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Financialization of Housing

As the centre of the historic structural transformation of the global markets, housing has a significant impact on people who need adequate housing and industrialized world economy. Housing is one of the asset classes considered High-Quality Collateral (HQC) which the global wall of money is seeking in today’s market.

Global capital markets and financial excesses lead to the global housing and real estate market transformed. The “financialization of housing” occurs when housing is treated as a commodity – a tool that accumulating wealth and often used as security for financial instrument traded on global markets. Housing risks are considered as financial risks because of the financialization of housing in these days.

Background

Further information: Financial crisis of 2007–2008

U.S. median sales prices, from 2000-2012.

Since the 2008 financial crisis, despite an uneven global economic recovery, adequate and affordable housing is increasingly out of reach to hundreds of millions of people, according to the United Nations Special Rapporteur for Adequate Housing. In recent years, the recognition of the increasing centrality of housing is growing. From large-scale forced relocation to making way for luxury goods development, anonymous companies purchasing real estate for investment. The increasing amount of empty houses as investment caused more people could not afford to live in houses. The reactions have been felt across to globe.

According to the causes of the 2008 financial crisis, the impact of housing is treated as an investment rather than a place for people live in, has been overwhelming. Countries were most affected by the Global Financial Crisis faced millions of foreclosures.

Informal settlements or long existing neighborhoods lived in 'prime land' often pushed out to make way for speculative investment in developing economies. Because of the repercussions, residents are often rendered homeless, replaced by luxury housing that often stands vacant.

The valuation of global real estate is approximately $USD 217 trillion. This amazing number is more than three times the world's total GDP, accounting for 60% of all global assets. Residential real estate accounts for three-quarters of the total value of global real estate. Since residential real estate has such tremendous value, it is not surprising that homes are increasingly seen as commodities by wealthy investors and multinational corporations.

Negative Impacts

Mortgage Markets Crisis

Mortgage markets are a special kind of financial market that are considered as credit markets to promote the capital to the secondary circuit of capital. Mortgage loan affected both people who are willing to buy a home and the house price. Since more and more people get approved used of mortgage loan, the competitions of buying housing increasing, leading to the increase in house price. In other words, the development of mortgage market and the relaxing of mortgage requirements effectively promote the increasing amount of homebuyers - households can easier acquires expensive properties, however, the house prices is higher.

The sheer volume of mortgage markets included €4.7 trillion outstanding mortgage loans in the European Union at the end of 2004 and €11.3 trillion worldwide. Mortgage loan effectively influences homeowners and the economy both directly and indirectly. Due to the push for homeownership and the privatization of public housing, the importance of homeownerhship increased at both individual and the societal level. The financialization of housing results to the interactant of housing market and financial market. Therefore, increasing in housing risks leads to financial market risks rises these days— and vice versa.

Global Housing Crisis

The increasing mortgage lending is much higher than real income growth and the rising house price. Due to mortgages loans are more available, both in terms of households that can receive loans and in terms of average loan size (compared to home values and income level), households can now access to more expensive properties. However, the case about households is extensive and leads to the sightly increase in the bid rent curve.
The combined effects of larger available mortgage loans and low interest rates is controversial. The western countries were most impacted, not only by increasing house prices, homeowners also had heavier debt burdens. Structural problems were not happened because interest rates stayed at a low level, employment high and house price increasing. Individual homeowners could sell their house to pay their mortgages and receive a high margins. Thus, people were willing to take on even more debt and make negligible down-payment. House price rises even further.

Human Right

Adequate housing has been forgotten as a human right. Due to development of financialization of housing, real estate have become the first choice for corporate and be considered as the “safe box” for the rich and the storage of capital and excess liquidity in emerging market. The soaring house price results in many people cannot afford to purchasing homes to live. With the urbanization of the world, the population living in cities in the near future will exceed the rural population. However, due to the serious shortage of housing, millions of people are forced to live in slums or other informal settlements, and their human rights and dignity are not guaranteed. Because of the severe reaction, the United Nations set a target that securing housing for all people as one of the 17 Sustainable Development Goals and targeted for achievement by 2030. All signatory member states work hard to achieve the goal.

Positive Impact

Financialization of housing also brings some positive change in society. There are some financialization and particularly financial innovation has brought about. The invention of insurance policies is a typical new financial product. Before 16th century, it was not possible that insuring your house and its contents against loss in the case of fire.  

Home equity protection can reduce the loss of homeowners from falling house price. There are several different forms of home equity protection, such as an insurance - a homeowner would receives a payment if the house prices decrease below a certain level. Although financialization of housing markets have created unparalleled displacement and expulsion, financial product such as insurance may allow homeowners to avoid the events such as the 2008 global financial crisis and offset displacement.

