Sotiris Sideris: At a time when many people can’t find an affordable and decent flat to live in, even in housing markets that are dominated by homeownership (which is the case in countries of Eastern and Southern Europe), debt has become a very attractive investment for international actors. What are the consequences on households’ livelihood and on processes of impoverishment in the “peripheries of Europe,” though?
Zsuzsi Pósfai: These different aspects of the housing market are all connected. On the one hand, there is the issue of tenure status: under what tenure (ownership, rental, etc.) people can find housing. On the other hand, there is the issue of debt and its connection to the tenure status. And then, the question of whether and how much the instrument of debt becomes a form of investment, and how it is linked to international actors.
There is a very high rate of homeownership in the countries of Southern and Eastern Europe which means, precisely in the context of rising housing prices, that it becomes more and more difficult for new people to enter the housing market. Since there is a lack of other forms of reliable tenure, like a regulated rental market, people will go to all odds to be able to buy a house and for that they need to take a loan because otherwise they can’t afford it. These tendencies also reinforce each other: because of rising house prices, people take more mortgage loans; and as people take more mortgage loans the house-price bubble grows.
Many actors of the housing finance industry will say that there is a low level of mortgage debt in Eastern Europe, and because of this low penetration, it is a good place to invest since there is scope for expansion. I think this is only one part of the story. The other part is that due to a lack of other options, people are willing to make a larger sacrifice to be able to buy property. Kinship networks are also important in this, with people putting the income or the house of their family members as collateral for their loan, in order to get a higher amount of credit. Altogether, the number of people entering the debt market and house price levels are rising faster than in core economies.
This is very much what happened in the early 2000’s, but I think it’s also happening now to some extent. Household debt is expanding quite quickly and it has become a good form of investment for international actors also because the conditions of debt are quite different compared to the more stable economies of Western Europe. Financial actors are expecting higher and faster returns from Eastern countries. Data from before the crisis show that international banks that were based in Eastern Europe were making a big share of their profits on those markets because they could sell mortgages with higher interest rates. This is exactly what makes a profitable form of investment.
There is a frequent critique of “framing mortgages as a problem.” The arguments goes that mortgages are necessary and useful, enabling people to buy housing who otherwise could not. In other words, the claim is that the problem is when you can’t get that loan and are stuck in the rental market which is of course unregulated and expensive. That’s completely true, and for that reason I think it’s important to differentiate between different kinds of loans. The main difference is whether a loan serves as an income substitution, or as a leverage for accumulating wealth in a situation where you are quite stable financially. The question of when debt becomes problematic should be explored more. It is not self-evident to make this distinction, but it is very important.
There is also the distinction between mortgage debt and other forms of debt. It’s important to differentiate there, too. And here I am coming back to your question, how much debt has become an attractive form of investment. Since the 2008 crisis, there have been more regulations in place that protect consumers or debtors in Europe, especially concerning the mortgage market. Also, interest rates were at historical lows during this period. Thus, mortgages have become somewhat less profitable. Financial actors say they don’t earn “much” on mortgages; the advantage of mortgages rather being that they make you a long-term customer. At the same time there’s a boom in consumer lending and other forms of debt, which are typically more expensive forms of debt, and are thus more profitable for lenders. And, of course, there is also a class dimension to the loans taken: personal loans and consumer loans are much more prevalent among lower-income households.
To address the aspect of your question about how much this leads to impoverishment: I think it does in cases where a household is not stable enough financially, and when debt is taken on to substitute income; especially if this is done systematically. In cases of precarious work and low income a household is not able to service the debt in a reliable way. On top of that, if there’s something unexpected that happens in their lives, they start getting into arrears and that’s another spiral, which can easily lead to a debt trap. In Hungary, in recent years, there are about three times more people who have taken new consumer loans and personal loans than mortgages. This number is getting higher and higher.
SS: Eastern and Southern Europe have always been dependent on the “economic core of Europe” for technology and capital. At the same time, Eastern and Southern Europe has provided cheap labor for capitalist production in the economic core of Europe, turning countries like Germany into economic heavy weights. How does household debt also come into play as a role in these relations of (inter-)dependency?
ZP: There are different aspects of how this larger-scale dependency and household debt are connected. The straightforward aspect is that debt is complementary to cheap labor. This is not the macro picture, it’s more on the scale of the individual. There are much more people in Eastern and Southern Europe who are indebted in some kind of risky construction because their labor power is paid for too cheaply while living costs are not so very different within Europe. For many of the products that we consume there’s a European-scale circulation, and are thus not less expensive in peripheral Europe. Think of electronic devices, for instance.
I think a lot of people get indebted because of the difficulties of livelihood, because they are not paid nearly as much as in the economic core of Europe. This wage gap is of course very much a consequence of the dependent relations on the macroeconomic scale of Europe.
This was, by the way, my first push of why I started to be interested in the issue of debt, and in theories of dependency. Ten years ago, when I was living in France, people were very surprised about wages in Hungary, they were asking how people make a living there. At that time, I wasn’t involved in this topic but I was thinking: “Probably they are indebted.” For me, that’s the intuitive part of the story.
