In February 2017, mrs Leilani Farha, the United Nations’ special rapporteur for housing, presented a paper on housing commoditisation to the UN human rights council in Geneva. The paper explains how an unregulated financial market has boosted housing prices to a level that excludes low-income households from certain attractive urban locations and created social inequality. Mrs Farha introduces the term ‘financialization of the housing market’. This article explains that execution of the ideas of mrs Farha will not lead to lesser social inequality. Other measures need to be taken rapidly.

What is meant by financialization of the housing market?

Global investment firms are looking for so called high-quality collateral investments, and housing is one of the asset classes that can be classified as such, together with US, German and Swiss government securities. This explains why housing is increasingly becoming financialized or subject to financial speculation. I would describe financialization in this respect as the increasing dominance of financial actors, markets, practices and measurements of the housing market. Thus, housing is disconnected from its social function and is part of an investment strategy.

Financial markets and housing prices

Stock markets and home building are leading economic indicators. The precise relationship is not known, but it can be observed that the housing sector influences the economy. When the stock market goes down, most portfolios loose money. The net worth of investors declines and so will their willingness to invest. Investors will also be influenced in their behaviour from a psychological perspective. In addition, contractors and their sub-contractors (plumbers, electricians, et cetera) are all dependent on housing. They will loose buying power, which influences other sectors as well.

Purposes of financial markets in general

Generally, the purpose of the financial (capital and money) markets is threefold: (1) raising money for new ventures (a small portion of the stock markets’ activity); (2) providing liquidity, so the investors and therefore contributors to the value of a company can cash in on their efforts and (3) allocating capital effectively, by setting the prices of the financial instruments. Stock markets all over the world list real estate companies.

Fundamental economic problems

One major economic “problem” is that the development of financial markets cannot be predicted. This is explained by the fact that it is too complex to specify all the original information and derivation rules that make up the price of financial instruments. Jeff Stibel (2009) explains this in the following manner:

The future, like any complex problem, has far too many variables to be predicted. Quantitative models, historical models, even psychic models have all been tried — and have all failed. Just imagine predicting something far simpler than the future of the stock market; say, chess. There are an overwhelming 10 to the 120th power possible moves. That’s a 1 followed by 120 zeros! As James Hogan explains it in his book Mind Matters, that sum far exceeds the number of atoms in the universe.

The same counts for housing prices. It is even hard to look back and compare housing prices in the past. Price alone is a misleading way to evaluate the performance of residential real estate. Those who fail to do additional analysis are likely to overestimate the attractiveness of housing as an investment. The only data available in this respect is Robert Shiller’s historical housing index (adjust for the significant increase in the size and quality of homes). To evaluate real estate as an investment, it is needed to consider the total impact that the purchase of the home has on the buyer’s finances. That is, incorporate all of the net additional expenditures (like interest, taxes, insurance and buying/selling costs) associated with the purchase.

The impact of time on the return of a real estate investment is often underestimated. In a 30-years time frame, in increase in price from EUR/USD 50.000 to 300.000 represents an annual growth rate of about 6.2%. The impact of time on the return on their housing investment is often under estimated. It should be stressed that this includes price increase with adjustment for inflation only. The average annual home price increase in the United States over a period of 100 years was about the same as the inflation rate.

Final thoughts

There is no such thing as a boost in housing prices over the years. Long-term housing prices are comparable to the inflation rate. They are not artificially kept high due to speculation. Houses are priced based on demand and availability. This does not mean that the government should not put an enormous effort into ensuring that everyone, irrespective of income or access to economic resources, has access to a safe, secure, habitable, and affordable home with protection from forced eviction.

The right to housing is a human right, protected by a number of fundamental declarations: Article 25 of the Universal Declaration of Human Rights; Article 11 of the International Covenant on Economic, Social and Cultural Rights; Article 27 of the Convention on the Rights of the Child; Article 5 of the Convention on the Elimination of All Forms of Racial Discrimination; Article 14 of the Convention on the Elimination of All Forms of Discrimination Against Women and Article XI (11) of the American Declaration on Rights and Duties of Man.

In my opinion, a governmental effort to reduce the so called financialization of the housing market is not an option to improve housing conditions for lower income households. It will lead to a housing bubble, since the market mechanism is artificially removed and prices do not reflect the real value of houses. In my opinion the only way to lower housing prices is to lower demand for housing. I cannot understand why it is not understood that reducing the human population is the most effective tool to combat poverty and inequality. As Paul Ehrlich, Bing professor of population studies at Stanford University in California and author of the best-selling book, the Population Bomb, in an interview with the Guardian (26 April 2012) says:

The optimum population of Earth – enough to guarantee the minimal physical ingredients of a decent life to everyone – was 1.5 to 2 billion people rather than the 7 billion who are alive today or the 9 billion expected in 2050.

We should not let mrs Leilani Farha’s ideas influence us, because they lead to a myopia. The focus should be on the factors that really can be influenced and make a substantial difference in fighting poverty.


Aalbers, M. (2016). The financialization of housing: a political economy approach. London: Routledge Taylor & Francis Group.

Ehrlich, P. R. (1975). The population bomb. Rivercity, MA: Rivercity Press.

Malthus, T. R. (2017). Essay on the principle of population. New York: W W Norton.

Shiller, R. J. (2016). Irrational exuberance. Princeton, NJ: Princeton University Press.

Stibel, J. (2009). Why We Can’t Predict Financial Markets. Boston, MA: Harvard Business Review.

Statistical sources

Eurostat, House Price Indices euro area and EU aggregates Index levels 2015 100 2017Q1

International Monetary Fund, Global Housing Watch

S&P CoreLogic Case-Shiller Home Price Indices

R.A.U. Juchter van Bergen Quast