More Mortgages, More Homes? The Effect of Housing Financialization on Homeownership in Historical Perspective

• Author: Sebastian Kohl
• DOI: 10.1177/0032329218755750
• Date: 01 June 2018
• Published date: 01 June 2018
• Subject Matter: Articles

https://doi.org/10.1177/0032329218755750

Politics & Society

2018, Vol. 46(2) 177 –203

© The Author(s) 2018

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DOI: 10.1177/0032329218755750

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Article

More Mortgages,

More Homes?

The Effect of Housing

Financialization

on Homeownership

in Historical Perspective

Sebastian Kohl

Max Planck Institute for the Study of Societies

Abstract

Recent research has emphasized the negative effects of finance on macroeconomic

performance and even cautioned of a “finance curse.” As one of the main drivers

of financial sector growth, mortgages have traditionally been hailed as increasing

the number of homeowners in a country. This article uses long-run panel data

for seventeen countries between 1920 (1950) and 2013 to show that the effect

of the “great mortgaging” on homeownership rates is not universally positive.

Increasing mortgage debt appears to be neither necessary nor sufficient for higher

homeownership levels. There were periods of rising homeownership levels without

much increase in mortgages before 1980, thanks to government programs, purchasing

power increases, and less inflated house prices. There have also been mortgage

increases without homeownership growth, but with house price bubbles thereafter.

The liberalization of financial markets might after all be a poor substitute for more

traditional housing policies.

Keywords

financialization, homeownership, mortgage debt

Corresponding Author:

Sebastian Kohl, Max Planck Institute for the Study of Societies, Paulstr. 3, Köln, 50676, Germany.

Email: kohl@mpifg.de

755750PASXXX10.1177/0032329218755750Politics & SocietyKohl

research-article2018

178 Politics & Society 46(2)

Some housing researchers speak of a new urban or new housing question.1 Following

the Global Financial Crisis (GFC) of 2008, many countries’ households were encum-

bered with high volumes of mortgage debt, high housing prices and affordability prob-

lems, and stagnating or falling homeownership rates. Young members of this generation

are often worse off than their parents in the housing sector despite the large inheritance

wave.2 Much of this has to do with housing prices and correlated rents that have reached

levels that even real estate optimists would not have predicted thirty years ago and that

even a financial crisis could only partially depress.3 At the same time, recent homeown-

ership rates have been stagnating, if not falling for the first time in decades. This seems

all the more surprising as almost all political parties have been defending homeowner-

ship and the liberalization and extension of financial markets in the mortgage sector

was meant to support this goal. This articles asks whether the “great mortgaging”4

across the last fifty to a hundred years has really produced the property-owning democ-

racies so many conservative liberals and even some social democrats envisioned, or

whether it has merely inflated house prices and exacerbated unaffordability.

Before the 1970s, capital markets in the housing sector were often shielded from

competition, both national and international, by governmental regulation of interest

rates and special circuits in housing finance.5 Afterward, commercial banks began to

dominate housing finance, mortgage bonds were more easily traded across geographi-

cal boundaries, and competition in mortgage lending increased in most Western coun-

tries.6 Stimulated by the Basel I Accord, mortgages, rather than traditional business

loans, became a major activity for banks. One of the central political motivations for the

financial deregulation since the 1980s was to make financial markets and the private

sector do what had been considered a public policy during the postwar era: to provide

decent and affordable housing to all citizens, but also to provide some kind of general

welfare through housing at times when the privatization of pensions started in many

countries.7 Housing and mortgage markets were one, if not the central policy area for

financial liberalization because aggregate mortgage credit has been the main driver

behind the expansion of overall private credit markets over the last decades,8 whereas

before the 1970s and 1980s, housing was seen as an important social policy field for

most governments. The promise that financial markets could take over this governmen-

tal function was also linked to the political idea of making homeownership accessible

to broad strata of the population that had previously been public or private tenants.

This article takes an empirical look at the question whether the rise of mortgages and

financial markets lived up to the political idea of increasing homeownership in a range

of OECD countries. Although finance has traditionally been credited with many positive

functions vis-à-vis economic growth and development, the overreaching of financial

markets as social policy instruments has been cited, since the GFC, as a cause of finan-

cial instability and even political radicalism.9 Thus, increasing household debt seems to

be a good predictor for the major recessions of the last hundred or more years.10 “Too

much finance” or even a “finance curse”11 has recently been found to hamper economic

growth,12 slow investment in physical assets,13 or produce more volatile growth pat-

terns.14 Debt thus seems to be associated with some macroeconomic vices; but does

mortgage debt bring along the benefits of more homeownership?