UK

It’s not the financialization of housing that is causing the housing crisis: It’s a lack of supply

Chris Worrall 

Today

Left Foot Forward

 Opinion

The accusation that housing has suddenly turned into a financial commodity ignores history

The term “financialisation of housing” has entered the lexicon of housing policy debates as a convenient scapegoat for rising house prices and worsening affordability. Proponents of this narrative, such as UCL’s Josh Ryan-Collins, argue that speculative investment, mortgage liberalisation, and global flows of capital into housing markets have transformed homes into financial assets, undermining their primary role as places to live. This argument, while emotionally resonant, is conceptually flawed, misleading, and distracts from the root causes of housing crises. Far from being the villain, financial flows into housing are a symptom of broader structural issues, particularly the failure to address fundamental supply constraints. And attracting such investment is part of the solution. Not the problem.

Housing is not becoming financialised—It always was

The accusation that housing has suddenly turned into a financial commodity ignores history. Housing has always been both a shelter and an investment. From Victorian-era landlords to post-war suburban expansion, the financial function of housing has been a cornerstone of economic stability. Homeownership has long been incentivised as a wealth-building tool, with governments rightly or wrongly promoting policies like mortgage interest relief and tax breaks on capital gains. The rise of buy-to-let landlords, or more recently targeted by financialisation proponent Dr Tom Archer – institutional investors, is not the “financialisation” of housing—it is a continuation of housing’s dual role in providing shelter and accumulating wealth.

Whether through direct ownership within a property-owning democracy, or funding retirement liability linked investments through rental property. Yes amateur buy-to-let landlords have historically been poor managers, but institutional investors operate much more professionally often attracting premiums in rent as a result.

To single out the so-called financialisation of housing as a unique modern phenomenon is to ignore centuries of precedent. Rather, what has changed is the increasing imbalance between demand and supply, exacerbated by poor planning policies and regulatory bottlenecks.

Supply constraints, not financialisation, are the real problem

Blaming financialisation obscures the elephant in the room: housing markets are being designed to fail because of government induced inadequate supply, not excessive investment demand. A litany of restrictive land-use regulations, localised NIMBYism, and planning delays has made it impossible to meet the housing needs of growing populations in desirable areas. As the economist Edward Glaeser has demonstrated, rising house prices are overwhelmingly a function of artificial scarcity created by planning laws and land-use restrictions.

When housing supply is constrained, the presence of speculative investment does not “financialise” the market; it merely redirects capital toward a scarce asset. Investors are not driving prices up in isolation—they are responding to the artificial scarcity that governments and planning authorities have allowed to fester. Without sufficient new housing, even the elimination of speculative demand would not restore affordability.

Blaming investors misses the mark

The term “financialisation” also vilifies investors—individual and institutional—without acknowledging their contributions. Investors provide liquidity, maintain properties, and in many cases, increase the rental stock. Institutional investment, particularly in the build-to-rent (BtR) sector, has created high-quality, professionally managed rental housing that meets the needs of a diverse population.

In markets where investors are demonised and restricted, the outcomes are predictable: fewer rental units, higher rents, and greater volatility. In Berlin and Scotland, for example, rent controls or “rent stabilisation” measures have discouraged private landlords, leading to lower-quality housing and less availability. Policies targeting so-called financialisation risk repeating these mistakes on a broader scale.

The illusion of a housing-finance feedback loop

The “housing-finance feedback loop,” a cornerstone of the financialisation argument, suggests that expanding mortgage credit drives house prices upward, creating speculative bubbles. But this theory collapses under scrutiny. Research consistently shows that inelastic supply is the primary factor driving house price inflation. Even in markets with liberal mortgage lending, such as Germany, house prices remained stable for decades due to a more responsive housing supply.

Blaming mortgage credit also fails to account for declining homeownership rates among younger generations. If credit were the main issue, we would expect homeownership rates to rise, not fall. The real barrier is affordability, driven by supply shortages, not heavily regulated liquid debt capital markets.

The misguided focus on demand-side interventions

Proponents of the financialisation narrative often call for demand-side interventions, such as higher taxes on property transactions or restrictions on buy-to-let mortgages. These policies are not only ineffective but counterproductive. They suppress liquidity, discourage investment, and penalise existing homeowners without addressing the structural supply issues at the heart of the problem.

Demand-side policies are politically expedient—they shift blame to investors and landlords—but they do nothing to create more housing or make it more affordable. In fact, they risk exacerbating shortages by discouraging construction and reducing the overall efficiency of the housing market. This is what researchers with limited financial experience or expertise do not understand.

From Red tape to Rent Pain: Why Supply-Side Restrictions Stunt Growth

In Ed West’s substack “Why is Britain poor?”, he highlights how restrictive planning regulations have driven up housing costs, limiting economic growth and productivity. Such high housing costs reduce disposable income and deter skilled workers from relocating. In turn, stifling urban agglomeration benefits like innovation and efficiency. Easing these constraints through alleviating housing shortages will lower living costs and boost economic growth. We know income inequality exacerbates poverty levels due to working households having to allocate an ever-increasing portion of their income on rent or mortgage payments, leaving less for other necessities and essential needs.

