Understanding the financialization of the city

The role of finance and financial actors in shaping the city is increasingly key to understanding some contemporary urban problems. Why are rents rising? Why is office space being built when we’re in the middle of a homelessness crisis and desperately need to increase the supply of affordable housing? How and where is profit being produced from urban space and what are the likely outcomes of this type of model? All of these questions in some way relate to how finance shapes the city.

These questions have somewhat complex answers.  Moreover, these are also quickly shifting sands. Indeed, the crisis (both in Ireland and internationally) and government responses to it has also created new opportunities for financial actors (Vulture funds, Real Estate Investment Trusts etc) to invest in and profit from the production of urban space.  To understand the contemporary city requires us to understand the role that finance plays.

In a previous blog post I looked at the concept of the ‘financialization of the city’. There were two key arguments put forward in that post. The first was that it is important to grasp precisely what is being financialized when we say the city is being financialized. It is the capacity of urban space, or rather property ownership over urban space, to generate ‘rent’ by capturing socially produced value. The issuing of credit and other financial products secured by or underpinned by income streams arising from property is ultimately underpinned by this singular monopolistic feature of ‘place as a commodity’, to use Molotch and Logan’s term.

The second argument relates more specifically to the contemporary context of ‘financialization’, understood as a specific phase of the development of capitalist political economy. Here, the argument is that what is decisive about the current conjecture is the ‘tradability’ of income streams arising from property. The classic example here is the securitisation of mortgages, whereby mortgage repayments are bundled together and traded on international financial markets. This argument has been put forward by a number of the most insightful commentators on this issue, including John Coakley’s (1994) early and extremely prescient work on property as a financial asset and the empirically rich analyses of Guironnet and Halbert (2014; see also Gotham 2006; 2009). Fine and Saad-Filho are particularly succinct in their analysis here:

“[A] mortgage…remains a simple (transhistoric) credit relation between borrower and lender. However, it becomes embroiled in financialization once the mortgage obligation is sold on as part of some other asset…”

In my previous post and elsewhere (e.g. Byrne, 2016) I also but forward the above argument. However, there are problems with this approach that I’d like to address here briefly.

The principal problem with the focus on real estate as a ‘tradable income yielding asset’ (Guironnet and Halber, 2014) is the fact that it is overly reliant on the US case and especially on the example of securitization. This is understandable given the role of securitization in the financial crisis. But it presents a particular problem for understanding the financialization of the city in the European context, where securitization played a relatively minor role. Understanding the role of property in the European financial system leads us in another direction. Here, the key driver of the property bubble was flows of finance between ‘core’ and ‘periphery’ (Flassbeck and Lapavitsas, 2015). This mainly took the form of inter-bank lending.

Essentially, northern European banks invested in the over-heating property markets of Ireland and Spain (and elsewhere) by lending to banks in those countries. Securitization did play a role in Spain (López and Rodríguez, 2010; Norris and Byrne, 2015), but it was far from the main vehicle through which credit flowed into real estate. Nor was it the vehicle through which income streams arising from Irish residential and commercial real estate flowed bank into the international financial system.

Most of the credit issued in Ireland during the property boom was non-securitized, more or less old fashioned development finance, investment loans and residential mortgages. The main driver was thus not financial innovation and the tradability of property as a financial asset, but economic and monetary union and the deregulation of financial flows, elimination of exchange rate risk and low ECB interest rates that accompanied it.

If the transformation of real estate into a tradable income-yielding asset is not the definitive feature of financialization of the city then what is? Drawing on the Irish and Spanish cases, the key feature relates to the way in which income streams arising from local real estate took on a structural and systemic role in the European financial system and its expansion as well as in European political economy more generally. As has been argued by others (Hadjimichalis, 2011; Flassbeck and Lapavitsas, 2015; there also many parallels with David Harvey’s work on the built environment as the secondary circuit of capital here), investment in and returns from real estate canalized the flows of capital from the ‘current account surplus’ core countries to the ‘current account deficit’ peripheral countries.

What is novel, then, is the systemic role of real estate in the circulation of interest bearing capital at a European level. The massive increase in the volume of credit flowing into real estate in Ireland and Spain reflects this role. From this point of view, securitization and inter-bank lending are two different mechanisms or avenues through which global financial capital can flow through local urban spaces, but not the cause or essential factor of the financialization of the city. Instead, the key  factor is the structural and systemic role that income streams arising from property take on in the accumulation of capital at the European level.

One concluding note which is interesting, however, is that the aftermath of the financial crisis has seen huge trading of financial assets linked to property in Ireland, Spain and across Europe. This has mainly taken the form of ‘bad banks’ and other ‘wind down operations’ selling distressed assets to US private equity and hedge funds (Byrne, 2015; 2016; forthcoming). This may mean the importance of property as a ‘tradable income yielding asset’ will grow in the aftermath of the crisis and the role of inter-banking landing and structural flows of capital between core and periphery may diminish. For the moment it is too early to draw any conclusion.

Articles referenced

Byrne, M. (2015). ‘Bad banks: the urban implications of Asset Management Companies’, Journal of Urban Research and Practice, 8(2) 255-266.

