The global political economy of housing : the case of the London Double-Movement

(1)

UNIVERSITEIT VAN AMSTERDAM

The Global Political

Economy of Housing

The case of the London Double-Movement

Author: Frederick David Smith

6/24/2016

Urbanisation and globalization are at the centre of the global political economy of housing. What is missing is a theoretical layer of the fictitious commodities; land, labour and money. The commodification of these commodities is fictitious because they are at the centre of social reproduction and identity. Thus to

commod-ify them is an inherent contradiction because the economic value of these commodities changes in their trad-ing which leads to dislocations in the social fabric that lead to a reaction by civil society to protect their way

of life in the face of liberalization. In London, land and the commodity of interest for this thesis that is built on top of it, housing, is very much a commodified and a financialized entity. It is the volatile changes in these values that is causing an affordable homes crisis, where workers are being asked to pay ever

increas-ing rent prices, as values soar absolutely and relatively greater than incomes. The questions for this thesis are; what processes are contributing to the liberalisation of housing, what are its effects, and how is

interna-tional capital investments into London contributing to rising house prices, and leading to a double-movement in the form of rent protests and local and national policy changes.

Master Thesis Political Science: European Union in a Global Order.

The Global Politics of Investment and Trade

Thesis Supervisor: Professor J.W.J Harrod Second Reader: Dr. R.M. Salgado

(2)

1

List of Abbreviations

GFC: Global Financial Crisis 2008 JRF: Joseph Rowntree Foundation MGI: McKinsey Global Institute

DCLG: Department for Communities and Local Government GLA: Greater London Authority

ONS: Office for National Statistics

S106: Section 106 of the 1988 Housing Act ARM: Affordable Rent Model

Housing: All housing unit types

Key Words: (dis)embed; fictitious commodities; commodification; liberalisation; financialisation; integration

(4)

3

Chapter 1: Introduction

“Governments are advised to abandon their earlier role as producers of housing and to adopt an enabling role of managing the housing sector as a whole.” (World Bank, 1993: 1)

Urbanisation, globally, has required states all over the world to divert resources into doubling the urban housing stock by 2030 from 1995 levels. One aspect of the existing policy paradigm is an increasing share of incomes going to housing costs and rents in both poor and rich countries (Angel, 2000: 3). As a result, housing markets have developed to address growing populations' need for housing, and where demand for housing is specifically high, markets and policies have had to become more sophisticated to meet the need. Additionally, governments have regulated and even been active participants in housing markets (p.4). Markets have permeated housing markets, even into the subsidised housing provided by the government and other organizations. This marketisation of housing, whether that be in the form of Right-to-Buy in the UK, where social housing is transferred to the private sector, or in tenants illegally selling their homes that were provided by the state for a small sum such as in Bangkok; has led to structural contradictions that has undermined the provision of housing at the bottom end of the market. This marketisation can serve some people well, by making it easier to exchange property and to have more flexible contracts and living arrangements, which can make individuals more mobile. For example in Stockholm, the BBC reports that due to the tight restrictions on first-lease homes, there is a thriving black market for accommodation to supply the growing start-up economy and fast growing population. On the black market rents can be much higher than official rents. However, taking a holistic perspective, the city argues that while some higher paid and migrant workers are inconvenienced, the system ensures that all workers have the right to live in the city at a reasonable

(5)

4 rate (Savage, 2016).

In London, housing policies changed in the 1988 housing Act when rent controls were lifted and buy-to-let mortgages were de-restricted in 19961 (Walker and Jeraj, 2016: 111-112). At the same time, London’s centrality in the international financial system makes it an attractive place for people to hold financial assets, and indeed, to invest in English housing assets through the city. The effects of this has been to increase the role of the market in the provision of housing and to also increase the importance of house price inflation to peoples incomes. In the period 1994-2015, as a result of transfer and reduction in local and national authority investments, the number of homes in the social stock has decreased from 3.61 million to 1.64 million (DCLG, 2016: 1), and the portion of people renting, as opposed to social housing or owner-occupier, is increasing. At the same time, the house building market appears to be failing as total house building has collapsed since the 1980’s, with most of the decrease attributed to the state ceasing to be a major housebuilder. The intention of this thesis is to show how the commodification of housing, and the subsequent liberalisation of housing so that it has become a financially traded instrument for investment, has meant that the need to maximise economic value from housing has undermined the social importance of housing, so that those on lower and even medium to high incomes are struggling to meet rent payments and to live close to their employment, or indeed to even find a quality home in their budget. Saving for a mortgage is increasingly difficult. In effect, the market is failing to provide affordable homes. At the centre of this crisis is the commodification of the fictitious commodities and Karl Polanyi’s insight that liberalisation of these commodities disembeds them from social relations and into the market which fetishizes the use-value of the commodity so that its exchange value is more

1

There is a deeper inequality mechanism at the heart of buy-to-let mortgages. Not only do buy-to-lets take up a house that could be sold to an owner-occupier, restricting supply and pushing up rental prices (in a lot of cases in London, the rents exceed the mortgage payments as well as the house value going up so it represents a significant transfer of wealth from renters to homeowners). In effect the renter pays the mortgage of the home they rent and contributes to the mortgage for the landlords real home, with little possibility of saving due to such high rents. In addition, banks consider buy-to-let lending as less risky than lending to a first time buyer, because there is two income streams to collect the mortgage payments (the landlords income and their tenants income). As a result these loans are at lower interest rates. Thus if you are an owner occupier, it makes sense to use the equity to buy another home, let it out, and receive both rental income and gains from a buoyant market.

(6)

5 important, leading to social crisis and demands for political intervention.

Indeed, power in the international economy is increasingly expressed through the 'free' purchasing of assets that contribute to widening class inequalities and structural power imbalances. Increasingly, domestic property markets in the major global cities are attractive investment opportunities for this international capital. In other words, desirable property is being purchased by international financial institutions, private equity funds, wealthy individuals, and even state funds.

The actual manifestation of this process is the pushing up of prices for existing and prospective buyers. The rhetorical justification for this process is the establishment of a full 'free' self-regulating market. Those existing at the bottom of the market, relatively disempowered inside the market due to pre-existing distributional inequities and state budget cuts, are seeing their cultural existence in many city centres and suburbs put under threat as their homes are being purchased by investors (domestically in the form of buy-to-let) and international investors (competing over the supply of homes and buying council/housing association stock) and their rents are pushed up. In addition, premium property in the centre is being purchased which pushes people further out in an affordability continuum (the housing market is a holistic ladder where if supply and/or demand changes at any rung, this has a ripple effect above and below). At the same time the government policies that are supposed to ease the effects of the market are being withdrawn and replaced by new approaches that work inside the market to find market-facilitated solutions.

