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The topic of financialization of housing in the global markets is of deep importance as It sets the trends of future development in developed and developing countries and changes the way the interlinked economy works. It affects the direction of money flow from a country to another as well as from one asset type to real estate. Such macro changes of capital flows affect the development scenarios and the FDI in or out of the country. Hence in countries of increasing population and increasing demand for housing, efforts can be seen to open their markets to private equity, HNI, FPI’s, and corporate investors. This helps them to keep fiscal deficit under check and increases investments, but at the same time escalates housing prices artificially to unsustainable levels which increases the rich -poor divide and leads to income and systematic inequality.
Financial engineering has increased complicated products available on the counter, but their understanding to retail investor today is limited. The use of various instruments in the 2008 financial crisis initially led banks to make money on offloading CDO’s little realizing the credit quality of the underlying asset. Hence regulation is necessary to keep a level playing field and to make sure of an element of housing for all goals to the Sustainable Development Goals. Such lending culture opened the doors for predatory lending practices to sub prime borrowers and turned housing into a commodity market, where the goal was to make speculative short-term profits. This arbitrage opportunity attracted short term money in the market and increased liquidity led to supply demand anomalies in many major cities. As a result, the financial system’s growth has been outstripping the real economy’s growth in many developing nations. The increased prices draw up one’s lifetime of savings into a real estate investment and make their financial position highly leveraged. This leads to large scale foreclosures in the small income and marginalised groups increasing the inequality in the social fabric of society.
Another argument against financialization of housing is the complete disregard of the human rights aspect of housing. Government, private equity funds financial institutions and investment banks making short term money, none are being accountable when it comes to the issue of ‘housing for all objective of the sustainable development goals’. In many instances States are obligated to defend the interest of financial institutions and any measure to correct the situation is also tilted towards them. The spending on bailouts after financial crisis outstrips the spending on the victims of the sub-prime crisis. In many European countries the spending on affordable housing and infrastructure has been reduced after the crisis. Austerity measures have been brought in to be borne by the low-income groups. Measures like increase in taxes in Greece after crisis led to large scale protest and showed disparity in systems and inequality. In some cases, lenders were also blamed for taking too much debt instead of the unethical lending practices and asset quality checks which lead to increased strain in the market sand erosion of lifelong savings.
One of the effect of the global surplus capital in the housing market has ked to the creation of safety deposit boxes for institutional investors and corporate houses. Such arrangement sin capital attracting countries lead to stashing of money in “hedge” cities and rapid escalation of prices. This leaves the retail investor and first-time buyer in a quandary as one is forced to reach beyond their capability to buy property, leading to highly leveraged positions. This acts as a dual incentive of for corporations as prices get high an upon foreclosures, asset reconstruction (ARC) companies can pile up high value assets for cheap money. Rented home and mortgages owned by remote investors operating from offshore offices leads to outward monetary flow from the city and increases the income disparity between countries and between people.
There are numerous steps a State can take to straighten the housing market. Regulation of financial products being offered and only to those who can afford it is necessary. While offloading MBS of different tranches of asset quality, companies should mandatorily give disclosures and hold a fixed percentage of that tranches of asset on their portfolio. This will improve the credit culture of the system and check predatory lending practices. Countries and even states can tax the remote investors and fix accountability on speculative gains made in transactions. The capital gains tax can be structured in accordance to the holding period of the asset. Such steps have been taken by some countries and will help to bring money back in the host economy in the form of taxes. This can be used to cater to the idea of affordable housing in various cities and allow financialization of housing to lead to a positive result.
Countries should take an effort to protect small investors and first-time buyers on a diplomatic level. Various international conventions and treaties which protect offshore investment and allow foreign ownership and tax benefits should also cater to protect local home buyers as they invest in the house and in building the community. Laws regarding foreclosures need to be redesigned and it need to be used only as a last option i.e. after exploring restructuring and other tools to resolve dispute. To achieve the housing for all goals of the SDG’s states can make it binding for proper rehabilitation of displaced population, along with a fixed percentage of affordable housing in all projects being undertaken.
Hence, effort on various fronts needs to be made like asset quality checks, lending practices, taxation of remote investors, allocation of specific portion to affordable housing, taming excessive speculation in housing market, redesigning of financial engineered products and most of all a culture of seeing housing as aright in accordance to one’s capability, not as one’s desire.
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