Mortgaging Europe’s Periphery

This paper examines the development of housing finance in peripheral European states. The biggest mortgage and housing booms and busts prior to the Global Financial Crisis (GFC) occurred in peripheral Europe. This is surprising, given the comparatively low level of mortgage debt and the unsophisticated financial sectors in the periphery. The paper asks why peripheral countries have been particularly vulnerable to housing and mortgage booms and busts; how these have shaped their exposure to the GFC, and how the GFC has affected peripheral housing finance. Building on literature on housing financialization and varieties of residential capitalism, the paper traces trajectories of housing-induced financialization before and after the GFC in four European peripheral countries: Hungary, Latvia, Ireland and Iceland. The paper argues that their differences notwithstanding, Europe’s East and peripheral Northwest have been characterized by high homeownership rates and unsophisticated mortgage markets. The evolving EU framework for free movement of capital and provision of financial services as well as the availability of ample and cheap credit has induced a trajectory of financialization, which has taken two major but not mutually exclusive forms: domestic financial institutions’ reliance on funding from wholesale markets, and direct penetration of foreign financial institutions. These two forms of financialization attest to a core-periphery relationship in the recent episode of housing financialization, whose hierarchical character played out in the crisis. As a result, peripheral European countries experienced sudden stops and reversals of capital flows, which badly affected their banking systems.