At the centre of this is how ‘affordable housing’ is defined. The government prefers to define affordability at 80% of market rates, with traditional social housing being discounted at anything from 50-80% of market rates. Thus many people are trapped in this position where they cannot live affordably within the new criteria, and so are being ‘asked’ to move to cheaper areas, perhaps in other cities. Or, they are accepting that they have to pay more of their income for housing and

(7)

6 eroding their savings. Other organisation’s such as the World Bank, the Joseph Rowntree Foundation, the McKinsey Global Institute, and Shelter, prefer to define affordability within the criteria of income; around 1/3 of income. In order to reach these targets for London workers, clearly a re-embedding of housing into the socio-political structure is needed. Which would mean a de-commodification of housing to meet the needs of the people; at the expense of the income of landlords and other investors who want to maximise profits in a dis-embedded and liberalised housing market.

What is clear from the research is that people living in the major cities of states that have highly liberalised financial markets, and lightly regulated housing markets, pay much higher portions of their income on rent than those that live in states with highly liberalised financial markets and more regulated housing markets, perhaps also with rent controls and more active states in house building. In fact, the UK housing market is one of the few to have removed rent controls and to also have very light regulation with regards to tenant rights. As a result, the average UK rent as a portion of income is 47% and for Londoners it is 72%. In contrast the EU norm is 22% (Walker and Jeraj, 2016). Below in figure 1, we can see changing trends in tenure over time. The pattern shows a growth in private renters and people who own their property outright; and a decline in social housing and mortgaged purchases. The graph thus shows widening wealth inequalities, with housing costs and ownership being at the centre of this inequality.

(8)

7 This thesis will explore how the housing market can only be understood through the Polanyian lens of the fictitious commodities and the inherent contradiction between the embeddedness of housing as a social need, and the dis-embedding of housing into a financially traded investment asset. Within this notion, we can only understand what has happened to housing within the international context of liberalisation and the transfer of responsibility of housing from the state, and into state-facilitated market provision. Only then can we see the affordable homes crisis as a market failure that is an inevitable consequence of the dis-embedding of housing from relatively more local control, and into the international financial system.

Figure 1(Source: DCLG, 2015: 12)

(9)

8 As we can see from figure 2 above, over the past five years house prices have been rising between 3% and 21% per year in London. Taking the average price of £534, 785, this could mean an increase in one year of over £100,000.

“No wonder that the contemporaries were appalled at the seeming contradiction of an almost mi-raculous increase in production accompanied by a near starvation of the masses.” (Polanyi, 1944:

85)

“Economic adjustment became slow and difficult. The self-regulation of markets was gravely ham-pered. Eventually, unadjusted price and cost structures prolonged depressions, unadjusted

equip-ment retarded the liquidation of unprofitable investequip-ments, unadjusted price and income levels caused social tension. And whatever the market in question—labor, land, or money—the strain would transcend the economic zone and the balance would have to be restored by political means. Nevertheless, the institutional separation of the political from the economic sphere was constitutive

to market society and had to be maintained whatever the tension involved. This was the other source of disruptive strain.” (Polanyi, 1944:.227)

“Labor is simply the activity of human beings, land is subdivided nature, and the supply of money and credit in modern societies is necessarily shaped by governmental policies. Modern economics starts by pretending that these fictitious commodities will behave in the same way as real commodi-ties, but Polanyi insists that this sleight of hand has fatal consequences. It means that economic theorizing is based on a lie, and this lie places human society at risk.” (Block, in Polanyi, 2944:

(10)

(11)

10

Chapter 2: Financialisation

Financialisation literally refers to the increasing size and importance of the financial sector relative to the rest of the economy (Epstein, 2005). In many ways it is a natural part of the capitalist processes continuous expansionary circle in its production of surplus value. Thus all advanced economies have a large and advanced financial sector to recycle the surplus from the real economy and to re-invest in the real economy or, what has become more common since the first major financial de-regulations in the 1980’s, which is to re-invest financial profits back into the financial sector with complex derivatives, securities, and other financial instruments that emanate their value from a portion of the original value of the asset that they splice with other asset values that creates a new product that can be traded (and subject to price inflation through increased demand). However, these values can get so out of kilter and feed a market that inflates and which then bursts, leaving a black hole in the accounts of the financial institutions (and states and individuals) and deflation of the asset value as it becomes clear that the real value (its social use) is very much different to the fictitious value it received in exchange (however in London this deflation period was very minor). This is what happened in the sub-prime mortgage crisis, where peoples mortgages ended up being worth very much more than the actual real-adjusted value of the house, leading to repossessions, which have been reducing in the UK month on month since the crisis as we can see from figure 3 below. Indeed, financialisation represents a systemic transformation of mature capitalism resting on the altered conduct of non-financial enterprises, banks and households; and has been shaped by the deregulation of labour and financial markets. The effects of this have been higher corporate profits and dividends, with concurrent reductions in real investment and rising individual indebtedness. This process has been described as financial expropriation (Lapavitsas, 2013: 802).

(12)

11 Repossessions are arguably intensified by the effects of financialisation, as people take on levels of debt that are unsustainable and align their financial security with that of the market, in particular the performance of the housing market.

In 2015, the Bank of England said buy-to-let posed a threat to the nation’s financial stability, accounting for 15% of the UKs mortgage stock, up from 1% in 2000 (Walker and Jeraj, 2016: 131).2

The financial sector increases its size by commodifying assets into financially tradable form (commodification) and the subsequent marketization of those assets which, while being traded, can fluctuate the exchange value of those assets significantly, without necessarily changing their use-values (as described above). Hence, the financialisation of the fictitious commodities, and in this case land, is a significant, if not the most significant place to look for how economies create, exacerbate and reduce social inequalities. Indeed, it is arguable that the original idea for the transfer of social stock into the private sector was to increase the number of home owners and thus allow them to benefit from a hot housing market and become more financially secure, in a ‘property-owning democracy’. This did happen and many people became homeowner’s and grew their wealth

2_{This is important for repossession volumes, because many of the foreclosures were buy-to-let properties and the} land-lord had to sell. But they still have their real home, it is their tenants that get evicted and experience the social

dislocation.

