Financial markets and housing financialization
Real estate cost according to what I have learned from Professor Shiller is not relative to construction cost but more of psychological factors such as social status and high class environment, and other factors like current prevailing market price, demand, utility, scarcity etc.
That being said, I believe a lot of work still needs to be done as the current situation of housing finance as we have seen from the United Nations Human Rights Council 2017 report on the financialization of housing, could potentially pose a great danger to the future of housing and the citizens of the world at large.
The financial market has served as a tool to accumulate wealth from real estate which in my opinion is not a bad idea until the primary purpose of housing is being defeated - Housing should serve as a shelter as well as a good investment opportunity without one purpose defeating the other.
Housing poses a problem when it is seen more as a commodity than as a means of livelihood as we currently see today.
Source : Pixabay
So now the question is, whose purpose do they serve?
Banking institutions – Banking institutions are supposed to serve as a saving grace to help the masses to finance their houses through providing mortgage solutions so they can help enhance affordability. However, banking institutions are majorly interested in providing mortgages to the people and reselling these mortgages as CDOs (Collateralized Debt Obligation) and CMOs (Collateralized Mortgage Obligation) to the private in order to make profit from it. This drives up the prices of the houses and compounds the problem of housing affordability. This act defeats the initial purpose of housing finance as the investor treat this as a business venture instead of an aid to help people finance housing. So making decisions on foreclosure of properties to defaulters are so easy because it is seen as a normal procedure not considering the general effect it would have on the people and the economy at large.
Real estate billionaires – a lot of funding is being pumped into real estate construction from billionaires around the world. it would have been seen as a great gesture as it poses a lot of great advantage to the city or country to which it affects because it could help improve the state of their economy, improve their housing conditions, help raise standard of living as it could create jobs, promote a more developed approach to housing and also help improve the general health of housing in such communities. But this real estate serves more as a means to hide and accumulate wealth as we know land usually appreciates, enhance money laundering practices as funds spent on financing these real estates are mostly acquired through corruption.
Government – any incumbent or incoming government especially in developing countries around the world always wants to be responsible for the growth of cities in their countries whether they have something to do with the growth or not. This motive blinds them to the fact that urbanization encompasses both improved physical growth and also mental health of the affected citizens. What is the point of housing when the masses cannot afford it? , what’s the point of housing when it doesn’t provide or give access to basic socio amenities/facilities? What’s the point of housing when its accessibility widens the inequality gap between the wealthy and the poor?
As long as real estate construction is ongoing, the government is deemed to be working and is fulfilled disregarding the fact that most of these real estate constructions are empty because no one can afford them. But investors don’t mind as these results do not defeat their primary objective which is that real estate serves as a means to hide or accumulate wealth acquired mostly through corruption.
So now, how can the financial markets help solve these fundamental economic problems?
Price modeling – Proper price modeling can help reduce unnecessary cost of housing as the real value is calculated using the right factors such as building construction cost, inflation etc. Real value is calculated based on cost (expenditure on materials, labour and so on) and price – which is the amount, someone pays for something. Cost and price both affect the value of properties. Financial price modeling can only be done by qualified and experienced financial expert as the impact on the economy has to be immensely considered.
Regulatory bodies – financial regulatory bodies should be set up to look into financialization of housing. This will be able to curb or discourage a lot of real estate investors whose prior motive is to hide wealth. Also the cost of housing will be in control as provided housing will now serve its initial purpose which is to provide shelter for humans. Regulatory bodies will also help enforce the laws already stated by the government of the affecting states.
Financial housing policy – there should housing policies to guide cost and type of housing provided. Already existing housing standards should also be enforced. The federal and state government policies regarding housing should be able to guide investors on the standards of housing to be provided and also the size and type of population it will be provided for. For example, housing zones could be created to provide both high density residential houses and low density residential housing.
A macro prudential regulatory housing approach should be introduced to housing as we have in finance. This will look at how the current trend of financialization of housing can affect the economy of the country; if it would provide jobs, add to the GDP, provide socio amenities and facilities, provide more shelter for the masses as the amount of homeless people especially in developing countries are increasing uncontrollably. The government of a country both in state and federal level should be able to determine the type of housing that are needed in the country or state and how these investors can help improve the current situation of the country.