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 the definition refers 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.

The dominant challenge in financialization without adequate regulatory and governance framework being in place lies in the strong element of speculation it fuels leading to overvaluation/ undervaluation of the underlying asset through speculation 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 in the perception of the housing and real estate for speculative value rather than on 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 and 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 which  enables funds to be invested in the sector derive strong connect with the underlying productive value when viewed as a means of production.

Unbridled financialisation of housing in India happened, in many sense, post liberalization in 1991 and 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 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. That the sector was completely unregulated till some sort of regulation was conceived in 2013 and enacted in Parliament in 2016 helped in skewing the property market 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.

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, if India is to achieve its 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 centre and upcoming growth centres. 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 MBS market calls for stronger and well regulated financialization of housing. This will lead to revolution in housing and urbanization in India. It will speed up economic growth.

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.

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