(13)

12 as the value of their home increased. Indeed, in 2014, the English Housing Survey shows 63% of people are owner occupiers (down from 2003 peak of 71%) and there is a record number of people who now own their home outright, mortgage-free. This number is 33% of 63%, which is 7.4 million homes owned outright, but 83% of these are one or two people households, suggesting they are older and possibly retired (DCLG, 2015: 8, 16). The problem was this exacerbated the financial issues for those on lower incomes who cannot afford to buy. At the same time, the higher house prices stipulate a barrier to entry for new, young workers. The affordable homes crisis thus represents a social and economic divide; between home-owners and renters, and also across age groups. Indeed, in 2013-14, 4.4 million (19%) households rented privately, up from 10% in the 1980’s and 1990’s. While almost twice as many working households rely on housing benefit to cover their rent in 2013-14 than in 2008-09(p.8)3. In the UK this is a very salient political issue, and is central to the political debate regarding the Bank of England increasing interest rates. That is because mortgage debt is so high and real wages have stagnated since the 2008 financial crisis, that increasing interest rates could seriously affect homeowners financial stability. On the other hand, low interest rates arguably drive prices up further as money is less expensive. Thus, since the peak of 2003, the financialisation of housing is now negatively impacting the middle classes.

However, for this thesis, it is the financialisation of social housing stock and privately rented properties that is causing such social distress. The right-to-buy scheme is a key policy of the conservative government that was elected in 1979, and this policy still exists today. The effect is that social housing stock is transferred to the private sector so that renters can become homeowners and benefit from the housing market. The problem is that these homes were not replaced by new social housing stock, and the private sector became the main actor in housing provision. This was the intention of policy that was being promoted by the World Bank in the 80’s and 90’s. However, as this thesis will show, the withdrawal of the state from the supply of housing disembedded

3_{In effect then, supply and demand has ceased to function in UK housing, as the government is paying landlords the} difference in rents that the individual cannot afford.

(14)

13 housing from social relations and has contributed to the dislocation of communities and contradiction between the competitive downward force on wages, and the competitive increase in house prices in rents. Ultimately, the private sector has failed to build enough houses to meet the demand, especially for those on low-incomes (which is arguably a permanent structural effect of market economies). Thus to fully understand the affordable homes crisis globally, and in London for our case study, we have to see housing through the lens of the fictitious commodities and embedded social relations centred around these commodities, land, labour and money; which according to Polanyi, “are not real commodities”. The commodification of nature, people, and exchange is central to the functioning of capitalism, but it is essential to understand that these commodities require political intervention to regulate them so that they are not extremely effected by changes in the market.

The next section will explore how the international political economy changed in the 1980’s, as domestic economies were liberalised further and competition between corporations became increasingly transatlantic and global.

2.1: Market for corporate control of global assets

“Today’s IPE has evolved in response to the need within the field of international relations to transcend the conceptual separations of, firstly, economics and politics and, secondly, the international and the domestic.” (Bernhagen, 2003:

258)

The 1980’s arguably represented a periodical paradigm shift with regards to the state-market condominium4. In other words, there was a global intellectual shift that argued that states and their

4_{The state-market condominium is the idea that political economy is always an integrated fusion of state and market} actors, rather than a conflict per se. (Bernhagen, 2003; Underhill, 2000)

(15)

14 economies would benefit if industries were de-regulated, physical and regulatory barriers to trade and financial flows were lifted, and that state provision of core needs was inefficient and so the market was needed for the provision of services such as energy, transport and housing; a “full privatisation”, to “disembed capital from these (embedded liberalism) constraints” (to its accumulation) gained momentum (Harvey, 2005: 11; World Bank, 1993). With regards to finance, the big-bang deregulation is well documented, which integrated domestic financial markets into a much larger international financial market centred on New York, London and Japan. This created a ‘casino’ culture in the financial system (Strange, 1986). This integration led to an explosion of mergers, acquisitions and stock-listings that increased the politico-economic power and legitimacy of private business activity in the market. Whether this period can be described as the neo-liberal revolution or the governance turn, ultimately less-regulated markets replaced the embedded liberalism of the post-war consensus. The removal of limits and increased competition also led to a cultural shift in business attitudes:

“Beginning in the 1980s and gaining strength in the 1990s, corporate strategies began to shift, focusing more on the maximisation of shareholder value and less on long-term growth. The transformation involved less investment out of retained earnings and, instead, a financialisation driven by an increased offering of financial services, an increase in the purchase of financial assets

and, more recently, the massive purchase of their own shares aimed at raising stock prices. This ‘financialisation of the non-financial corporate sector’ in the USA has been well documented, and

some recent studies have connected financialisation directly to reduced capital investment” (Milberg and Winkler, 2010: 276).

In other words short term maximisation of profits, of asset values, and the trading of these values on financial markets to further maximise profits created a situation whereby firms and also states

(16)

15 reduced their capital investments and ‘sweated out’ existing infrastructure5

. At the same time the proliferation of economic statistics and corporate information such as quarterly earnings etc., fuelled a culture of short-termism and private gain that also fed into the housing market with the explosion of buy-to-let and the transfer of social stock into the private sector. Indeed, From the 1980s, the Right to Buy policy enabled many social tenants to purchase their home at a discounted price, and the proportion of households in the social sector fell from 31% in 1980 to 19% in 2000 (DCLG, 2015: 12).

Milberg and Winkler’s (2010) analysis of corporate activity shows a connection between financialisation of the non-financial corporate sector and a leakage in the nexus between profits and investment. “This leakage is especially important because recent studies have established that financialisation has come at the expense of investment” (p.279). They continue, “While the profit share rose and investment as a share of profits stagnated or fell, firms sharply increased their dividend payments and purchases of financial assets.” (p.285) (between 1970 and 2007 corporate profits in the financial sector as a proportion of total G.V.A. went from 33% to 43%). “This has permitted the US non-financial corporate sector to behave increasingly like the financial sector, purchasing more financial assets and raising dividends and executive compensation rather than investing in the real economy” (p.290). I would argue that this is what has happened to local authority housing. As the housing stock was privatised and financialised in the housing market, itself embedded in domestic and international financial markets, the link between rent payments to the council and re-investment into improvements to and increases in (or replacement of transferred stock) the total stock of housing was severed. The income from the demand ceased to increase the supply and the market inflated rapidly. The income that used to be reinvested, instead increased the

5_{This pattern is also something I noticed when I researched post-war UK energy Policy for a previous thesis. The} privatization of the energy sector and its infrastructure coincided with reduced capital/infrastructural investments and technological development, the removal of cross-subsidies which meant higher prices for some customers, and high corporate profits.

