Political Economy Students' Journal

Introduction 

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The financialization of housing, defined by the United Nations’ Human Rights Office (2021) as “the phenomenon [that] occurs when housing is treated as a commodity—a  vehicle for wealth and investment—rather than a social good” has become a worrying phenomenon in Europe over the last decades, with both individual and institutional investors interfering with the human right to housing for speculative motives. In this essay, I seek to make the connection between financialization and the difficult reality of housing in Portugal, where low wages, foreign investment in real estate, and soaring property prices are all part of a difficult panorama for locals, and notoriously for young people, which are among the latest to leave the parental home in Europe (Eurostat, 2020).  I will start by briefly introducing the reader to the financialization of housing in the  Western world, before focusing on how this process “came to” Portugal. I will then relate it to available data on the Portuguese housing market, before going through possible solutions to this problem. Finally, I will wrap up the essay with my main conclusions. 

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Financialization of housing: a brief history 

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As noted by Aalbers (2017), housing is one of the main elements of the process of financialization. As in other aspects of governance that political economy studies, it is possible to identify a Fordist model of housing provision for the trente glorieuses (1945  to 1970s), which was disassembled from the late 1970s with the rise of neoliberalism.  Aalbers (2017: 1) identifies some of its characteristics: a separation of housing finance from “other banking and financial channels” (with mortgaged homeownership requiring a large downpayment, and only specialized institutions financing the remainder, as opposed to general banks); a detachment of “subsidized rental housing”, which was regulated and also provided by the state or semi-public institutions, from financial markets; and the incorporation of housing into the development of strong welfare states,  through planning. 

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The disassembling of this model involved the integration of housing finance with other finance channels, the upscaling of lending institutions, the securitization of mortgages,  the erosion of social housing provision, and a shift towards generalized private homeownership (Aalbers, 2017: 2). As a result of this new paradigm, advanced economies saw a steep increase in private debt from 1980 to 2010 (from the 50-60% range to 118% in 17 advanced economies, according to Jorda et al., 2014), fueled by an “explosion of mortgage debt”, with mortgage loans increasing from 20% to 64% of GDP  between 1914 and 2010 (ibid).  

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The financialization of housing means that housing has become an asset (Fernández &  Aalbers, 2017: 3), with real estate becoming an ever-more important store of value.  Piketty (2014) argues that “the large stock of agriculture-based capital” of the XVIIth and  XIXth centuries, which was destroyed by the two World Wars, resurged as “real-estate based wealth” (as cited by Fernández & Aalbers, 2017: 3). In the Eurozone, for example,  housing wealth rose from €3.7 trillion to €24.2 trillion in the 1980-2006 period (ibid). 

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Fernández and Aalbers (2017: 4) claim that there is a “wall of money” behind this trend,  promoted by four factors: the rise of “pension fund capitalism” (a concentration of wealth in the hands of institutional investors such as pension schemes or insurance companies),  the recycling of trade surpluses of emerging economies (the savings glut), loose monetary policies such as quantitative easing, and the rise in accumulated profits for transnational corporations. 

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Financialization of housing in the Portuguese case 

 

Financialization, as in, the explosion of the financial sector’s importance that hit Western societies in the post-Fordist era only reached Portugal in the 1980s, with policies of “bank privatisation, abolition of capital controls, and deregulation and decompartmentalization of the financial markets” (Santos et al, 2015: 6). The impact of these policies in the  Portuguese reality was especially relevant because all of the banking systems had been public since the 1974 revolution, with strict controls on capital flows, administratively set interest rates, and the targeting of the exchange rate through the use of a “sliding scale pegged to a basket of foreign currencies” (ibid). 

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The 1990s were subsequently an era of credit expansion, with credit limits and the administrative setting of interest rates gone. Other measures, such as the fall of the rate  of compulsory reserves, also contributed to the growing importance of the financial  system and its assets, which by 2013 represented about 700% of Portuguese GDP,  rising by about 255 percentage points from 1995 (ibid: 8). However, and until very  recently, the expansion and diversification of Portuguese finance were relatively limited,  compared to Anglo-Saxon countries, when it comes to “securitisation of credit, the  development of new credit markets such as the subprime market, stock market euphoria, 

and even the growth of investment banking” (ibid: 9 e outros), and this is reflected in housing finance being mainly focused on retail banking. 

