Ten years ago, the massive failure of subprime mortgage holders and lenders in the United States dealt a devastating blow to the world economy. The worst international financial, economic, and social crisis since the Great Depression had its origin in one of the most potent features of the financial turn of capitalism: the ever-intensifying finance-property link. In most countries worldwide, the use of property financing as an “arterial route in the circulation of finance,” as economic geographer Philipp O’Neill puts it, has increasingly intertwined the fates of the financial and real estate sectors, for better and for worse.
In Lebanon, the intensification of the finance-property interplay is too often ignored, despite its central position in the workings of local capitalism. For instance, the current debates on the soundness of subsidized home loan programs—and on the decision earlier this year to temporarily shut them down—rarely question the root reasons for which Banque du Liban (BDL), Lebanon’s central bank, i.e., the gatekeeper of Lebanese capitalism, has invested so much time and money in encouraging and subsidizing bank-sponsored homeownership. A detailed investigation of central bank involvement by the author reveals housing solutions to be a secondary concern, if that. Rather, property financing has first and foremost been leveraged over the past 20 years to bolster GDP growth and to secure a precarious financial and monetary stability. This reality comes to the fore when the countercyclical timing of central bank monetary and regulatory interventions in the property sector is examined: a majority have taken place during periods of financial, economic, and property stagnation. This was the case, for example, in the late 1990s when BDL orchestrated the establishment of the state-owned Public Corporation for Housing, which assumed a pivotal intermediary role in the development and standardization of private-led housing finance, and again in the 2010s when it deployed successive housing-focused stimulus plans and debt-restructuring schemes for property firms. The object, here and elsewhere, has been the invigoration of property demand and asset prices, to which were added in recent years the avoidance of mortgage holder and development firm failure. But why, and through which mechanisms, is property so critical to the country’s macroeconomic performance and financial and monetary stability?
The property peg: a key trait of crisis-prone Lebanese capitalism
Two major features, among others, characterize Lebanon’s rentier and finance-driven growth regime: a currency peg between the Lebanese lira and the US dollar to secure monetary stability, and the high remuneration of sovereign debt and bank deposits to ensure the country’s financial attractiveness. A third, added in the past two decades or so, is a property peg. The property market, through real estate and housing finance, has acquired an important strategic position and mediating role in the country’s political economy. It functions as a stabilizer that pins together the imperative, at the country level, of capitalist expansion and regulation, and, at the city level, the eminently capitalist process of urban development. By regulation I mean the action of public authorities and elite business actors whose aim is to correct the vulnerabilities, tensions, and contradictions of the local economy, financial system, and monetary order and to reduce, or postpone, the risk of a systemic crisis. This regulation-urbanization nexus, which is the central mechanism of the model I have termed ‘pegged urbanization,’ is common to a number of financializing economies of the Global South dependent on incoming money transfers. It is also a prevailing feature of the very liquid political economies of Japan, Hong Kong, and the United Arab Emirates. In this cross-level feedback loop, urbanization is both a consequence and an instrument of regulation, enhancing GDP growth and protecting financial and monetary stability.
In Lebanon, regulation initiatives importantly shape the nature, location, and materiality of real estate and construction activity, and the trajectory of property asset prices. The 2002 Paris II international donor conference decision to lower the remuneration of sovereign securities, and consequently of bank deposits, is, in many ways, a telling illustration of the property peg. This public policy initiative, intended to loosen debt pressure and restore confidence in the domestic financial system, unexpectedly reinforced the attractiveness of local property assets for wealthy capital holders. In doing so, and alongside other policy decisions that diminished risk, increased asset liquidity, and maximized the absolute and relative financial performance of property, Paris II helped to trigger the 2000s upmarket property boom in municipal Beirut. The resulting asset price growth subsequently pervaded other market segments, extending the construction frenzy to most areas of greater Beirut. In a similar way, reducing the remuneration of traditional financial products played an important role in the proliferation of condominium towers in prime city locations. On the supply side, such capital-intensive projects provided high-yield, relatively liquid, placement vehicles in the short to medium term. On the demand side, they offered appealing investment opportunities for stocking and fructification of value, and diversification of capital portfolios in the longer term. The plethora of residential high-rises invading the city have thus been constructed primarily to accommodate capital, not people, as anyone can see at night, when most units soaring above are unlit.