(17)

16 income of landlords and homeowners6. The homes that are supposed to provide a use, a house, instead provided a financial function to the landlord, and was treated as a financial asset to be purchased and its value maximised. This is the motivation for the majority of buy-to-let landlords that make up 70% of the two million landlords with just a single home (walker and Jeraj, 2016: 36). The motivation is income from the exchange value on the market; not necessarily the eleemosynary of providing an individual with a house, or to build more houses.7

Another final point Milberg and Winkler (2010) make relates to how increasingly rapid technological change “causes a ‘‘greater rate of churn in the labour market. This greater churn strengthens firms’ bargaining positions and allows them to capture a larger share of factor income (relative to wage costs)’’ (Ellis and Smith, 2007, p. 18, cited in Milberg and Winkler, 2010: 284). This is interesting because the social housing movement that began at the end of the nineteenth century and reached its zenith post-second world war, was in the backdrop of millions of organised labourers working in factories, shipyards and dockyards etc. that employed thousands of people each. These people were organised, visible, and needed secure housing to reproduce their labour for the next day’s work. For example, in 1915, a rental strike of potentially 20,000 workers in Glasgow against their private landlords rent increase was avoided because local trade union representatives lobbied the judge, warning of a strike, who then dropped the charges, and initiated rent controls. Events like this happened across the country and there were waves of strikes and unrest throughout 1915. Disparate groups joined the movement and on November 25, the Rent Restoration Act was passed and rent controls were implemented in Law (until 1988) (Walker and

6_{Of course, this income is still spent in other areas of the economy and growth ensues. However, because of the} centrality of the fictitious commodities in social reproduction, the loop that recycles rents back into social housing, which protects the integrity of the ficitious commodities (to be used again), which is the foundation of the entire economy, is broken. Thus the crisis that we can see now because of the closing of this loop is more serious, in my opinion, than what would happen if landlords incomes were reduced. This is because when the disembedding of the fictitious commodities (land, labour and money) becomes so great (high land/house prices, unemployment/low wages, inflation/deflation) serious events such as riots and revolutions happen. This is why Polanyi claims these commodities markets always need political regulation, and thus any policy approach has to recognise the always embedded nature of these commodities.

7_{This is logical. The financial incentives are there to become a private landlord, and they do provide a necessary} function in the market, especially for short-term lets. However, policies are pushing people into private renting who are not suitable for it, creating negative social consequences. Policies need to respond to this market failure.

(18)

17 Jeraj, 2016: 96- 102). Council housing had begun (beyond previous slum clearance policies), as a result from a double movement by tenants to secure the embeddedness of their housing within their community and wider social relations, and at a fair price. This organised political power by the people that require affordable housing was a key moment, in many moments like this, that resulted in government policy changing so significantly, that local authorities were required by law to house the people and began building social housing en masse, at very low rents. The entrance to the housing market of local authorities coincided with the housing association movement led by egalitarian philanthropists like, for example, George Peabody, who in the 1860’s built 66 flats for Birmingham workers for between £5.40 and £10.79 per week in today’s prices8 (p.98).

Organised labour and factories employing thousands of people simply doesn’t exist on the scale it did in the past. It is therefore difficult to bring together enough people, with disparate employment and social positions, to put pressure on landlords and local authorities to intervene in the market. Likewise much of London’s rental market is made up of young, upwardly mobile workers who may be less concerned with their high rent in the short term because they anticipate being in a sounder financial position in the medium to long-term and so are less likely to really organise and increase their bargaining position9. Thus perhaps the phenomena in advanced economies to have less labour organisation (partly due to diffusion of economic activity from large factories to smaller unites with more constant capital used, and most people working in services), is part of the reason why in the UK, housing costs have been able to swallow up increasing proportions of income over time, without a concurrent double movement by civil society that happened in the past and that Karl Polanyi theorised.

This is changing rapidly and became a national issue in 2014 with the New Era Estate protesters in

8

Not all landlords were against the new policies. Indeed, many wanted to see improvements in the housing sector as a whole, and also wanted more regulation so that they were not uncompetitive in relation to other landlords who may not be as focused on quality.

9_{This is what I have found in my experience. However, a survey with a large sample would be required to confirm if} this is a wider trend.

(19)

18 Newham, which will be discussed further in the case study of London in Chapter 5 of this thesis. In Chapter 5 of Walker and Jeraj’s (2016) book, ‘The Rent Trap’, they show some of the activities that have been undertaken by disaffected groups to protest about rising rents and a policy paradigm they see as unfair. For example, the Waltham Forest Group (made up of renters in the area), now meet their local council weekly to ensure they are enforcing the new landlord licensing scheme (p.90). Further, they also made a website where prospective tenants can see all the fees (often unlawful) that letting agencies charge. Further, in Hackney, a group called Digs, collected renters experiences and sent them to the council (p.93). In 2014, Generation Rent was set up, with the expressed intention of making private renting a primary issue of the 2015 General Election (pp.85-86). In sum, there are many instances of renters becoming activists as a direct result of their situation. From reading all of these instances, two aspects stick out. One, individuals and groups are using information tactics to highlight the issues to wider society and to contact like-minded groups. These campaigns are reaching councillors and MP’s and there are policy changes. Two, these groups are having to organise and fund themselves, and they are very determined. Thus, there is a wider double movement, concentrated in London but also in other areas of the UK such as Edinburgh (where the living rent campaign started), by people, and they are quickly penetrating the political system.

The double movement will be explored more in the case study of London in Chapter 5. First, it is important to show how housing policy has changed and where we are today; both globally and in the UK.

