Explainer: the financialisation of housing and what can be done about it

A recent United Nations report on the right to adequate housing identifies the financialisation of housing as an issue of global importance. It defines the financialisation of housing as:

… structural changes in housing and financial markets and global investment whereby housing is treated as a commodity, a means of accumulating wealth and often as security for financial instruments that are traded and sold on global markets.

The UN Special Rapporteur on the Right to Housing argued that treating the house as a repository for capital – rather than a place for habitation – is a human rights issue.

The financialisation of housing has been central to wealth creation in Australian households since at least the second world war. Today, it underwrites the bank of mum and dad, amateur property investors as landlords, asset-based welfare, and foreign real estate investment.

Australia’s financialised housing system

Following Prime Minister Robert Menzies’ “Forgotten People” speech, Australian governments have effectively subsidised housing investment through taxation incentives for home ownership.

Capital gains exceptions, the exclusion of the primary home from pension calculations, negative gearing, tenancy policies that favour property owners, less restrictive mortgage financing arrangements and first home owner grants are commonly cited examples.

These policies and practices underpin many of the benefits of property investment. But they also change the way Australians think about their home. Houses have shifted from being valued as a place to live and to raise a family towards being viewed also as a place to park and grow capital.

This strongly influences Australians’ decision-making about buying and selling property. It also affects how they think about and use housing equity for business, retirement, family and other purposes.

21st-century winners

Owner-occupiers and property investors benefit most from a financialised housing system.

While many Australians own investment properties, these investors tend to be amongst the wealthiest in our society, challenging the myth of the “mum and dad” investor. The Household, Income and Labour Dynamics in Australia (HILDA) Survey shows, for example, that “over 50% of owners are in the top wealth quintile, and over three-quarters are in the top two quintiles”.

Property investors also tend to have higher incomes, with 70.3% earning in the top 40% of all incomes. They can access their housing equity by buying and selling when market conditions are right. The home can also be treated like an ATM via redraw mortgages.

Linked with foreign investment policies, this system can expose local housing markets to foreign investors and shifting global capital and financial markets. This can change the investment dynamics of local property markets and rental stock.

21st-century losers

Richard Ronald recently highlighted the emergence of “Generation Rent”. While some young people will eventually inherit from their parents, those whose parents rent or are over-leveraged mortgage-holders are increasingly shut out of home ownership.

This suggests a growing polarisation in housing opportunity.

People earning middle and lower incomes, younger people whose parents are not home owners and women who have lost a home or never gained housing wealth are among the most disadvantaged.

Pensioners who rent face housing insecurity and difficulties making ends meet. People remain homeless despite it costing government less to provide permanent supportive housing to end homelessness than to provide services to the homeless.

People living in public, social and other “affordable housing” can be doubly disadvantaged.

First, due to their affordable housing tenure, these groups have not built any capital in their housing.

Second, some residents face eviction through large-scale public housing redevelopments by governments that view their homes as key real estate assets.

Housing experts call for action

David Madden and Peter Marcuse have shown how to definancialise a housing system. They argue that even the term “affordable housing” is a financialised way of thinking about housing provision.

They call for an increase in public and social housing, and for an end to the eviction or rehousing of public and social housing tenants. Some affordable housing advocates agree, arguing for an increase of “at least 2,000 new dwellings a year for ten years” in New South Wales alone.

More affordable housing and low-cost social rentals, which peg housing costs to income, are needed. Government and not-for-profit builders could provide such housing. This would also require “new ways to finance affordable-rental housing”.

Private rentals need to be more secure, too, so tenants have the regulatory support to treat their housing like a home. Removing no-cause eviction is an important start.

A long-term plan for overhauling the taxation system is key. This would, however, need to limit the financial risks to current home owners and investors.

A slow winding back of tax breaks for investment properties would encourage property owners and investors to move their housing wealth into other asset classes over the long term.

This would help to ameliorate the current “distorted investment pattern that disadvantages the supply of affordable rental housing”.