Definancialization of housing, Europe style
The Week in Housing 18/02/22
Last week I wrote about some trends in the US PRS, and introduced the report My Home is an Asset Class: the financialization of housing in Europe, written by Daniela Gabor and Sebastian Kohl for the Greens/EFA in the European Parliament. This week I want to dig into this report in more detail as it brings a very novel take to the debate on institutional landlords and the financialization of the PRS.
As mentioned last week, there are three particularly interesting aspects of the analysis, which I’ll look at in turn:
1. The political economy of institutional landlords
The report sets out at a very useful definition of the financialization of housing:
“The disproportionate growth of housing finance relative to the underlying housing economy or the turn to Housing as an Asset Class (HAC), captured by the increasing for-profit and financial orientation of actors in housing markets.”
There are three distinct aspects to this. First, ‘the adverse consequences of large institutional landlords for tenants, housing maintenance and neighbourhood development’. Adverse effects include ‘disruptive eviction practices’, ‘negative consequences of housing affordability’ and ‘displacement of lower-income tenants’. Second, the ‘growing structural demand from institutional capital’ chasing housing as an asset class. The report draws parallels here with the run up to the Global Financial Crisis: ‘In a manner similar to the banking glut of the 2000s, the global portfolio glut captures the rapid accumulation of institutional capital, termed by some as the age of asset management’ (my emphasis). The report finds that around $44 trillion worth of residential real estate assets are held by institutional investors globally.
The global ‘asset glut’ is driven by a number of factors, including:
- The weakening capacity of the state to tax multinational corporations;
- The withdrawal of the state from public health and state pensions, feeding the growth of private pension/insurance funds (which are the largest institutional investors in residential real estate);
- The tighter regulation of global baking after the GFC has not been matched by systemic regulation of institutional investors, inducing a reallocation of capital towards the latter;
- ‘Unconventional monetary policies’, i.e. ultra-low interest rates and long term QE.
The report also notes a high degree of market concentration in some segments. For example, in terms of the €167 billion of residential assets held by private equity firms in Europe, the top 4 (Blackstone, Patrizia, Lone Star Fund and Amundi) account for 50% of assets under management.
The third aspect of the political economy of institutional landlords noted is their likely expansion in the future. They put this down in particular to the counter-cyclical aspect of institutional investment, which is well placed to take advantage of housing market downturns, for example. The report also argues that there is significant additional or ‘pent up’ demand from institutional investors for European PRS assets.
2. The European context
Housing is not a competence of the European Union. Nevertheless, the EU has many important impacts on housing systems. In the past, researchers and policy makers have focused on state aid and competition rules and on restrictions on fiscal rules. This mainly impacted social/cost rental housing. European institutions also play a role in financial markets, however. This was very relevant during the last bubble, as the stable interest rate environment and removal of currency exchange risks between Eurozone countries played a very important role in the credit/property bubble in the European periphery, as we know in Ireland.
This report argues that ‘the EU’s major competence in the housing domain is through capital markets’. For example, the authors argue that by easing capital requirements under the Solvency II Directive, ‘European regulators have systematically encouraged insurance companies to invest in real estate’. The report goes into plenty of detail in relation to how EU level rules structure financial markets in ways that support institutional real estate investors (much of which, admittedly, went over this reader’s head!).
3. European solutions
On the basis of all the above, the report argues that ‘the growing institutional appetite for residential housing, historically supported by increasingly permissive European legislation developed to promote the Capital Markets Union, suggests that Europe also needs an integrated approach that reclaims responsibility for affordable and adequate housing from financial markets’.
They put forward a number of interesting proposals here, but I want to focus on just one: the creation of a ‘European Housing Fund’. What is most interesting here is that they envisage this fund playing a specific role in balancing ‘the countercyclical forces moving residential housing from private/public to institutional portfolios’. The current wave of institutional PRS investment emerged in the context of the Global Financial Crisis as private equity firms were able to acquire large volumes of discounted assets, often facilitated by state institutions (e.g. NAMA/IBRC), as I argued in this co-authored paper from 2016. As capital increasingly accumulates in financial markets, institutional investors can take advantage of the cyclical nature of housing markets (especially financialized ones), to launch new waves of investment. The European Housing Fund would ‘function as a countercyclical force that ring-fences the collapse of housing asset bubbles that typically result in the transfer of housing units from local private/public ownership into institutional portfolios’. The bursting of property bubbles would thus be an opportunity to grow social/non-market housing, rather than for the expansion of financialization.
The authors envisage the fund being initially capitalized with European common funds and then issuing bonds on international capital markets. This would create what we can think of as a new financial circuit which would direct capital into the expansion of social/non-market housing, thus undermining the dominance of large financial institutions in controlling how capital (including the savings of households in the form of pension funds and insurance) interacts with housing.
No doubt there is a lot to debate about a proposal like this, but it is great to see the ‘definancialization agenda’ starting to take shape, and particularly at a European level. In this regard, the report can be read alongside the recent #Housing2030 report that I wrote about here and here.
Events
The Scottish Housing Policy conference took place last week, and had a particular focus on the PRS. You can watch recordings of some of the sessions here (see especially these sessions on rent controls and on the nature of demand for PRS housing today). A video of the recent Conference on the Future of Europe Housing Event, hosted by NUIG Centre for Housing Law, Rights and Policy, is available to watch here. You can also now watch the Trinity Long Room Hub event ‘falling out of love with Dublin?’, held last week. In terms of upcoming events, later today there is what looks to be an interesting sociological webinar on ‘social anchoring and the development of migrants’ sense of home’.