(20)

19

2.2 Neo-liberalisation of Global Housing

The driving forces of globalisation and neoliberalism precipitated:

“a global U-turn in prevailing housing and urban policy agendas…The new paradigm was mainly based on the withdrawal of states from the housing sector and the implementation of policies designed to create stronger and larger market-based housing finance models. The commodification

of housing, together with the increased use of housing as an investment asset within a globalized financial market, has profoundly affected the enjoyment of the right to adequate housing (Rolnik,

2013: 1058)”.

The GFC 2008 originated in the housing market due to huge contradictions in values and incomes. As financial institutions poured capital into the housing market, with the expectation of high returns, housing transformed into a fictitious commodity (p.1058). This transformation was not uncontested, and groups in New York City continue today to campaign for more affordable housing (Fields, 2014). However, the response to the crisis has been a continued disembedding, with liquidity being directed into the financial system, rather than to directly stabilise household finances.

This transformation was legitimised by deeply rooted, or the adoption of, notions of homeownership as being the pivot to which democracy, financial and social security emanated from10. Thus, under the same neo-liberal reform programme, both financial industries and housing markets were deregulated, opening up a new frontier of capital accumulation and the integration of middle and low-income earners into the financial circuit. In the context of the late 1980’s and the confidence of markets after the fall of the Berlin Wall, the liberalisation of housing markets gained momentum, so that the effect was a policy transformation from more relatively embedded housing,

10_{I would agree with this to a large extent. However, since 2003 the commodification of housing has accelerated so} that even middle and higher income earners are experiencing the disembedding effects of the market, and their finances are put at risk.

(21)

20 to housing becoming a major economic sector. In the more advanced economies, mortgage markets now represent up to 100% of GDP (Rolnik, 2013: 1059).

At the heart of this transformation was the subtle conceptual shift in the meaning of housing as a social good which could raise the degree of civilisation by housing those with fewer resources in decent conditions, paid for by the surplus generated from an advanced capitalist economy, and into an asset. Housing is central to distribution (p.1059). Indeed, the increase in buy-to-let mortgages in the UK, coupled with the statistically insignificant social housing building since the 1980’s, has led to a phenomena whereby renting is often more expensive than buying (by monthly expenditure, excluding deposit). This has the effect of lower-income renters paying both the mortgage of the home they rent and their landlords real home. This can also lead to tensions in friendships as a result of this transfer of wealth (there are many stories of people charging as much or more for a room in a shared house as the entire mortgage) .

The housing market then was effected by “the wholesale dismantling of basic institutional welfare, and the mobilization of a range of policies intended to extend market discipline, competition and commodification (Brenner and Theodore, 2002, cited in Rolnik, 2013: 1059). The effects were most acute in urban areas, where low and middle-income people saw the liberalisation process both increase land and property values, while at the same time seeing their incomes fall. Fiscal constraint, reduced welfare spending and lower taxation on business and higher earners, had the effect of reducing the income and distribution of national surplus for the poor and increasing income for the middle and upper classes. This allowed more capital to be invested and for international capital to flow into domestic circuits, with the expectation of increased investment. However, as shown in the previous section on corporate control markets, and as will be shown in the next section, investment did not increase. Rather, speculation increased and values soared, without any increase in private investment into house-building. The profits from rental income

(22)

21 were not retained for investment. In fact, the withdrawal of the state from house-building can be interpreted as a roughly 50% decline in housing investment since the 1980’s (shown in the next section). In effect, the social investment in housing in the twentieth century (with peaks during and after the first world war and after the second world war) that had been demanded by social reformers and wider civil society, was reversed in the 1980’s, and this investment was privatised, with the increase in home ownership numbers. However, this also increased private renter numbers, and raised the barrier to home ownership due to the hot market. In other words, the double movement that led to the embedding of housing in the twentieth century, moved back again in the 1980’s period of liberalisation. This thesis will show that we may again be experiencing a double-movement back in the direction of political intervention to re-embed housing.

Globally, the debt crisis of the early 1980’s opened up an opportunity for neo-liberal restructuring programs across the developing world. The IMF and the World Bank underwrote austerity reform and the liberalisation of markets. For example in Latin America, “between 1990 and 2000, the housing deficit in the region increased from 38 million to 52 million housing units. The result in most cases was an increase in poverty and informal arrangements (favelas), further worsening the living standards of the poor (MINURVI, 2005, cited in Rolnik, 2013: 1060).

Thus, “Across both developed and less developed countries, states have played a prominent role in the creation and promotion of an enabling environment to attract international capital and foreign investment (and to retain domestic surplus) (p.1061).”

The general pattern taken to financialise housing rests on two steps. One, privatization of housing. This involves the transfer of social stock into the private sector, for example in the UK with the Right-to-buy scheme that was introduced in a limited form in 1970 but became the flagship policy of the new government in 1979. There have also been transfers to non-profit or semi-profit

(23)

22 organisations to manage housing for those previously targeted by social programs. According to the World Bank, global transfers of residential property could be as much as $1 trillion (p.1061-2).

Two, financing homeownership. This involves the extension of credit markets to lower income households (sub-prime mortgages), made viable by the socialisation of risk in the banking sector and other government guarantees. At the same time, financial innovation enables homeowners to maximise the value from the asset through equity schemes and to benefit from the market push towards higher prices. In 2002 The Economist estimated the total value of residential property in developed economies increased by an estimated US $20 trillion (to over US $60 trillion) between 2000 and 2003. In 2005, The Economist suggested that house prices hit record levels in relation to incomes in Australia, France, Ireland, the Netherlands, New Zealand, Spain, the UK and the US (p.1062). While responsibility to build affordable homes was left to private enterprise, with much of this investment funded by the unlocking of future land-value increases (p.1063). These higher prices were made possible with government guarantees on some mortgages, lenient lending practices by banks, and the illusion of risk elimination from securitization.

In sum, the global political economy of housing has been effected by the neo-liberal pattern of governance reform in much the same way as other industries. The state has been central to this process of planning the liberalisation of markets, and the financialisation of embedded commodities.

(24)

23 In this section we will see how the implementation of the neo-liberal policy paradigm affected UK building. Below we can see this happening through the statistical data on income to house-price ratios, and on housebuilding from 1969 to the present day.

