FINANCIALIZATION OF HOUSING

Housing and real estate markets have been transformed by global capital markets and
financial excess. This phenomenon is known as “financialization of housing”. It occurs when
housing is treated as a commodity – a vehicle of wealth and investment, rather than a human
dwelling.

On 1st March 2017, The Special Rapporteur on the right to housing of the UN Human Rights
Council, Leilani Farha, presented a report on the financialization of housing, in which she
discussed how homes were no longer viewed as place to live in dignity, to raise a family and
thrive within a community. Instead, it has become a security for financial instruments –
traded and sold on global markets. From the foreclosures in the U.S. and Spain, to inequality,
poverty and housing exclusion existing in India, she paints a bleak picture which implies that
financialization must only have negative effects. However, my essay intends to bring to light
some of the advantages that financialization bestows, demonstrating that innovation in
finance indeed does have positive effects. Since Ms. Leilani has detailed largely on the
experiences she underwent in India, and since my nationality is Indian, I will be attempting
to shed light on the benefits and need for financial innovation of housing in the Indian
economy.

If we think of finance, it’s safe to assume that most people tend to overlook the immense
benefits that financialization and financial innovation in general brings in the society. From
the invention of inflation-indexed debt (first established in Massachusetts in 1780, which
protects investors from the devaluation of government-issued debt due to inflation) to
Mortgage-backed securities (that have ensured a higher supply of capital to potential lenders,
making housing more affordable). When a graduate leaves his city to find a job and settle
elsewhere, it’s the financialization that helps the young adult buy a house at a price that he
can afford.

With regards to the housing market, examples of financial innovation with positive impact
are also manifold. For example, in India itself, the Central Government recently announced
the National Mission for Urban Housing called ‘Housing for All by 2022’ which is a bold
attempt not only to galvanise the housing market but also to improve the life of people living
in urban areas of the country. This whole exercise entails enormous amount of funding of
homebuyers through home loans by banks and housing finance companies (HFCs) that have
an onerous responsibility to ensure that home loans are tweaked according to needs of the
borrowers and make them attractive enough to borrow from banks.

A couple of years back, a few banks had introduced what were called as teaser home loans. It
started in 2009-10 when banks found that the best way to expand credit was to attract people
to avail home loans as they found that this was the safest way to increase their retail loan
portfolio, since the delinquency was lowest in housing loans. A few banks, led by State Bank
of India (SBI) offered home loans to new borrowers at a much lower rate of interest on fixed
interest rate basis for first two years, where after the loan would be converted into floating
rate at the then existing higher interest rate. These home loans attracted a lot of interest
amongst home buyers, and enabled buyers to purchase houses. In view of the importance of
housing, a key element of public policy in many countries has been to encourage house
ownership largely through fiscal incentives and better availability of housing finance.

In view of the importance of housing, a key element of public policy in many countries has
been to encourage house ownership largely through fiscal incentives and better availability
of housing finance. While development of housing finance in advanced countries has a long
history, the expansion of housing finance by the formal financial sector in India is of
relatively a recent origin. Keeping in view the demand-supply gap, our favourable
demography, increasing urbanisation and better growth prospects, the demand for housing
finance will continue to grow. The challenge, therefore, is expansion of housing finance to a
wider section of the population with the necessary safeguards to preserve financial stability.

To conclude my essay, I will now lay down my thoughts on the way forward:

1. First, besides institutional finance, self financing from private sources, withdrawals
from provident funds and loans from employers are important sources of housing
finance.
2. Second, both the NHB-Residex and RBI-HPI, besides providing a cross-check on
house prices, facilitate a comparison between final market prices and registration
prices. The coverage of the cities needs to be expanded to develop a representative all-
India urban house price index.
3. Third, in order to enhance the information base of the housing finance market, the
Reserve Bank should place in public domain its detailed database on house price
monitoring system.
4. Fourth, keeping in view the recent moderation in expansion of institutional finance for
housing, an important question is whether securitization would help in expanding
housing finance and also address the problem of procyclicality, thereby stabilizing
house prices.
5. Fifth, in order to mitigate risks in housing finance, besides application of macro-
prudential regulations, there is a need to develop a fixed rate housing loan product of
longer maturity.

Thank you.