Crisis report UN 2017: Housing & its financialization

Substantial economical shifts in the housing sector find their roots back in the 2008 financial crisis. In 2017, Leilani Farha, a former United Nations Special Rapporteur, brought light to the controversial aspects of the financialization of housing. During her speech, she attacked the ruling paradigm of the former practice that focuses on housing finance as the main means of promoting homeownership. She demanded a paradigm shift of housing policies based on financialization to a human rights-based approach.

The perception of treating real estate as a commodity or a financial asset has been under strict scrutiny for several years. Unethical business practices that ensued from large private-equity firms have been linked to foreclosures, evictions, and inadequate and unaffordable housing, with a discriminatory effect on lower-income households and other groups. But who is to blame? Is it an inherent fault in the economic model? Would the government with its track record with public housing be the solution? Or is the solution to be found in more public-private partnerships?

The need for adequate housing is real, but it is not as simple as large firms buying all the houses and price gouging rents. It is important to understand the benefits as well as the potential downsides of current systems. Blackstone and Blackrock do not buy all properties in cash. They use debt and raise money from investors and shareholders. Investors include government agencies and the common person. When government employees retire the money is not just printed. Managers like Texas Teachers Retirement System need to grow this wealth to provide competitive benefits like earlier retirement to 1.9 million teachers, in a country where $1M is needed for standard retirement.

Here are some advantages:

Tax breaks. The US government allows investors to write off taxes in RE because when they purchase an apartment building, taxes are reassessed. Most of the time, when taxes are increased, where does the money go? Nearly 80% share of these property taxes go to schooling and public health. How many teacher salaries could $440,000 produce? For this reason, the govt offers some tax incentives.

More jobs. Firms like Blackstone buy new apartments that now have to pay higher taxes. To solve this problem they have to add value. They hire painters, construction workers, landscapers, a property management company, lawyers, maintenance staff, etc. to improve and operate the apartment. More opportunity for people and more taxes for the government to finance policies for further improvement is, thus, resulted. Once again, the government lets the capitalistic machine churn and grow their income for them.

"Landlording". Renting has a purpose. It is meant to be a cheaper alternative to homeownership with less involvement, so the owner or management company is responsible for the maintenance (in most cases).

Granted we all need housing. This system could allow slum lording and incentivize gentrification projects that make affordable areas unlivable in exchange for economic growth. Structuring an alternative while protecting the advantages of our current system is crucial. How would we front the growing costs of education and have competitive wages for teachers?

According to Leilani, “Global real estate represents nearly 60 % of the value of all global assets or $217 trillion USD—with residential real estate comprising $163 trillion USD or 75 percent. This represents more than twice the world’s total GDP.” The report assesses the effect of those historic changes on the enjoyment of the right to adequate housing and outlines an appropriate human rights framework for States to address them.

In light of the complex market and its multitude of actors, including banks, real estate developers, investment companies, and private equity funds, accountability is limited. The Government has to enter take control of the real estate market into its hands to ensure no unethical business practices are taking place. They have to create regulations to efficiently regulate the real estate market. Financialization of housing is not as big of a problem as the lack of government regulations on the housing market. A proper scheme issued by the Government to keep checks on large private equity firms and major real estate investors is a potential solution.