Globalisation can be defined as “the process of global integration of markets in goods, services, and capital.” (Bernhagen, 2003: 257). It is precisely this integration of capital markets that is a contrib-utory factor to the double movement because the increase in capital flows into the markets pushes the price up further, beyond what would be possible if the market was localized and prices were controlled. This can be seen from statistics provided by the English Housing Survey 2013-14. In figure 4 below cells D3-D35 are the London boroughs, and D40-43 are provincial housing markets that we will use for our control markets because they are hardly affected by economic activity in London. In 1997, the mean average ratio of income to house price in the London boroughs was 1: 4.44. However, by 2014, this mean average had increased to 1: 13.98. In the four provincial mar-kets, the mean average income to house price ratio increased from 1: 3.045 to 1: 5.475. In other words, the London house price rose significantly above average earnings while the regional house prices increased only slightly above earnings. In 1997, almost every London borough was afforda-ble based on the assumption of a mortgage three to five times salary. This is still the case in the provinces in 2015. However, this is no longer possible in every single London borough since 2004.

This suggests that prices are not increasing because of wage growth, but is instead driven by the financialisation of housing. The effect of this in London is that the proportion of households in the

(25)

24

Figure 4 (Source: DCLG, 2015)

This is important because it shows strong correlation between the liberalization and integration of financial markets in the 80’s and 90’s and increasing house prices in London where this activity is concentrated11. In fact, in 2012 50.05% of UK financial and insurance sector GVA was in London (plus an additional 9.4% in the south-east which is geographically and economically an extension of London), contributing 8.1% of GDP. In 1997, UK financial and insurance services contributed just 6.6% of GDP (Tyler, 2015: 1-3). Global Property Guide argues that London’s financial sector is a contributory factor to high house prices, as well as Immigration and population growth, record low interest rates and “quantitative easing”, and weak construction activity (Global Property Guide, 2016).

The UK Government’s Department for Communities and Local Government is an excellent re-source to look at historical data on house building. As explained above, the international housing

11_{This correlation could easily be causation however, because the financial sector is relatively larger in the Netherlands} than in the UK, where there doesn’t appear to be such an acute affordable homes crisis (Tyler, 2015: 4). In 2012, 93% of the Dutch housing stock was covered by regulated rents (Vandevyvere and Zenthöfer, 2012: 6)

(26)

25 policy paradigm changed in the 1980’s and 90’s so that the State’s role reduced to become more a market facilitator, rather than a market actor. The DCLG provides data on house building completions from 1969-7012 up until the present day, and the patterns give an indication as to the political economy of housing over time.

In the 1970’s, 3,521,410 homes were built in the UK. Of these, 1,843,490 (52.4%) were built by private enterprise, 147,580 (4.2%) were built by housing associations, and 1,528,100 (43.4%) were built by Lo-cal Authorities (Social housing).

In the 1980’s, 2,173,740 homes were built in the UK. Of these, 1,624,720 (74.74%) were built by pri-vate enterprise, 156,200 (7.2%) were built by housing associations, and 392,810 (18.1%) were built by local authorities.

In the five years from 2010 to 2015 (the 2016 figure is incomplete and only contains the England figure), 705,370 homes were built in the UK. Of these, 543,870 (77.1%) were built by private enterprise, 149,820 (21.24%) were built by housing associations, and 11,740 (1.67%) were built by local authorities. (DCLG, 2015: table 209).

These statistics show some very interesting trends. One, overall house building has declined over time. Two, private enterprises role has increased relatively from 52.4% to 77.1%, peaking at 86.86% in the 2000’s, but private enterprise has absolutely not been able to increase production enough to balance the withdrawal of the state . Three, housing associations become more important every decade, peaking

12_{This thesis does not include the 25 years up to 1970, when the social housing and wider welfare movement gained} momentum. However, many homes were built in this period with similar proportions to the 1970’s.

(27)

26

now at 21.24% of supply. Four, local authorities role reduces dramatically from 43.4% of supply in the 70’s, to just 1.67% of supply today, but local authorities are more important this decade than in the pre-vious decade.

Taking the figures a whole, “the majority (82%) of housing association homes were built from 1945 onwards and a third (35%) were built after 1980. The majority (71%) of local authority housing stock was built between 1945 and 1980; just 9% was built after 1980 (DCLG, 2015: 43)”

Thus, we can infer that the government has withdrawn from its role as a housebuilder and this has switched to the private sector. However, even though private enterprise has increased its role relatively; the private sector still builds absolutely less homes now than it did in the 70’s when local authorities were almost as important an actor by size. In other words, the withdrawal of local authorities has not been met by a concurrent entrance by private actors. This restriction of supply has the effect of increas-ing price and reducincreas-ing choice for tenants, which reduces their bargainincreas-ing position when negotiatincreas-ing rents and contracts. The effect is rent-seeking through restrictions (by both developers and landlords who benefit financially from lower supply). Indeed, Walker and Jeraj (2016) detail with many examples how this power imbalance between the tenant and the landlord in the context of this market, can mean that the tenant is afraid to report unlawful practices for fear of a no-fault eviction, because they fear hav-ing to find a suitable property again.

2.4 Conclusion

Thus, any analysis of rents and how they have increased so much in major cities relative to wage growth, cannot be understood unless we embed the rental discourse within the discourse of neo-liberalisation. By comparing housing with international corporate competition over assets and profits; we can see the same patterns of a downward effect on long term investment, and the

(28)

spill-27 over this has into the policy approach and culture of the housing market. This has a further impact on government policies because the underinvestment in long term output results in a short term increase in profit but decrease in investment and thus higher inequality (because those profits accrue to the shareholders) and lower tax receipts (capital gains taxed at a lower rate and rental income subject to tax relief, or avoided altogether because of the use of OFC’s and holding companies). Thus the UK government is finding it difficult to move away from austerity policies because the reaction to the financial crisis has been one characterised by austerity (continued disembedding), partly due to the disciplining effect from financial markets that will lower sovereign credit ratings if they believe that states aren’t making the required structural reforms. So there is a dual process. In the private sector infrastructure is being ‘sweated’ out to squeeze as much value out of them as possible. Which in the context of rising population and greater demand for services increases the demand for homes without supply which increases the cost. At the same time, housing developers are using the financial crisis as a way to appraise building projects with councils that claims profitability is lower and thus they cannot deliver the targeted number of affordable homes (main reason for the weak affordable housebuilding numbers by private enterprise in the most recent three years). At the same time these developers are benefitting from a very strong housing market so they can sell or rent their homes at high prices. On the government side their budgets are restricted because even though corporate profits are so high, inequality and lack of investment has hurt demand and the tax base because people have less disposable income to spend. While much of the corporate profits and dividend pay-outs avoid national tax jurisdictions and flow into other capital markets. Thus state budgets are squeezed which makes it more difficult to invest in the supply side of affordable homes. Indeed, in 2012 the UK housing budget was cut by 60% (Walker and Jeraj, 2016). Thus there is a net effect of under investment and under supply which only really benefits landlords and other owners of assets (even though this group is a majority of the population, it is shrinking fast).