International policy for Financialization of Housing

The policy for residential finance is a special financial arrangement for public policy. It has three main purposes. First, to remedy market failure, providing financial services that the market cannot provide. Second, to meet the residential needs of special groups such as people with lower income. The third one is to maintain the affordability, liquidity, and stability of the entire residential financial system. Its basic characteristics are: 1) It is a special financial arrangement for the government's housing policy objectives, including not only the establishment of institutions (government capital injection or private financial institutions established by law), but also the establishment mechanism, that is, the government with interest, term And certain benefits such as availability of funds to guide commercial financial institutions; 2) it is a paid financial activity, different from financial funds; 3) unlike commercial banks, it enjoys government policy support; 4) it is only the whole One of the components of the housing finance system is integrated with, complemented by, and developed together with commercial financial institutions.

The different social environment lead to different government policy. The operating mode of policy-based residential finance is also different.

the US Policy

Since the Great Depression of the 1930s, the United States has adopted numerous legislation to establish a number of government agencies and government-sponsored private enterprises that specialize in residential financial, thus forming a unique government-supported, market-driven residence. financial system.

The government provides liquidity support to banks and credit guarantees for special groups. The Federal Housing Banking System (FHLBs) were created by the Federal Home Loan Banking Act in 1932, which aim to support mortgage lending and community investment. It consisted of 11 regional FHLBanks, more than 7,300 member financial institutions, and the Office of Finance, the System’s fiscal agent. The Federal Home Loan Banks is one of the typical systems which created by the government through the Federal Home Loan Bank Act to provide an additional source of real-estate-lending support for the U.S. banking system. These banks are exempt from federal and state taxes. The Federal Home Loan Banks provides various housing initiative programs and housing loans, and also offer cash advance. The Federal Housing Act created the Federal Housing Administration (FHA) in 1934 and established the U.S Deparment of Veterans Administration (VA) in 1944. The purpose of the Veterans Administration (VA) is to provide insurance for low-income families and veterans to purchase home, ie, FHA and VAbear some or all of the unliquidated obligations when borrowers are unable to pay their debts. However, the borrowers' income, house prices,house price-to-income ratio and loan ceiling are strictly being controlled for preventing the abuse of public resources.

Furthermore, the U.S. government encourage innovation and securitization of assets in the secondary mortgage market. After World War II, the mortgage market faced strong housing demand and banks to borrow short-term loans long, liquidity risk. According to the "1968 Housing and Urban Development Act", the Federal National Mortgage Association split into two loan securitization of housing company. One is Government National Mortgage Association (GNMA, also called Ginnie Mae), a government-owned company under the Ministry of Housing and Urban Development, is responsible for the securitization of housing loans guaranteed by FHA and VA. The other is Federal National Mortgage Association (FNMA), also called Fannie Mae, a private joint-stock company. As the private enterprised established by government, Fannie Mae and Ginnie Mae are maily responsible for the government-guaranteed regular housing mortgage loan securitization business. The purpose is to the availability of low-income earners' purchase loans through credit guarantees and reduce financing costs, and improve the purchase of households. The institutional arrangement effectively change the bank's traditional business methods, reduce financial risks, and maintain the security and stability of the residential financial system. The financial innovation helps the United States out of the Great Depression, the deposit and loan crisis, and 66% of American families have good housing, far exceeding Many developed market economies.

Germany policy

The housing price in Germany has long-term stability worldwide. The housing policy Germany used is mutual savings bank model. It is a financial institution established in accordance with the law and specializing in housing contract savings, and supported by preferential government policy.

Germany has a strong investment culture. Financial institutions provided housing loan in the primary market include savings banks, mortgage banks, commercial banks, housing mutual savings banks, credit cooperatives, and insurance companies. Loan consumption has evolved into a consumption habit that German choose, no matter whether they are rich or poor. According to the mortgage law in Germany, homebuyers cannot get the whole housing loan from a single financial institution. Usually, a resident purchase loan is a combined loan provided by a number of banks.

1) Most of the first mortgage loans are adjustable-rate mortgage loans provided by mortgage banks and savings banks with long-term funds. The length of maturity is generally 20 to 25 years. Interest rates are adjusted every 4 to 5 years with current market changes. According to the relevant regulations, the mortgage loans provided by the mortgage bank and the savings bank should not exceed 55% to 60% of the value of the mortgaged assets, and have the first right to dispose of the mortgaged assets.

2) Second mortgage loans is mainly provided by the Mutual Savings Bank. The general length of maturity is 6 to 18 years, and the average length is 11 years. The loan interest rate is low and fixed. This is mainly due to the operation mode of “contract low and low loan” for member contract housing savings. The amount of the installments does not change throughout the repayment period. The repayment portion of the installment is relatively lower than interest portion of the installment at the beginning. The percentage for the annuity can be decided by clients ((in general no less than 2 to 3% - normally referred to as "Tilgung") as well as the runtime of the loan.

Reference

[Category:Great Recession]] 2007-08 Category:Economic bubbles