Byrne, M. (2016a). ‘Asset price urbanism’ and financialization after the crisis: Ireland’s National Asset Management Agency. International Journal of Urban and Regional Research, 40(1), 31-45.

Byrne, M. (Forthcoming) ‘Bad banks and the urban dimension of financialization: theorizing the co-constitutive relationship between finance and urban space’. City.

Coakley, J. 1994. ‘The Integration of Property and Financial Markets’. Environment and Planning A 26 (5): 697–713.

Flassbeck, H., & Lapavitsas, C. (2015). Against the troika: Crisis and austerity in the Eurozone. Verso Books.

Gotham, K. F. 2006. The secondary circuit of capital reconsidered: globalization and the U.S. real estate sector. American Journal of Sociology 112(1): 231-75.

Gotham, K.F.  2009. Creating Liquidity out of spatial fixity: the secondary circuit of capital and the subprime mortgage crisis. International Journal of Urban and Regional Research 33(2): 355-71.

Guironnet, A. and Halbert, L. 2014. The financialization of urban development projects: concepts, processes, and implications. Working Paper n14-04 URL: https://hal.archives-ouvertes.fr/hal- 01097192/document

Hadjimichalis, C. (2011). Uneven geographical development and socio-spatial justice and solidarity: European regions after the 2009 financial crisis.European Urban and Regional Studies, 18(3), 254-274.

López, I. and E, Rodríguez. 2010. Fin de ciclo: financiarización, territorio y socieded de propeitarios en la onda large del capitalismo hispano. Madrid, Traficantes de Sueños.

Norris, M. and Byrne, M. 2015. Asset Price Keynesianism, Regional Imbalances and the Irish and Spanish Housing Booms and Busts. Built Environment, 41(2): 227-243.

Mick Byrne

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New EU university ranking exercise – U-Multirank

This afternoon sees the start of the “Rankings and the Visibility of Quality Outcomes in the European Higher Education Area” conference in Dublin Castle, part of the events associated with Ireland’s Presidency of the EU.  A good chunk of today’s proceedings focuses on the adoption and roll-out of the EU’s new university ranking exercise, called U-Multirank, which aims to be live by 2014.

Since the initial global university ranking in 2003, there have been a plethora of ranking systems developed, with the big three being the ARWU (Shanghai) ranking, QS ranking, and the Time Higher Ed ranking.  These rankings have become key benchmarks for comparing universities within regions and across the globe, seized upon by some universities for marketing, and the media and government to either promote or denigrate institutions.  They are undoubtedly being used to shape education policy and the allocation of resources and yet they are routinely criticised for being highly flawed in their methodology.

Somewhat ironically, a sector devoted to measurement and science has been evaluated to date by weak science. There are several noted problems with existing rankings.

The rankings use surrogate, proxy measures to assess the things they purport to be measuring, and involve no site visits and peer assessment of outputs (but rather judgements of reputation, alongside indicators such as citation rates).  An example of such proxies include using the number of staff with PhDs as a measure of teaching quality; or the citation rate to judge quality of scholarship.  The relationship in both cases is tangential not synonymous.

The rankings are highly volatile, especially outside the top 20, with universities sliding up and down the rankings by dozens of places on an annual basis.  If the measures were valid and reliable we would expect them to have some stability – after all universities are generally stable entities, and performance and quality of programmes and research do not dramatically alter on a yearly basis.  And on close examination some of the results are just plain nonsense – for example, several of the universities listed in the top 20 institutions for geography programmes in the QS rankings in 2011 do not have a geography department/programme (e.g. Harvard, MIT, Stanford, Chicago, Yale, Princeton, Columbia; note the link automatically redirects to 2012 results for some reason) and other rankings barely correspond to much more thorough assessments such as the UK departments vis-a-vis the UK research assessment exercise (very few geographers would rank Oxford University as being the best department in the UK, let alone the world).  Such nonsense casts doubts on all the results.

The measures do not simply measure performance but also reputation judged by academics. The latter is highly subjective based on opinion (often little informed by experience or on-the-ground knowledge of the relative performance of universities in other country systems) and is skewed by a range of factors such as the size of alumni, resources and heritage (their past reputation as opposed to present; or simply name recognition), and is inflected by wider country reputation.  The sample of academics who return scores is also skewed to certain countries.

Because the measures add weight to data such as citation and research income they favour universities who are technical and scientific in focus, and work against those with large social science or humanities faculties (whose outputs such as books are not captured by citation and require less research funding to do high quality research).  They also favour universities with large endowments and are well resourced.  The citation scores highly skew towards English-Language institutions.

The rankings take no account of the varying national roles or systems of universities, but looks at more global measures.  Universities in these systems are working towards different ends and are in no way failing by not having the same kind of profile as a large, research-orientated university.

None of the ranking standardise by resourcing, so there is no attempt to see who is performing the best with respect to inputs; they simply look at the scale and reputation of outputs and equate these to quality and performance.  This conflation raises some serious questions concerning the ecological fallacy of the studies.