(29)

28 This combination of private and public underinvestment means that future delivery of homes has to come in the form of public/private coalitions with more creative financing. This seems to be the approach that the housing research institutions are taking and that the government is taking . As we can see in the Joseph Rowntree Foundations 2014 report ‘Rethinking Planning Obligations’ the number of homes delivered through S10613 and social housing has been reducing significantly in the UK and London since the global financial crisis. The report claims there is a shortfall of 300,000 affordable homes in England (JRF, 2015: 4). We can see in figure 5 below, in the UK since 2004, the most private enterprise has been able to build is 65% of the affordable homes required in a year, which was in 2006-07, and the performance has been weakest in the most recent three years, just 37% in 2013-14 (JRF, 2015: 26). This can be seen to be a market failure as developers lobby the authorities to water-down their obligations to maximise profits. Equally, if they are not building, this suggests that private enterprise does not find it profitable to build affordable homes; which constitutes a serious flaw in the logic of enabling the housing market to work that is at the core of the 1993 World Bank Report which will be analysed in the next section.

Thus the proposed solutions are for the government to ensure profitability for the developers while also unlocking future revenue streams from the development and using future land value increases as a result of development to invest now. The JRF report elaborates on how better policies related to four areas: land assembly and planning; finance; localism; governance and delivery – can significantly improve the efficiency of planning and also the viability of developments, that meet local needs (pp.19-23). There is space in the market in the current context for creative ways to deliver affordable homes, and private companies and housing associations have to be innovative to deliver these homes. The government also has to be innovative in ensuring healthy competition in the market and potentially be more active in housebuilding again (which has happened as we can

13_{S106 is the name of the policy which requires developers to build a certain percentage of affordable homes on any} new development. The exact number is negotiated with the local authority and is subject to a viability appraisal. The developer can argue that the requirement to build a certain number of homes makes the project unviable, and the quota can be decreased, or removed and replaced with a cash payment so that the homes can be built somewhere else.

(30)

29 see from housebuilding figures above for the last five years). Creative public/private projects to deliver housing is also at the forefront of the Mckinsey Global Institute’s 2014 report ‘A blueprint for addressing the global affordable housing challenge’ and the World Bank’s most recent Housing Finance Conference which was held in May 2016. Looking at the pre-conference agenda, the World Bank is emphasising the need for public facilitation of markets, and the need to find new financing streams, to meet the demand for 3 billion new homes in urban areas by 2030 (World Bank, 2016).

Figure 5(Source: JRF, 2015: 26)

The next section will summarise the World Banks 1993 report and show how the effects of their proposed policy approach would lead to the disembedding of housing from established social relations.

(31)

30

Chapter 3: Three Approaches to Housing

3.1 World Bank Report 1993

“The housing sector is to be managed as a major economic sector.”(World Bank, 1993: 1)

The 1993 World Bank Report, ‘Housing: Enabling Markets To Work’, is an important report to read if one wants to understand how the intellectual approach to housing, and the fusion of the neo-liberal agenda with the more tightly regulated markets of the fictitious commodities, changed in the 1980’s and 1990’s. The basic argument is that markets are efficient and broadly produce correct outcomes; thus if the state creates the right conditions, then the market will solve the urban housing crisis. This may be the case for some markets and some aspects of the market. For example, the English Housing Survey 2013-14 shows how when local authorities introduced competition for maintenance contracts on their housing stock to meet the Decent Homes Standard (part of the Decent Homes Programme 1996), then standards improved (DCLG, 2015: 48). However, markets such as this, which are markets for real services and commodities, are fundamentally different to the housing market which is providing the core need at the centre of all other social and economic relations. In this sense then, the market approach is as imbalanced as the state approach. We need both state and markets to provide every type of housing that is required. This state and market approach is more fully proposed in the 2014 JRF report and the 2015 MGI report.

The World Bank report “advocates the reform of government policies, institutions, and regulations to enable housing markets to work more efficiently, and a move away from the limited, project-based support of public agencies engaged in the production and financing of housing. Governments are advised to abandon their earlier role as producers of housing and to adopt an enabling role of

(32)

31 managing the housing sector as a whole” (World Bank, 1992:1).

The report highlights the size of the housing market in GNP terms. “Housing investment typically accounts for 2 percent to 8 percent of gross national product (GNP), and the flow of housing services for an additional 5 percent to 10 percent of GNP. Annual spending on housing, therefore, accounts for between 7 percent and 18 percent of GNP. (p.2)” Further, “the performance of the housing sector is intertwined with that of the broader economy through real, financial, and fiscal circuits.(p.2)” This analysis of housing at the centre of the performance of other aspects of the economy is very uncontroversial and essentially fits with Polanyi’s claims. However, the World Banks 1993 approach is to see the negative urban environments as proof of government failure to facilitate markets, rather than a more complex failure of both government and markets. As such, their solutions, if we see them through the Polanyian lens, are bound to cause contradictions that will require more state intervention, either to enforce the failure of disembeddedness (through huge housing benefits payments etc.) or to re-embed housing by regulating and becoming an actor as well as a facilitator, in competition and cooperation with private organisations.

The report claims “there are strong links between housing policy reform and the Bank's concerns with reducing poverty and with reversing the deterioration of the urban environment. Slums, dilapidated urban neighborhoods, and squatter settlements which provide housing to the majority of the urban poor are very often the places of lowest environmental quality… It is the poor that are most disadvantaged by poorly functioning housing markets, and who suffer the most when governments fail to address the environmental concerns of urban settlements (p.3)”. Again, these statements are not controversial. However, there is a clear assumption that markets can solve these problems on their own, if government let them.

(33)

32 failure. In part, this reflects the fact that policies are often inimical to the functioning of the rental housing sector, which houses the majority of urban populations throughout much of the developing world. While housing costs and prices have been higher than necessary, they have also had negative macroeconomic consequences, affecting investments in other sectors, savings rates, budgetary deficits, inflation, interest rates, labor markets, productivity, and even the balance of payments.

