People interested in urban studies will have no doubt come across the term ‘the financialization of the city’, or similar terms such as ‘the financialization of real estate’ or the ‘financialization of urban space’. This post gives a sense of what this means, but also theorizes how financialization relates to urban space with regard to the ‘accumulation’ of wealth.
At its most basic, financialization describes the growing power of finance capital over economic, social and political processes. From an urban point of view financialization can also be understood as a form of accumulation characterized by the capturing of value and wealth through the provision of credit, insurance and forms of financial intermediation.
Debt extracts huge volumes of wealth from across the economy and society, leading Costas Lavapistas to conceptualize it as a parasitic form of ‘profiting without producing’. Much of the expansion of finance in this regard has occurred in the spaces left open by welfare retrenchment. The privatization of social housing, pensions, transport, education and healthcare have all been fundamental to the emergence of new financial markets. This draws attention to shift from ‘welfare to debtfare’ and thus to the ways in which finance serves to sink its teeth into the social reproduction previously sustained by public services. Here the literature on financialization shares much with concepts like ‘enclosure’ and ‘accumulation by dispossession’ (although these have taken aim at neoliberalism and privatization more so than at financialization).
While financialization refers to a vast and varied set of processes, urban space is especially important. There has historically been a strong link between finance and the built environment due to the large upfront capital costs of development and the need to manage risks across long time spans. However, the highly place-based nature of real estate has also traditionally posed obstacles for finance. Every property is unique and hard to measure against other properties and this has made property markets more local and idiosyncratic than, say, the market for cars, washing machines or pizzas. High transaction costs and the large amount of time required for property development, relative to other commodities, add to this.
Financial innovation and deregulation has, however, made property increasingly liquid. This works by disembedding property assets from local contexts as well as more complex mechanisms for managing risk. Real estate as an investment asset can now be easily traded on global markets (e.g. securities, mortgage bonds, large scale commercial real estate, loan portfolios) and investors have come to view property as a ‘tradable income yielding asset’. As one private sector informant told me, property sits ‘nicely’ between equities and bonds in that it produces a fixed income stream (like a bond) while at the same time offering possibilities for capital appreciation (like shares). At the same time, the wider financial system itself has grown rapidly because of deregulation, the liberalization of capital markets and currency exchange, and a prolonged period of historically low interest rates in key economies.
There is a large and growing literature on all of the above, but what has received less attention is what this relationship between finance and urban space means in terms of accumulation (i.e. the accumulation of capital). The fact that real estate allows the owner to capture socially produced wealth has long been recognized, for example in the pioneering work of Henry George. The late 19th century political economists wrote that if you speculate on land “You may sit down and smoke your pipe…and without doing a stroke of work, without adding one iota to the wealth of the community, in ten years you will be rich.” What makes this possible is that increasing property prices and rent reflect value added by environmental improvements, public infrastructure and services, and social relations. Property values represent, as George put it, “a value created by the whole community”.
Because of the monopolistic nature of space, land and property values capture wealth creation happening in and around them. This ‘parasitic’ quality of real estate has featured prominently in debates about gentrification, where property speculation both feeds on and undermines unique locational qualities and forms of social and cultural wealth.
The financialization of urban space essentially involves the power of finance capital (especially credit and products linked to credit) to embed itself within space’s monopolistic appropriation of value, and thereby to extract and trade claims over income streams arising from property assets. What is financialized is not simply urban space, but more concretely space as an apparatus for capturing collectively produced wealth. And this process is not neutral, there are winners and losers here. The wealth appropriated by finance capital, whether in the form of job creation, environmental improvements, public infrastructure/services, or social relations, is central to social reproduction. It also has important spatial implications for the political economy of space. In particular, when the income streams captured by property become tradable on international markets they go global, integrating the places we make our lives in with transnational circuits of capital.
Finally, the state is anything but a hapless bystander in all of this. Scholars and social movements in cities across the world have highlighted the role of the state in the financialization of urban space and fomenting property bubbles. This research has primarily focused on how housing and urban development/planning policy serve to drive financialization. A smaller body of work has examined some forms of state intervention relating more specifically to financial assets, identifying how such interventions may lead to the creation of new products and markets (witness our own NAMA at the moment).