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Throughout the 2000s, Portugal was one of the Southern European countries which  Stockhammer et al. (2016) consider to have experienced growth based on financial imbalances and a property price bubble. This bubble was backed by an expansion of credit that saw household debt reach 130.5% in 2009, up from 35% in 1995 (Santos et al., 2015:  33-34), with the weight of housing loans representing 81% of total household debt in  2011. This transformation was pushed by a public housing policy that was focused on the  “promotion of private ownership” of housing (ibid) and by aggressive competition in the banking system and financial markets, which led to “the appearance of quick, easy credit”. All in all, the main result of the first stage of housing financialization in Portugal was the creation of a class of indebted owners. 

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In the last two to three decades, however, we have started to see Real Estate Investment  Funds (Santos et al., 2015: 40) come into play in the Portuguese housing market, bringing its financialization to a different stage. These funds may partake in four activities (acquisition of property for rent or other forms of related business use; acquisition of property for resale; acquisition of other property rights, e.g., garage space; and construction and urban rehabilitation projects) and enjoy a special status when it comes to taxes. For instance, they do not pay Municipal Property Tax (IMI). Since the 2008 crisis, REIF portfolios have seen a sharp growth in the weight of housing, especially those that own property not destined for rent. REIF’s assets are mainly concentrated in the centre of Portugal’s two biggest cities (Lisbon and Porto). 

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Some of the world’s biggest institutional investors in housing, such as Blackstone and  Lone Star (Idealista, 2017), have entered the Portuguese market in the last half-decade,  due to the more favourable and less risky post-economic crisis conditions. In a press release from Deloitte Portugal (2017), it is explained that a shift, from “parasite” funds and individual investors to bigger institutional investors dominating the business of housing finance, is to be expected after a period of low prices and crisis. That is because these bigger funds can sustain high prices better. Gabor and Kohl (2022:3) warn of the  “negative social impact” of these funds, which are part of “Financialization 2.0”, as depicted in the literature. Financialization 2.0 is not about “buying high, selling low,  increasing rents without maintenance” anymore, but about institutional investors who  generate “both rental income and capital gains” as house prices rise (ibid: 9).

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Negative consequences in Portugal 

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The consequences of financialization on the affordability of housing, indebtedness of families, recharacterization of city centres, and life prospects of young people have been very extensive all over Europe. In Portugal, we find that current homeowners are extremely indebted (as shown above), tenants face ever-higher rents, with prospects of eviction, social housing provision is almost non-existent for the low-middle and middle classes, and those looking to move out of the parental home do it later and later, with the city centres not being an option at all. 

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In the last decade, average house prices grew by roughly three times as much as the average income (Martins & Rosa, 2022), and by looking at OECD data we can see that  Portugal presents the highest house prices-to-income ratio in this group of countries, at  146,8%, which indicates that the escalation in prices is not driven by “average” citizens buying homes, but by foreign cities and institutional investors with a higher purchasing power. It also presents us with the sheer scale of the unaffordability problem, especially for lower-income earners. Just in the last year, house prices rose by 13,8% (Expresso,  2022) while the average wage only grew by 3,4% (Eco, 2022). 

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One of the trends that we can associate with the soaring house prices is the growing weight of foreign investment in Portuguese housing. From 2019 to 2021, 25,000 houses were bought by foreigners in Portugal (Neto, 2022b), at significantly higher average prices (about €245,000 for EU citizens, and €375,000 for the “rest of the world”) than those bought by locals (whose average stands at about €150,000). This difference is to be expected due to the higher buying power of foreigners looking to buy houses in Portugal when compared to that of the locals, but it is also to be expected that it will impact the accessibility of housing for them. Lisbon is also a standout in this trend, with €900 million worth of houses bought by foreigners in the city just in 2021, representing 38% of the total spending on housing acquisition for that year (Observador, 2022). This trend can be attributed partially to the Portuguese government’s “vistos Gold” (golden visas)  programme – which started in 2012 - which grants citizenship after 5 years to non-EU citizens that fulfil one of three conditions, one of which is investing at least €500,000 in  Portuguese real estate (Jornal de Negócios, 2014). 