Housing policymaking must thus move away from its previously narrow focus on a limited engagement of government in the direct production of lowcost housing. It must now guide the

performance of the housing sector as a whole, including that of the formal and informal private sector, with a stronger emphasis on its overall role in national economic development (pp.3-4)”. We can agree with much of this also. High prices and poor regulations negatively impact the poor and the wider economy. However, the underlying implication from the report is that private enterprise will build the homes and fix the environment without the need for the state other than to be an ‘enabler’. There is even a criticism of state building of low cost housing, without the recognition that it was the terrifically bad conditions of the privately built and rented urban slums in the nineteenth century that catalysed the double-movement that influenced the government to pass Acts forcing local authorities to build houses and improve the urban environment. Indeed, the World Bank does not seem to understand the history of house-building and its centrality to social stability.14

If we compare what the report is proposing to the real effects of this policy approach on UK house-building, based on the statistics from the 1990’s and 2000’s detailed in the previous section, then we can see the inherent contradiction more clearly. The house building statistics shown in the previous section highlight how the state building of low-cost units complemented the building of private enterprise and housing associations. When the state retreated from housebuilding and became an enabler as this report suggests, then housebuilding absolutely declined, and private enterprise was

14_{It is beyond the scope of this thesis, however, I am not aware of any contemporary or historical society that didn’t} involve the state in house-building. Indeed, housing the poor is central to state-craft.

(34)

33

not able to make up the shortfall. Through the Polanyian lens this is logical. That is because

private enterprise is about the production of surplus value in the abstract, not direct use-values. Hence, the specific building of a house is actually the abstract building of an object that can receive a monetary value in exchange. This is why the state became a housebuilder in the first place, because private enterprise (generalised) produces products for as little cost as it can and sells as high as it can. In order to sell for a higher price, the supply must be restricted (this is exactly how S106 has been applied in London; the developers argue if they build too many homes at the same time than the average price goes down and the income from the entire development is lower; so they build less homes over longer periods of time to maximise their return). Equally, it is easier for a landlord to buy an existing house and turn it into a privately-rented home, then it is to build a home from scratch (faster maturity of the investment). Therefore, the actors in the market are incentivised to reduce supply and increase the price.

On the other hand there is a certain incentive to improve the quality. This is because you are more likely to let out a nicer house faster. Further, higher quality standards stipulate a barrier to entry and so larger private letting firms often lobby for higher standards and enforcement of rules (although enforcement of rules is often non-existent due to budget cuts). However, in London, houses are often not let by quality, because the prices are so high and competition is so fierce that many people are willing to accept severely damaged, and often unsafe homes. Overall then, the government is still essential as an enforcer of regulations, even if a competitive market could theoretically drive up standards naturally; and based on the evidence from the UK, market facilitated building is not adequate on its own.

Finally, the report elaborates on the polices governments are encouraged to adopt “that enable housing markets to work”. The Bank proposes seven policies, three addressing demand-side constraints, three that address the supply-side, and one that improves housing sector management. We will address each of them individually in relation to Polanyi and the UK market.

(35)

34 Three demand-side instruments: “(i) developing property rights: ensuring that rights to own and freely exchange housing are established by law and enforced, and administering programs of land and house registration and regularization of insecure tenure; (ii) developing mortgage finance: creating healthy and competitive mortgage lending institutions, and fostering innovative arrangements for providing greater access to housing finance by the poor; and (iii) rationalizing subsidies: ensuring that subsidy programs are of an appropriate and affordable scale, well-targeted, measurable, and transparent, and avoid distorting housing markets.” (p.4)

Three supply-side instruments: “(i) providing infrastructure for residential land development: coordinating the agencies responsible for provision of residential infrastructure (roads, drainage, water, sewerage, and electricity) to focus on servicing existing and undeveloped urban land for efficient residential development; (ii) regulating land and housing development: balancing the costs and the benefits of regulations that influence urban land and housing markets, especially land use and building, and removing regulations which unnecessarily hinder housing supply; and (iii) organizing the building industry: creating greater competition in the building industry, removing constraints to the development and use of local building materials, and reducing trade barriers that apply to housing inputs.” (p.4)

“These instruments are to be supported and guided by developing the institutional framework for managing the housing sector: strengthening institutions which can oversee and manage the performance of the sector as a whole; bringing together all the major public agencies, private sector,

and representatives of nongovernmental organizations (NGOs) and community-based organizations; and ensuring that policies and programs benefit the poor and elicit their participation.” (p.5)

(36)

35 happened centuries ago (property rights are normalised). The second measure arguably is a key factor in the sub-prime mortgage lending and associated splicing and securitization of junk mortgage debt that contributed to the 2008 crisis. This measure fails to address systems analysis and structural inequality based on the laws of competition and value. The intention to bring in the urban poor and middle-income earners to the international financial system, and to hedge the risk by socializing credit risk, may in fact increase risk and weaken the financial position because if the security of their income is taken away than these people have huge liabilities. The third measure arguably is an advocacy of state budget-cutting and ‘appropriate and affordable’, when applied to people’s lives, is a contradiction in term . As we have seen, this reduces enforcement of rules and contributes to market failure in this way. At the same time the contradiction inherent in the commodification of the fictitious commodities, has meant that actually in 2013-14, despite almost three decades of housing market liberalisation, the housing benefit budget is growing at a fast pace, with twice as many working households receiving it to meet their costs than just five years previously. This is partly caused by labour market competition putting downward pressure on wages, and structural mis-incentives to reduce housebuilding and charge higher rents.

The first supply-side instrument is logical because of course infrastructure is needed for new developments. Better coordination of agencies is key to reducing costs and speeding up the planning process. The second one is about good regulations and removing bottlenecks which is a good thing. However, the assertion that states should remove unnecessary regulations that hinder supply is contradictory. There is no evidence from the UK data that deregulation increases house-building. In fact, private house building declined after the industry was de-regulated. The third one is also about efficiency and competition which I would also argue in favour of. However, there is a failure to recognise that the state is also an actor in the building industry and that local authorities building social housing contributes to competition, and frees up developers to build homes for other sectors of the market, without having to provide homes through S106 or other obligations (the MGI

The global political economy of housing : the case of the London Double-Movement