In the past, it was those on the lowest incomes who were most likely to move in search of better job opportunities. Now, the situation has reversed. Where only the wealthiest can afford to relocate. Those left to compete for a limited number of jobs end up driving wages down further, which only adds to the sense of deprivation in such areas. West, on the other hand, goes on to argue that the restricted supply of housing in prosperous regions makes it significantly harder for growing industries to expand. And he is right. This is because employers struggled to recruit mid-and-lower-skilled workers to support their operations. Workers wages would be the ones benefiting from the increased productivity if the supply of housing in successful areas was not so constrained.

Enrico Moretti’s recent research suggests that when local labour supply is infinitely elastic – indicating perfect worker mobility – localised productivity shocks do not result in changes to workers’ real wages. Instead, the benefits of such productivity increases are entirely absorbed into local house prices, leading to higher land values. This occurs because the influx of workers drawn by nominal wage increases raises the demand for housing. Thereby driving up housing costs and neutralising any nominal wage increases. As a result, the economic benefits are captured by landowners in the area, while workers’ real wages struggle to grow at the lowest end of the economic spectrum.

If planning policies were less restrictive, the effects of local productivity shocks on workers’ real wages and housing costs would change significantly. With fewer restrictions, developers could respond to increasing housing demand by building more homes. The expanded supply would dampen the rise in housing prices, ensuring that landowners do not fully absorb the benefits of local productivity shocks. This means real wages, adjusted for living costs, would rise.

Housing affordability would improve due to a better balance between supply and demand. By making it easier for workers to move to high-productivity areas, workers’ standard of living would improve. Less restrictive planning policies would facilitate greater worker mobility, enabling more people to relocate to areas with better job opportunities. This would enhance overall economic efficiency and growth, which should all be music to the Labour front benches ears.

And last of all by reducing housing costs there would be a meaningful reduction of inequality. More affordable housing would help narrow economic disparities between homeowners (who benefit from high land values under restrictive regimes) and renters or new entrants to the market. Removing the red tape will effectively reduce rent pain for such households.

Twisting Truth: How ideologues dismiss supply and demand to mask policy failures

But all of this appears missing in the research undertaken by Josh Ryan-Collins. A critical oversight in his flawed analysis is that his report overlooks those left behind because of pervasive agglomeration effects driven by restrictive planning policies. Government-commissioned research should strive to avoid such missteps, in this case evidenced by case in point by the previous government’s housing ministry.

Ryan-Collins claims we need to move away from “simple supply and demand explanations and focus much more attention on the distribution and ownership of stock”. Simply because this incoherently deflects the argument away from the true causes of the crisis, while attempting to downplay calls for supply-side reform. Those who believe the myth of the “housing finance feedback loop” are simply ideologues who believe housing investment is bad. That simply masks housing investment as a type of “demand” that incorrectly needs to be curtailed.

The very notion that supply and demand explanations are simplistic in itself is reductive and a misrepresentation of its inherent complexity, particularly in the context of the UK housing crisis. While basic supply and demand principles may appear straightforward, their application involves a myriad of interconnected factors, such as regional economic disparities, planning policies, land availability, and real estate capital markets for both development and investment.

These variables create feedback loops beyond simply housing finance. Instead, the unintended consequences of restrictive planning policies and labour markets is the key driver to what complicates the relationship between supply, demand, and affordability. Arguments that claim financialisation is to blame simply deflect and mask these issues.

A call to focus on real solutions to end the destructive feedback loop

The financialisation narrative is not just a misnomer; it is a distraction that diverts attention from meaningful reform. As a result, the destructive feedback loop of higher housing costs driven by restrictive planning policies lead governments to demand more subsidised housing, which in turn results in higher taxes on development. This results in less housing development overall, which is why we need to focus on solutions that does not result in only the best paid people being able to move to the most successful areas. We need policies that improve all workers’ standards of living.

This is why the real solutions to the housing crisis lie in supply-side interventions:

1. Reform Land-Use Regulations: Governments must streamline planning processes, increase allowable densities, and unlock land for development. The current Labour front bench have already put this front and centre. Yet could go further through moving towards flexible zoning.

2. Encourage Construction: Incentivise developers to build in high-demand areas by reducing red tape and reforming tax policies. Current burdensome regulations such as the Gateway Approval process and flaws in Biodiversity Net Gain are currently hindering such progress. But perhaps Brownfield Planning Passports, with more industry input, could hold the key to meaningful reform.

3. Expand Affordable Housing: Address affordability directly by investing in social and affordable housing on a large scale.

By focusing on these measures, we can address the structural causes of housing unaffordability rather than scapegoating investors and financial markets. Calls have been made by the Fabian Society Local Government and Housing Member Policy Group for Low-Income Housing Tax Credits – in its “Homes for Britain: Planning for Growth” report. .

Conclusion: A Dangerous Myth

The term “financialisation of housing” is a seductive but dangerous myth. It simplifies complex dynamics, vilifies necessary players in the housing market, and offers no viable solutions. If policymakers continue to be distracted by this misnomer, the real drivers of the housing crisis—supply constraints and planning failures—will remain unaddressed, leaving future generations to bear the burden. Housing is not becoming financialised; it is being mismanaged. It’s time to put this ‘housing finance feedback loop’ myth to rest and focus on building the homes we so desperately need.

Christopher Worrall is a housing columnist for LFF. He is on the Executive Committee of the Labour Housing Group, Co-Host of the Priced Out Podcast, and Chair of the Local Government and Housing Member Policy Group of the Fabian Society.