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Some justifications for the steep increase in house prices, as given by the president of  APPII, the Portuguese Association of Real Estate Promotors and Investors, include the rise in the cost of materials needed for construction, a supposedly restrictive tax system, and a supposed excess of demand for housing in Portugal, that supply cannot keep up with. He also claims that Portuguese contractors want to build houses for locals but are well aware that this is not possible, with the prices only accessible to foreigners with higher purchasing power (Rádio Renascença, 2022). While some of these factors are comprehensible, the notion of scarcity clashes with the reality of Portugal as the second  European country with the most empty houses (Sol, 2018). Lisbon alone is home to as many as 48,000 empty houses (Idealista, 2022), and a positive correlation can be found between the weight of alojamento local (“local accommodation”) and the number of empty houses in each municipality. It seems likely that these houses are being kept empty as a store of value or as speculative instruments, as prices rise by the day. 

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Possible solutions 

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Solutions to slow down the financialization of housing and governing it as the social asset that it is may come from several scales of political power. One thing that most authors seem to agree on is that public organisms, from municipalities, to state governments to alliances like the European Union itself, need to step forward more and play a bigger role, both in regulation and housing provision, to push against market forces and ensure the human right to housing. Portugal could benefit from all these levels of policymaking,  being part of the EU and having seen a public debate on regionalization for decades. 

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Gabor and Kohl (2022: 73) put forward a four-element policy guide for the EU to deal with this matter and “reclai[m] public responsibility for affordable and adequate housing from markets” at a European level. The four dimensions include a European level regulation of institutional landlords, according to the European Commission’s Social  Taxonomy proposals; the creation of a European Housing Fund to support social housing provision; the ring-fencing of housing asset classes from any regulatory easing incentives through a “Housing Red Flag” rule; and the use of macroprudential policies pushed by the European central bank to keep mortgage debt and house prices down. 

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On the other hand, Leijten & de Bel (2020: 17), who make their approach to housing financialization from a human rights perspective, point out some examples of measures that municipal powers have taken in recent years. For instance, they mention the improvement of poorer tenants’ protections from eviction in Toronto, the expropriation of empty flats owned by institutional investors in Barcelona, and the capping of rent for some apartments in the German cities of Munich and Berlin. In Lisbon, some policies in the right direction have been enacted in recent years, such as the “Lisboa PRA Todos”  program which attributes a few dozen houses to lower-class families at way lower than-market prices each year (Mendes, 2017: 27). The former mayor of Lisbon also mentioned his intention to restrict local accommodation in some areas of the city, and even promised to prohibit the emission of more local accommodation licenses in Lisbon in case of an electoral victory that did not occur (Observador, 2022). 

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Whatever “scale” is prioritized to contain housing financialization, however, there should be some room for manoeuvre when it comes to bumping Portugal’s public expenditure on housing, which has been under 1% of GDP since the end of the 1970s (Santos et al.  2015: 9). As times change and new necessities arise, housing should not remain the poor relation of the Portuguese welfare state. 

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Conclusion 

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In this essay, I have attempted to demonstrate the impact of financialization on the  Portuguese housing market. As with other trends of the neoliberal era, the financialization of housing reached the country relatively late and does not present the same characteristics as in other advanced economies. However, its impacts are still felt through the indebtedness of owners, soaring prices that are disproportionate relative to wages, the increasing presence of foreign capital in Portuguese real estate, local accommodation, the number of houses left empty for speculation, and the struggle of young people to leave the parental home. I have demonstrated these impacts through available data and enlisted some possible solutions to deal with financialization and fix the Portuguese (and  European) housing crisis. The way forward for any government will necessarily involve tighter regulation and better and more plentiful public provisions, in order to restore the purpose of housing as a social good and human right, instead of a financial asset.

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References 

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Aalbers, M. B. (2017). The variegated financialization of housing. International journal  of urban and regional research, 41(4): 542-554. 

Baccaro, L. & Pontusson, J. (2016) “Rethinking Comparative Political Economy: The Growth Models Perspective”, Politics & Society, 44(2): 175-207. 

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Neto, R. (2022, February 10). Salário médio dos portugueses subiu 3,4% para 1.361  euros. ECO. https://eco.sapo.pt/2022/02/10/salario-medio-dos-portugueses-subiu-34- para-1-361-euros-em-2021/ 

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Santos, A. C., Serra, N., & Teles, N. (2015). Finance and housing provision in Portugal.  FESSUD Working Paper Series, 79: 1-58. 

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