Academic journal article Italian Sociological Review

Consuming the Home. Walking the Thin Line between Welfare and Catastrophe

Academic journal article Italian Sociological Review

Consuming the Home. Walking the Thin Line between Welfare and Catastrophe

Article excerpt

1. Introduction

During the late 1970s, 1980s and into the 1990s, the global and national economies were financialised, making credit a constitutive force in the economic system (Harvey, 2005; Steger & Roy, 2010). Obviously, whether focussing on the production of goods, their demand and consumption, or the system as a whole, there would be no economic growth without credit-based investments. A specific feature of the financialisation process was the increased profitability of canalising capital into financial products (Krippner, 2012). For households, this meant general access to an ever-widening range of mortgages, consumer loans and fund-related forms of saving. A particularly important aspect of these innovations was the increased scope for mortgage equity withdrawal.

From a general point of view, investing in property and fund-related forms of saving offers opportunities for households to build welfare with borrowed money. Unfortunately, as welfare mechanisms, financial products work differently during economic upturns and downturns. In good times, the combination of rising home prices and wages typically produces growing overall levels of welfare and well-being for most people - especially the homeowners. But the imminent instability of financialised systems also tends to turn homes into houses of cards. Exactly how economic downturns and crises affect homeowners depends on a number of factors related to the characteristics of the general economy, the nature of the crises and the degree of financialisation of given household economies. As shown below for Norway, financial crises may even improve the scope for mortgage equity withdrawal.

This article analyses the risks associated with the institutionalisation of equity borrowing as a source of welfare. It looks at its theoretical basis and asks for the mechanisms making people ready to consume their homes. It is argued that the form and extent of equity borrowing are context-dependent, and thus a variable. The empirical analysis uses Norway as a unique case in contemporary, crisis-ridden Europe. It is demonstrated that the effects of the financial crisis have encouraged equity borrowing beyond the scope of most European countries. So how risky is it to consume the home? Is there a point of no return?

2. The theoretical foundations for equity borrowing

By definition, equity borrowing refers to the use of secured loans for purposes of discretionary consumption (Smith, 2012). As pointed out by Wood et al. (2013), the phenomenon has received little interest in microeconomics, since standard models of saving and consumption seldom include housing equity. Still, scholars in a number of academic disciplines recognise it as a key welfare mechanism. Since mortgages are typically charged at lower interest rates than most other loan products, they offer a relatively cheap way of financing extended consumption (e.g. Cook, Smith, & Searle, 2013; Elliot & Wadley, 2013; Ford, 1988; Sjørslev, 2012). As such, home equity appears as a piggy bank that can be broken by borrowing (Benjamin & Chinloy, 2008).

In a wider perspective, the financialisation of the economy established a system for asset-based welfare where households were given the opportunity to take care of their futures by borrowing and investing in property and financial products. Beyond the piggy bank function, equity borrowing appears as a buffer for a number of welfare needs associated with income fluctuations, children's education, unforeseen expenditures and life-changing events such as loss of employment, health problems and retirement. By establishing housing as a main route to asset-based welfare, governments have been able to institutionalise equity borrowing as a safety net that in part may fill the gaps left by the retreat of - in the words of Krugman (2007) -the 'big state'. It has led several writers to speak about a welfare-switching effect whereby privately owned housing wealth substitutes for collectively funded provisions (Wood et al. …

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