What is financialization
Some people think that we need to build a lot more housing to improve housing affordability in cities. Others think that that is an insufficient solution as housing has become “financialized”.
Last year, a Toronto City Councillor wrote about this for Spacing magazine.
“That’s financialization and it has nothing to do with the simple supply and demand curves taught in high school. It makes housing more expensive. It increases the concentration of wealth. It is an insanely risky way to run the biggest economic sector in the world.”
This word seems to be relatively new to the debate, and I think that I’m now just starting to understand what it means. Specifically, I understand financialization to mean three things.
First, the increased legibility of housing by global capital markets. Thanks in large part to the internet, the housing market has become more efficient as information asymmetries have eroded. It’s now much easier for an analyst in New York to get a good understanding of distant housing markets and allocate capital accordingly.
Second, predictable scarcity leading to housing as a store of value. Housing in most major North American cities is predictably scarce because a series of land use and other rules have made it hard to build. As a consequence, housing values in these cities typically increase at a higher rate than inflation. This makes housing attractive as a store of value.
Finally, an inflating money supply that contributes to and exacerbates the increased demand brought about by both of the points above.
To restate the point, these are all demand-side factors impacting housing prices and affordability. They do directly have to do with the simple supply and demand curves taught in high school.
Which is not to say that this couldn’t be a problem, or that we shouldn’t explore relevant solutions. Predictable scarcity for instance could become predictable abundance given the right land use policy reforms.