These failings favour certain kinds of institutions in certain places, with the top 100 universities in the three main rankings all dominated by US/UK institutions, particularly those which are science and technology orientated.  There is clearly an Anglo-Saxon, English language bias at work, hence the new EU ranking.  Very few people who work in academia believe that the UK has many more better universities than those in Germany, or France, or the Netherlands, or Sweden, or Japan, or Australia, etc.  Yet only a handful of universities in these countries appear in the 100, and hardly any at all in the top 50.

Whether the U-Multirank system will provide a more valid and robust ranking of universities, time will tell.  The full final report on its feasibility suggests a wider vision and methodology and some concerted attempts to address some of the issues associated with the other rankings.  One thing is certain, rankings will not disappear, as flawed as each of them are, because they serve a useful media and political function.  However, they should be viewed with very healthy scepticism, mindful of the criticisms noted above.

Rob Kitchin

For an interesting set of blog posts and links to media stories re. university rankings see these collections at Global Higher Ed and Ninth Level Ireland.

 

Ireland a step closer to septic tank fines

Earlier this month two important judgements of the European Courts of Justice were referred back to the Courts by the European Commission which went unreported in the media. Both cases are likely to have a significant bearing on the future implementation of EU environmental law in Ireland and result in very significant costs to the taxpayer.

Ireland has the unenviable distinction of having one of the worst compliance records with EU environmental law in Europe. However, while Ireland has lost pretty much every ECJ case it has ever faced, never before has Ireland received fines or been to a stage in the ECJ process where fines are inevitable. This has emboldened successive governments to continue a liberal approach to enforcement and constantly seek endless derogations to delay implementation in order to pander to various sectoral interests. However, now the Commission has lost patience and the chickens have come home to roost. In the case of C-188/08 (License and Inspection of Septic Tanks) the Commission has sought a lump sum fine of €2.7 million and €26,173 for every day of non-compliance. In the case of C-66/06 (Implementation of the EIA Directive for ‘on-farm’ developments) the Commission has sought a fine (by formula) of approximately €3.8 million and a further €3 million in legal costs. The Commission argued in both cases that the judgements were now two-and-a-half years old and Ireland does not appear to be close to achieving full compliance. Interestingly a week after these cases, the EPA launched a public consultation on a National Inspection Plan for Domestic Wastewater Treatment Systems with a tight deadline of just 3 weeks for comments.

Minister Hogan has been desperately trying to close off the fifteen or so current ECJ cases against Ireland before he takes the reins as the de facto minister of environment for Europe during Ireland’s forthcoming presidency commencing in January 2013 (See here for a useful overview prepared by Friends of the Irish Environment). However, while we will have to of-course await the final ECJ judgement, fines now seem certain and based on the experience of recent cases against other EU countries, fines are generally imposed by the ECJ six months after the hearing. So in these cases we can potentially expect fines around April 2013 – right in the middle of the Irish presidency. This is likely to be of significant embarrassment to the Government but, more importantly, a cause of further distress to the hard pressed tax payers who face the prospect of a further bill of at least €10 million.

The predicament faced by the government is stark. Both of these cases relate to contentious rural issues with very significant opposition to the introduction of septic tank registration and charges, in particular. In order to placate the public and encourage registration the Government has reduced registration fees, is stressing that a ‘risk based’ approach to site inspections will be applied and retrofitting costs will be minimal. However, this has failed to assuage the public and with fines from the ECJ applied on the basis of each day of non-compliance the final bill could potentially be much higher. It is also unlikely to satisfy the European Commission. Given the sheer scale of new unsewered ‘one-off’ dwellings permitted during the ‘Celtic Tiger’ (170,000 since 2001) in locations where soil characteristics are likely to be unsuitable for an on-site waste water system together with the complete abandonment of any proper risk assessments; it is very unlikely that the retrofitting of septic tanks to comply with EU water quality legislation will be inexpensive.

A study in 2005 by Trinity College Dublin in 2005 of 74 randomly located septic tanks in Leinster found that just 5% had soil conditions suitable for the installation of a septic tank. This would appear to be corroborated by the River Basin Management Plans published in 2010.  For example, the North West River Basin Management Plan states “In the North Western IRBD there are approximately 60,000 unsewered properties located in areas where the hydrogeological characteristics mean that inadequate percolation is available.” Again, in the Shannon IRBD ‘there are approximately 83,950 unsewered properties located in areas where the hydrogeological characteristics mean that inadequate percolation is available.’  A detailed study of five selected on-site systems by the National Centre for Freshwater Studies in 2008 found that in each case the on-site systems were either poorly maintained, non operational or poorly installed; and the majority of sites are unsuitable for conventional septic tanks. Is it possible that one of the key reasons why successive governments have dragged their feet on this issue is because the actual cost of complying with this judgement and EU water quality legislation could run to hundreds of millions of euro, if not more?

From an environmental perspective the implementation of multi-million euro fines are welcome and will hopefully force the government into addressing Ireland’s woeful environmental record, poor enforcement of environmental law and to stand up to vested sectoral interests. From the tax payer’s perspective it is just a further reminder of the horrendous legacy costs associated with Ireland’s failed experiment in deregulated neoliberalism in land-use planning policy.

Gavin Daly