as an efficient securitization market. Other countries like Denmark tend to finance their mortgage markets domestically and they also tend to force their domestic banks to hold onto the risks associated with the assets they create. The Danes have enormous household borrowing and associated housing bubbles, but their problems are not those found in the United States.

These cross-country differences are important because they explain the variation in how the dynamics of housing finance manifest across countries; the differences in national experiences do not shed much light on how policymakers can solve the associated problems. Instead, they present policymakers with a series of complex trade-offs – many of which boil down to striking a balance between the advantages of extending credit to poorer or at risk members of society and the stability that comes from financial repression.

There is no magic formula for avoiding the next crisis or for escaping the inequalities of income and access. Instead, what Fuller offers is a better understanding of how everything is connected through housing finance and what are the consequences of policy action and inattentiveness. His book may not help us avoid the next crisis – anyone who claims to have beaten the financial cycle should be regarded with deep suspicion – but Fuller’s book can help us anticipate problems before they emerge and it can help us recognize the symptoms that spell impending disaster. As such, Fuller’s book is essential reading not only for understanding the last crisis but also for preparing for the next.

1

Housing and the great debt transformation

Housing markets play a key role in shaping political, social and economic outcomes across the developed world. For many European families, the family home is the most valuable asset they will ever own – and the mortgage used to buy that home will be their largest debt. Across the European Union (EU), there are €7 trillion in residential mortgage loans outstanding (EMF 2018). That is just under half the EU’s annual gross domestic product (GDP), smaller than the €10-trillion market for non-financial corporate loans but far larger than the €2-trillion European market for those companies’ bonds (OECD 2018). Moreover, €7 trillion is a significant understatement of the financial importance of European households; banks create secondary assets derived from consumer lending, especially from mortgages (i.e., derivatives like mortgage-backed securities or collateralized debt obligations). This effectively results in the creation of multiple layers of financial-sector liabilities sitting on top of a smaller amount of household debt. As more of these mortgage-derived financial products are bought and sold across borders, malfunctioning housing markets in one major country increasingly have profound global consequences – as the late 2000s financial crisis definitively revealed.

In short, housing matters. When assessing the drivers of economic volatility and of inequality, housing must be part of the discussion. When analyzing the effects of capital sloshing from one national financial system to another, housing must be part of the discussion. And when debating the politics of risk and distribution, housing must be part of the discussion. More and more, experts from a variety of backgrounds have begun to realize this, generating a growing wave of studies into the social, political and macroeconomic consequences associated with housing institutions and policies. These investigations have clustered around two core arguments. First, housing market structures can generate both national and international macroeconomic volatility; second, policies and institutional configurations within housing markets can affect inequality (particularly wealth inequality). Two 2014 academic books that each caught mainstream attention present a good starting point for these arguments.

Atif Mian and Amir Sufi’s (2014) House of Debt forcefully made the case that malfunctioning housing markets cause macroeconomic instability. Using local housing data from the 2000s housing boom in the United States, they showed that neighbourhoods with more indebted households suffered more pronounced economic downturns; basically, where households took on more debt, families were forced into more severe bouts of deleveraging (i.e., saving in order to pay down previous debts). It turns out that this pattern is consistent with the findings from a number of other boom-bust postmortems over the decades, each of which tended to show that countries with greater private debt accumulation in good times tend to experience sharper recessions (King 1994; Jordà, Schularick & Taylor 2013).

Housing debt can also fuel instability by encouraging greater levels of external indebtedness. That is, banks can sell mortgage-derived financial products to foreign investors, helping an economy bring in the foreign currency needed to sustain a current account deficit (Fuller 2016). This is important because of what Ricardo Caballero, Emmanual Farhi and Pierre-Olivier Gourinchas (2017) call the global safe assets shortage. In brief, there is more global demand for safe financial products than there is supply. Globally, low interest rates and slower growth have combined to generate lots of liquid capital and relatively few decent uses for it. Mortgage derivatives can soak up some of that liquidity, as Herman Schwartz (2014) has found with pension funds, for example. Fully funded pension schemes must buy savings products with decent returns in order to function, meaning that household-derived financial products and funded pension structures are complementary to one another. This complementary relationship is not necessarily confined to within national systems, either – investment funds in one country can invest in the mortgage derivatives produced by another country. This means that instability in housing markets can contagiously spread, given the right conditions.

Turning to inequality, Thomas Piketty’s (2014) shock bestseller, Capital in the Twenty-First Century, unintentionally thrust housing into the centre of an intensifying debate over wealth distribution in advanced capitalist economies. Piketty was himself not terribly concerned with housing. Instead, he wanted to lay out a new set of capitalist laws revealing that the return to capital tends to rise faster than economic growth in general (in his formulation, that r > g) – a trend that was only briefly reversed during the immediate postwar period. In assessing Piketty’s ideas, however, supporters and critics alike have identified housing wealth as the key driver of this phenomenon. When housing prices rise faster than economic growth, aggregate wealth levels rise faster than ordinary wage incomes. Indeed, when housing wealth is excluded from these calculations, the relative jump in capital income that Piketty found becomes far less pronounced (Bonnet et al. 2014).

There are, nevertheless, substantial disagreements over what has caused housing prices to rise. Ben Ansell (2014, 2017b) has echoed an established argument within the community of housing scholars by maintaining that families have grown increasingly reliant on housing wealth as a substitute for disappearing welfare-state spending (Malpass 2008). The more sceptical Matthew Rognlie (2015) disputes this, maintaining that housing price changes simply reflect the increasing scarcity of attractive housing in certain areas. From a strictly classical economic perspective, some argue that rent, not housing prices, should matter for the dynamics of wealth inequality (Bonnet et al. 2014). In other words, the true value of housing should be determined by the present value of future rents, not current market value. If we look at housing wealth in this way, the increase in wealth-to-income ratios disappears; rents, it turns out, have not grown to the extent that housing prices have. Beyond large landlords, however, there is an open question as to how many real-life actors actually view housing wealth this way.

Despite these findings, there have been relatively few efforts to connect national housing systems to major political-economic events. The most substantial exception to this has been Ansell (2017a), who convincingly argues that housing prices were a potent predictor of whether British households would support or oppose Brexit in the referendum of June 2016. He found that homeowners whose housing prices were high and rising were far more likely to oppose Brexit – even when accounting for different wages and locations. This book follows Ansell’s lead; I maintain that inequality and instability tend to rise fastest where housing has been most commodified – particularly where it becomes more subject to financial market forces (or financialized). In sum, this book provides answers