Financialization of Housing – is it an evil which leads to deprivation and degradation of the poor in society, infringing on their right to housing and shelter? Or is it of great benefit in an open market economy which leads to movement of scarce capital to the sector which has direct impact on human wellbeing, productivity, earning capacity and economic development?
This has been the subject of major debate worldwide due to rising inequality, deprivation and consequently social unrest across the world.
What does Financialization mean?
Greta Krippner of the University of Michigan refers to financialization as “pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production.”
In the introduction to the 2005 book Financialization and the World Economy, editor Gerald A. Epstein says “Financialization refers to the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions, both at the national and international levels.”
In my view both definitions refer to the result of a shift in viewing of an asset as a means of production and capital formation to a financial instrument to be used for trading and speculation in financial markets. This arises from increasing importance of financial markets, financial motives and financial elites in the operations of the economy and the governing institutions, both at the national and international levels.
How Financialisation depletes value
Without adequate regulatory and governance framework being in place financialization, , may fuel speculation . It leads to overvaluation/ undervaluation of the underlying asset without any change in the utility/ productive value of the underlying asset.
Housing and real estate across the world has been a victim of a radical shift. The perception is that these have more speculative value rather than the underlying utility and productive value.
Thus an important means of production and capital formation has been lost to speculation in financial markets across the globe leading to deprivation and loss of productive capacity in an economy.
Whilst financialization remains important for directing private savings into housing / real estate sector for increasing economic activity, capital formation and social wellbeing; strong regulatory framework needs to be in place to ensure that financial instruments derive strong connect with the underlying productive value, when viewed as a means of production.
Financialisation of Housing in India
Unbridled financialisaton of housing in India happened, in many senses, post liberalization in 1991. Real estate became a separate asset class for rich investors which led to housing gradually becoming unaffordable for a large section of the middle and lower middle/lower class. Hygienic and good housing went out of their reach and remained the preserve of the rich and the wealthy. This led to slum-based urbanization as India integrated with the global markets and urbanization started moving at a rapid pace as India grew.
By the time some sort of regulation was conceived in 2013 and enacted in parliament in 2016, the property market was already skewed towards unaffordability. Thus, India faces a peculiar situation where homes lie vacant and held as a form of speculation whilst housing is not available to the needy.
This has severely impeded India’s ability to grow sustainably and equitably.
More challenges in Indian housing
The estimated housing shortage in India is close to 20 million and heavily skewed towards the country’s poorest socio-economic group. Going by the last census in 2011, 56.18 percent of the shortage pertains to households with annual incomes of Rs 100,000, and 39.44 percent is for those with annual incomes of less than Rs. 200,000.
It is the needy and the most important segment of the society, which contribute to the cheap labour force that India boasts of who cannot afford to live in proper housing or do not have scope for permanent affordable housing.
The Public Sector enterprises set up post-independence were mandated to provide workers housing facilities in all their production units as part of their social objectives. Post liberalization with the decline of public sector entities, and the focus on the private sector enterprise these aspects of workers housing was lost. The private sector, barring of course the Tatas at Jamshedpur, Pune, paid scant regard to organized worker housing, so much essential for a productive labour force. Thus, India urbanized faster post liberalization with higher slum population as migration from rural areas happened.
Anecdotal evidence suggest that some 26 lakhs migrants were stranded in various urban and production centers due to announcement of the Covid 19 lockdown in March 2020. As per the census 2011, some 11.09 million residential units forming about 12.28% of the urban housing stock lay vacant. Given that the average household size in India was pegged at 4.66; the available housing stock could have housed some 50 million or 13 % of the urban Indian population. This perhaps, throws significant light on the magnitude of the social and labour productivity issues plaguing India which hinder the quest for becoming a global manufacturing hub
The pandemic, the migrant crisis and the disruption of global and local supply chains have now bought into focus the crying need for regulated growth of the housing finance sector and the need for orderly financialization of housing. This is imperative if India is to achieve its lofty goals of “Make in India” and “Housing for all.” There is a need for financial resources to build some 62.5 million affordable homes in India, targeted at the lower and lower middle class.
The government does not have the financial resources to build the homes in urban and upcoming growth centers. Private financial resources is the only way to meet this huge resource gap. This calls for deeper, orderly and well-regulated real estate sector which offers multiple investment opportunities complete with appropriate returns to compensate for the risk – for building rental and ownership housing.
Setting up of Investment Trusts and creation of a deep Mortgage Bases Securities (MBS) market calls for stronger and well regulated financialization of housing. This will lead to revolution in housing and urbanization in India. It will significantly assist in meeting India’s stated social and economic goals.
Housing and Construction has very strong linkages with other sectors of the economy like steel, cement, ceramics, employment, consumption etc and can lead to tremendous multiplier effect. The National Rental Housing Policy announced by the government is a good step in that direction. The PMAY schemes though well intended has not been able to meet the desired objectives given the paucity of resources – affecting the demand as well as the supply side.
Thus, financialisation of housing can be beneficial only and only if there is a strong regulatory and governance framework in place. It needs focus, political and social will. Without these, unbridled financialization can spell compete disaster for our economy and society. After all a happy society is a productive society !
Sanjoy Banerjee is an industry veteran with a career spanning 39 years across Financial Services, IT and Engineering Industry. He has held leadership positions with marquee corporates including GE, L&T, SRF Finance and ICRA. In his entrepreneur avatar he established Seriata Information Systems in 2000. He is currently a consultant and trainer with leading agencies including CRISIL and IFC. Sanjoy has deep domain expertise in Mortgage and MSME lending expert and has advised and trained across many organisations during the last decade.
Disclaimer: The opinions expressed here are those of the author and does not reflect the views of FrankBanker.com