Piecing through the wreckage of the 2007-2008 global financial crisis, fingers were predictably pointed in the general direction of bankers, technocrats and policy makers for their inability or unwillingness to have seen it coming. The complex nature of the vehicles through which finance is created made it hard to pin the blame on a single cause.

In truth, the crisis was fundamentally an abrupt failure of the housing market, exemplified by the homes in US suburbs for which mortgages were mis-sold to customers and then portioned up into slices of toxic mortgage-dependent securities. Investors’ tendencies pre-2007 to store their idle cash in such products resulted from a stagnation in interest rates in the Western world. The carefree use of derivatives when dangerously tied to flexible interest rates and inflationary housing market bubbles proved fatal for institutions such as Fannie Mae and Freddie Mac, who had a combined $5 trillion worth of mortgage-backed securities at the time the Federal Reserve stepped in to bail them out. These processes then rippled through to Spain, Ireland and other parts of Europe as real estate confidence began to falter.

Capitalism is often used as a pejorative term to diagnose the ills of contemporary society, but it is important to clarify which kind of capitalism we seek to describe. The capitalist ideal of creating an open, competitive marketplace based on consumer priorities falls short when it comes to housing provision. Unlike, for instance, the car or the vacuum cleaner, the decision to purchase property is primarily based not on its inherent quality or superior performance but in most cases in the hope that it will appreciate in value. Providers tend not to follow the path of indefinite struggle and product improvement derived from reinvestment. The boom-and-bust nature of the construction industry led by a small number of powerful stakeholders precipitates a process of inertia and underinvestment in research and development.

It’s necessary when assessing the role of global capitalism in housing not to confuse the physical act of construction and development of land on which housing depends with the role of credit and financial instruments which proved most responsible in creating an uplift in the value of the housing market. In short, they are two sides of the same coin – one is the crisis of affordable accommodation in London in which land in high value areas is being used for residential development in the most profitable means possible, and the proliferation of financial products which expands the use of credit. Rather than focusing on the mere output of units in a simplistic ‘supply and demand’ approach to making housing more affordable, there needs to be more attention paid towards the abundance of inflationary financial mechanisms for the growth in house prices. The emergence of financial products in the past 30 years or so has led to a swell in the monetary value of the housing market and pushed house prices ever further from their original relation to incomes.

In David Harvey’s Limits to Capital, he identifies three circuits of capital. The first relates to the act of production using labour or machinery to create value. In the case of surplus capital being produced, it passes to the secondary circuit, investing in profitable outlets, including the built environment – housing, infrastructure and so on through the conduits of finance and credit. “The surface of speculation, it turns out, is just as essential to the dynamics of accumulation as price movements are to the formation of values […] Any increase in the flow of credit to housing construction, for example, is of little avail today without a parallel increase in the flow of mortgage finance to facilitate housing purchases. Credit can be used to accelerate production and consumption simultaneously.”

The decline in the first circuit of production, namely the production of wealth through industry and the creation of goods, has led to a situation where the options for investment are limited to a very few ‘safe’ reservoirs for idle monetary capital. One of those, for a series of political and economic reasons, has proved to be the London housing market, traded as a commodity. When we speak longingly of housing as a lost component of the welfare state, we also fail to realise that housing itself is not even a competitive product which embraces the opportunities of technological change but primarily a conduit through which capital passes.

Blame for London’s shortage of affordable housing tends to get channelled towards greedy developers or exploitative foreign cash-buyers who leave luxury flats vacant all year round. These actors, however, are merely part of a much wider and more complex process of the financialisation of the housing market. Foreign investment and the uptake of financial products as derivatives of mortgage lenders are in simple terms placing their trust in homebuyers being able to service their debt, given the UK’s status as a relative safe haven both politically and economically. If, however, we are ever to make housing genuinely more affordable, it is imperative for prices to be linked intrinsically to incomes. By swelling the amount of credit available through securities dependent on mortgage loans, the housing market becomes distorted and fuelled by what is essentially commodity trading. Rather than its unhelpful dismissal as a deregulated product of free market capitalism, the housing market needs to be considered as a complex financial instrument, detached from its physical function as a collection of places of habitation.