So, what can we do about all this? There has been lots of discussion about the ‘right to the city’ in recent years. This term is associated with Henri Lefebvre, but I think Henry George put it best when he said:
“The equal right of all men to the use of land is as clear as their equal right to breathe the air – it is a right proclaimed by the fact of their existence. For we cannot suppose that some men have right to be in this world and others no right.”
Property values, rent and financialization are all the flipside of the exclusion of all of us from housing and from free and equal access to and enjoyment of our cities. We can’t take on financialization, without taking back urban space.
Mick Byrne
Mick Byrne is an IRC postdoctoral researcher in NIRSA NUI Maynooth. He is also an activist involved in various housing issues, including the Dublin Tennants Association.
July 6, 2015 at 7:39 am
Gosh thats a tough read. Any chance of a plain English version?
July 6, 2015 at 9:24 am
Reblogged this on provisional university and commented:
This is a short post that gives a kind of overview of the critical theory around the financialization of the city
July 6, 2015 at 11:44 am
John, I’m afraid it’s beyond my capabilities to communicate this stuff any better, but if you have any questions on specific parts of the post I’d be delighted to have a go at clarifying.
July 7, 2015 at 9:33 am
Thats a pity.
Perhaps if I try to lay out my understanding of what you wrote we can reach a common understanding of it.
My understanding of your piece is that it starts when a person buys a property with say a loan. In theory all loans come from the funds of savers- call them a community. As the borrower pays the loan they return the original funds to community plus a fee (aka interest) for costs of loan admin and profit to lenders. Part of the profit to lenders pays a very small return to the community savers.
While that is going on the taxpaying community pays central and local government to carry out improvements in infrastructure. This is usually a local taxpaying community. In theory (and also in practice) these improvements increase the value of the property.
The increase in the value of the property becomes the individuals personal wealth allowing them to increase their ability to get more loans to repeat the process. So in this way community funds (savings) and taxes (used for infrastructure investment) move to the benefit of the individual property owner.
So if I understand you correctly this is a social problem especially when the individual moves past property ownership for the sake of personal accommodation and uses it for investment? This is magnified when owners with multiple properties and access to borrowed funds start to trade these ‘investments’. These can even become owned by members of international community who put nothing into the local saving or infrastructure development.
Am I correct in that you argue that this is getting to be a more serious problem as the wider community in the form of the State are no longer involved in house development and provision and therefore do not benefit from any gain in value?
But surely if all that is so then a tax or series of taxes on second, third and other properties is the mechanism to effect a return to the community to reward their share of the added value? Is this not the point of Capital Gains tax, stamp duty, property tax and the like?
Then the harvest from these taxes can or should be used to provide the urban space you seem to seek?
Was that your point or have I missed it?
JA
July 7, 2015 at 11:48 am
Thanks JA, very interesting commentary. What you describe above fits with my understanding of financialization. There are two small caveats. One is that it is not only state investment that enhances the value of property but also things like local culture and community, i.e. forms of community created place-based wealth. The other is that there are now very many ways to invest in property. For example, you can buy shares in a Real Estate Investment Trust (benefiting from dividends without actually owning any property). You can set up a Qualifying Investor Fund, which is also shareholding. You can also buy loans from a bank or other loan originator. You can buy securitized packages of loans and even other financial products linked to securities, such as credit default swaps.
The problem with all of this is, exactly as you point out, there is a lot of money flowing into the built environment but very little by way of a kick back for either the state or the local community. On the contrary, high levels of investment in real estate are driving up land and property prices in Dublin and many other cities, making provision of social housing and other public infrastructure expensive.
I’m not too sure what the solutions are, but I guess there are probably three different avenues. One is to ‘de-financialize’ real estate by, for example, banning credit default swaps or the selling of distressed mortgage loan books and generally regulating credit availability. Tax can also be used to dis-incentivize financial speculation. The second is to ‘de-commodify’ property altogether, by for example having more social housing and communities taking over land or properties for social functions (this is what I advocate in the post).
The third would be taxation, as you say. Many of the financial vehicles used to invest in property are very ‘tax efficient’ For example, REITs and QIFs pay very little tax. So I think it would be a good idea to expand and diversify the tax base by trying to tax these types of ‘investors’.
