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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‘What if Dublin’ and the Politics of Urban Space

‘What if Dublin’ superimposes possible future of the Markets on to existing everyday reality

A public-engagement installation running throughout the St Patrick’s Day festival entitled ‘What if Dublin’ aims to directly ask citizens of Dublin about what the city could be. The approach is a relatively straight-forward one: benches with imagined futures have been located in five locations throughout the city centre. On each bench is a piece of information about the specific location with an image of possible transformations placed on a screen. Viewers are then asked to engage in discussion via twitter. In opening up the possibility of citizen engagement, ‘What If Dublin’ challenges both existing power structures and us as citizens to think about what type of city we desire. This in itself raises deep-rooted questions about the political economic structures of the city and the politics of citizen engagement.

Challenging the Capitalist City? ‘What if Dublin’ reinvention of land-assembly site on Abbey Street

In asking questions about a variety of spaces, whether they be about the re-use of vacant sites, the transformation of former public toilets, or the possibilities for new public spaces, the ‘What if Dublin’ project taps into what could be referred to as a ‘political economy of place-making’. The asking of what at face-value may seem like the relatively straight-forward question of ‘what if’ opens up questions that go to the very core of our political and economic system. To take one example, reading a city’s spaces through its levels of vacancy and dereliction points to the dominance of a highly speculative approach to city-building, where vacancy emerges through a never-ending seesaw of disinvestment and reinvestment. With such processes at the core of Dublin’s social and spatial reality, it is hard to escape the direct connection to the transformation of public space, whether it be the gradual erosion of public services such as public toilets, or, indeed, the wider socio-economic transformation of the city.

In projecting a design-led approach of promoting public engagement, ‘What if Dublin’ raises the broader need to question an approach dominated by land-assembly and market-oriented city-making. Yet, we must also recognize that spatial imaginaries do not happen in a political vacuum. Design and related forms of engagement are part of a much wider set of processes that have deeply rooted economic, political and social dimensions. In seeking to question our future city, we must also ask what type of city ‘we’ desire. This in itself is perhaps one of the hardest questions we can ask ourselves, and is only a short step to asking who has the right to define who the city is for and what form it should take. In the words of David Harvey, drawing on Robert Park:

“… the question of what kind of city we want cannot be divorced from the question of what kind of people we want to be, what kinds of social relations we seek, what relations to nature we cherish, what style of daily life we desire, what kinds of technologies we deem appropriate, what aesthetic values we hold. The right to the city is, therefore, far more than a right of individual access to the resources that the city embodies: it is a right to change ourselves by changing the city more after our heart’s desire.”

The opening up of public dialogue around different spatial typologies by ‘What if Dublin’ allows for discussions that go beyond surface images, and opens up the potential to question directly the forms of politics that city might necessitate for an open, engaged and ‘just’ city. Yet, in so doing, we must be aware of the politics of our own desire. Spatial renderings are embedded with a set of political meanings or economic imperatives that can often come to represent the interests of one core group over the interests of wider society. ‘What if Dublin’ can be read as a call to embrace the multifaceted politics of urban space. That is a debate worth having and one that is urgently necessary.

Philip Lawton

 

CITY LIMITS – Inventive Uses for Urban Spaces

This open invite event might be of interest to Ireland After NAMA readers in the Dublin area.

CITY LIMITS – Inventive Uses for Urban Spaces

18.00 -20.00pm Thursday February 13th 2014

Wood Quay Venue, Dublin City Council Civic Offices, Dublin 8.

Over 600 prime sites and a wealth of historic buildings within our nation’s capital are currently vacant or disused.

These neglected places undermine Dublin’s competitiveness and quality of life; becoming hotbeds of anti-social behaviour, detracting from the city’s aesthetic, and artificially inflating the cost of housing. With public and political pressure to use mounting, a government taskforce has been charged with examining the introduction of a levy on vacant lands, intended to prompt action from site owners. As these spaces come in to circulation once more, the challenge becomes how to match the best ideas in urban development with the most suitable spaces.

The Lord Mayor of Dublin Oisín Quinn will open an evening of discussion on potential solutions for vacant city spaces “City Limits – Inventive Uses for Urban Spaces” at Wood Quay Venue at 18.00 on Thursday February 13th.

Initiatives to be discussed on the night will  include the proposed vacant sites levy, DCC Arts Office creative spaces programme,  Allotment Homes, Dublin House, Granby Park, the Rediscovery Centre, Chamber Weaver Park and Makers & Brothers pop up shops. If you have a project you’d like to discuss or are just interested in this area, please come along.

This free, open-invitation event will be followed by networking and drinks. Hope to see you there.