At the same time, city-making, through property financing and property asset prices, has also purposely been used as a pivotal instrument of regulation to avoid crises and to reproduce, in the short term, the local outward-oriented growth pattern. The rapid expansion of housing finance in particular was intended primarily to provide new vehicles of capitalization, to allow banks to absorb yield-seeking surplus liquidity in times of financial and economic boom, such as the second half of the 2000s. According to the International Monetary Fund, as of 2015, real estate and construction lending in Lebanon totalled at least 40 percent of private debt. Housing finance also helped to reinforce the size and influence of a growing equity-owning middle class whose interest in the stability of the financial system is expected to generate more economically, socially, and politically conservative behaviors. To put it bluntly, research has shown worldwide that the need to avoid failure and foreclosure motivates indebted homeowners to support the status quo, a tendency that clearly upholds and benefits the ruling political-economic elite. As importantly, in the context of the post-2010 financial and economic stress, the fast-paced deployment of mortgage-based homeownership has also sought to sustain consumption-based growth and to shield the local banking industry from a range of financial risks. By increasing the volume of private debt on the banks’ loan books, property-related credit and costly property assets acting as high quality collaterals that secure private debt growth do indeed help to alleviate, or at least contain, sovereign risk. Moreover, by supporting property asset prices, housing finance also helps, at least temporarily, to mitigate property risk.
A critical threat to the financial system?
The regulation dimension of property activity—and more generally the ever-growing finance-property link—is subject to controversy, however, since it carries a number of risks. Economic decisions of agents in the property sector (e.g., households, development firms, etc.) can contribute to regulation, but they can also constitute a negative feedback capable of propelling the domestic economy and financial system into crisis. Unlike the period of late 1990s property sluggishness, during which the banking industry’s exposure was limited, the fast-paced deployment of bank debt in real estate and construction activity in the past 20 years has placed Lebanese banks in a fragile position. The credit system is now a critical channel for the transmission and amplification of booms and busts between the real estate and banking sectors. Simply put, the extensive use of credit has accentuated the vulnerability of the property market by exposing it to credit risk as much as it exposes the financial sector to a sudden drop in property asset values. Any sharp increase in the delinquency rate of housing and construction loans is, in effect, able to trigger a rapid downward adjustment of property prices. Just as importantly, any plunge in property asset values is likely to jeopardize credit system stability. As such, the various scenarios of crisis contagion, which could involve both the demand and supply sides of the property sector, should be considered a serious possibility in a context where asset prices—despite a progressive decline—remain artificially overvalued, real estate demand is persistently stagnant, and the prospects for the growth of construction and real estate activity are bleak. In the face of the country’s accentuated financial and political vulnerability, any exogenous and endogenous shock, of an economic or extra-economic nature (e.g., an economic recession, a protracted drop in remittances, diplomatic tensions among/with Gulf countries, an episode of civil violence), could very well deal a fatal blow to this house of cards.
The property-based regulation of Lebanese capitalism ultimately raises a number of policy questions. Over the past 20 years, the maximization of real estate activity and exchange value, a key feature of ‘pegged urbanization,’ has, from the perspective of the Lebanese people, negatively and irremediably affected property use value. The Lebanese have been the first to bear the cost of this financialization of urban development, both individually, with the housing market’s ever-increasing unaffordability, and collectively, with the increased wealth and income disparity between equity-owning groups and others. This can only worsen in the event of a property-generated financial crisis, during which private debt default and eviction could throw tens of thousand of people into turmoil throughout the country. The experience of the millions of bankrupted Americans who became homeless or who suffered very poor living conditions in the aftermath of the subprime crisis reminds us that such a scenario goes beyond theory.