I hope that makes some kind of sense and thanks again for your commentary
July 8, 2015 at 8:50 am
Hi
Great we have reached an understanding.
So the problem in your view is that there is not enough money flowing back from property into the community? I wonder is that actually factually correct? Common sense seems to tell me that if it were true then the c. 50% property price drop would not have hit the public finances so hard?
Or is you point it that people speculate on property investment and this is a bad thing?
By the way does “de- finacialise” mean make property an unattractive investment?
I am afraid i need your help again on understanding what does de commodify mean? I understood a commodity was something that was readily available, widely traded, easily replaced by alternatives, frequently in supply surplus relative to demand. The one that comes to mind is say wheat or copper when I think of commodity. I would not have thought housing/property could fit into that definition. Is it your view that housing and land is a commodity?
Finally the point you advocate, that communities take over land or properties.
Is this the urban space you mention? Is it your view property should be in the ownership of the community and that it will somehow stay there and not be traded? I am not sure what that has to do with making more space/property available at lower price points? Seems to me it will reduce supply which usually puts up price?
Again maybe I have missed the point? I look forward to your thoughts.
In the meantime if you could indulge me while I pontificate a view of my own?
I always find it hard to understand why property prices; supply and demand is so regularly messed up in this country.
In this little country of ours It is clear for a very long number of years in advance the number of new household formations that will occur and roughly where they will occur. Most planners, CSO etc have this information and it should be 90-95 % accurate. It is far easier to forecast than the weather imo.
Surveys could further clarify community and individual intentions on where the new home formers would like to own a property or live. So the demand information is easily obtained for that cohort.
At the same time there is a cohort of people who will never wish to own a property and will be renters. These will need property that is owned by either community, state or investors. There will be a further cohort who will wish to acquire property to hedge against their old age or facilitate their lifestyle or just because they can! All these can be identified also.
So a demand number is reasonably easy to attain.
The mismatch imo is that there is no body ensuring that the investment funds and taxes are channelled to achieve that in terms of numbers and or location. In my experience most development investment in property starts off as pure speculation or at best an informed guess.
Most county council planners look at the new developments to see if they fit in with existing built environment and if water, sewage and other services are available. Oddly (to me) they rarely if ever have any information on demand requirements for the proposed development. Certainly they do not have any information on who will be living there in the future.
Oddly (to me) planners have no involvement at all in sales or trades of existing buildings (unless afterwards if there is a proposed change of use).
Regarding prices then, it should be relatively straightforward to bias purchase prices to favour first time household formers and surcharge second or multiple owners to make this cost neutral to the community and state.
If there are 100,000 property sales in the country in a year and 20,000 are new formations then I see no reason why the 80,000 can’t pay a tax sufficient to subsidise the new starters. If the 20,000 need a subsidy of, say,€100,000 to buy their property (along with a mortgage and savings etc) then the 80,000 will need to be taxed at a rate of €25,000 each. (clearly CSO / PSRA or some body would need to regionalise this).
Given the steady population growth and the relatively minor relocations within the country this subsidy/surcharge could be know for several years in advance by all the players. They won’t like it and politicians will howl but if it is clear and transparent with a slow rolling adjustments into the future, and if the subsidy/surcharge levels are known a good few years in advance then it will be accepted. The problem will be that it will be twisted to support regionalisation and other politically driven aims rather than the simple aim of providing access to new home formers from the gains older ones are realising.
A certain float of houses could be built or be shovel ready as a speculative punt to iron out demand wrinkles and to assist in keeping a ceiling on prices if supply side is insufficient to satisfy demand.
As i say it seems pretty simple to me but far too many vested interests are busy demonstrating their cleverality rather than attempting to use common sense.
JA
July 8, 2015 at 2:01 pm
Hi again JA and thanks for those comments.
The proposal you mention sounds interesting and it’s great to hear an alternative on these issues.
re your response to my above comments. Yes I think there is too much property speculation. I’m using ‘commodity’ in a wider sense, something which is produced and exchanged for money essentially. By de-commodify I mean taking land/buildings out of market exchange, whether in the form of public ownership or community ownership.
M