If we think about it on a macro level, there are different forms of dependency that Eastern and Southern European countries are subjected to. Very often, scholars think about the distinction between dependencies in terms of financial relations and in the productive sector (for instance, when Western or multinational companies dominate your economy). Of course, these two are deeply intertwined.
The case of Hungary shows that a very important part of the economy is German car factories that produce their cars here. They are big manufacturing companies and they will systematically pay labor much cheaper than they would in Germany. In this sense there is a very clear relation of dependency in the productive sector. On the other hand, in the financial sphere, there was a very clear dependency before the 2008 crisis with the forex loans and the bank sector being almost completely in foreign ownership. After the crisis this changed, with the government trying to reduce these ties of direct dependency in the financial sector.
There is another aspect of dependency, which is more related to the nature of household debt itself. The conditions of loans you can take in Eastern European countries are much worse than in the economic core of Europe, because financial actors will perceive this area as riskier. This means higher interest rates or variable interest rates, shorter loan terms, etc. If you want to take a loan you can’t take it with the same conditions as someone in Germany. That’s the very practical implication of the broader dependency situation.
This also influences what other forms of housing tenure can be developed. With the Periféria Policy and Research Center we work a lot on the possibility of new housing finance instruments and how to establish non-profit housing organizations that could break the dominance of homeownership. In this work, we always get back to the issue of finance. In Hungary and Eastern Europe in general we don’t have access to the financial instruments that would allow any organization to develop and maintain affordable rental housing in the long term. This is a deadlock that needs to be overcome.
SS: Debt often remains an invisible problem, pushed to the realms of individual responsibility. What is the role of the state in preventing households’ over-indebtedness and helping them out of a debt trap? In what ways has the mainstream European paradigm for crisis management helped low- and middle-income households in the fight against poverty, if at all?
ZP: What happened after 2008 was quite telling in this context. Before then, there was little regulation about who can take a loan and how. Then 2008 was a big shock for our societies as people got into an economic and social crisis. That’s when governments in the region realized that they had to actively do something about the issue of debt. The situation was very problematic. Social movements in different countries emerged and were pushing for more regulation or for having their debt canceled or at least reduced. And they were successful, at least to some extent, because of the historical situation and because the situation was not sustainable. There have been regulations put in place after 2008 in our countries. In Hungary, for example, there have even been instances of canceling some portions of the debt. It was a big step and, thanks to that period, household lending is more regulated now.
But still, even after 2008, companies have been getting a lot more benefits and debt cancelations compared to individuals and households. There are many households in Eastern and Southern Europe that remain indebted and in an economic dead-end because of loans they took before 2008. In other words, the situation has been “pacified,” making it – to a certain degree – manageable. But there have not been any far-reaching, sustainable solutions.
As far as the role of the state is concerned, I think that it is high time to introduce a supportive regulatory environment that prevents people from becoming over-indebted, and limits the possibilities of corporate actors to overstretch the debt market. Moreover, it is the state’s role to introduce debt cancelation mechanisms and support in debt management. And even before this is set in place, the state’s role should be to prevent people from needing to get over-indebted. That means securing affordable housing and affordable livelihoods, and making sure that people are getting paid properly, and that they have an affordable place to live.
SS: The Eastern enlargement of the EU in the mid-2000s was an important turnng point for European and global corporate actors, such as banks, rapid credit providers and debt collector companies, in opening towards new peripheral markets. To what extent have these companies influenced the ways household debt has developed in Eastern European countries?
ZP: They have had a fundamental influence. Even from the end of the 1990’s and the early 2000’s these countries were already in the accession negotiations and it was a prerequisite for joining to liberalize markets, among them financial markets. It was a super fast change because during this period of a narrow ten years (from the early 2000s until the 2008 crisis), household debt went from being almost non-existent to rising uncontrollably. In addition, the actors that were present in the housing market became completely internationalized and 80-90% of the banks in Eastern European countries were bought by international financial institutions, mainly Western European ones.
Over this period, there has been a complete turnaround of what was happening in terms of household lending in these countries and of course it was very hard for individuals, for regulators, for everyone to follow-up.
So these companies have influenced how household debt has developed also through their internal corporate strategies, their ways of doing business when stepping on a new market. They also extended these internal procedures, which became the market practices in these countries. Since these are international companies, what they do in the market of an Eastern European country will depend on their global corporate strategy, which then turns into a strategy on the ground of how they relate to individuals.
But we should also think of other financial actors beyond banks. Rapid credit providers and debt collectors are very interesting and we talk very little about them. We always talk about the banks, while these are very big international companies and are very much present in Eastern European countries. Also, they are so much related to the debt overhang from 2008 and the general poverty or difficulties of livelihood.
Rapid credit providers are especially related to the difficulties of livelihood. They are similar to what we call ‘payday lenders’ in Anglo-Saxon countries. They are not necessarily linked to payday but they provide these short-term, very expensive loans to lower-class people. That’s very present in Eastern Europe.
And then the debt collectors. That’s a different story, but it’s also very closely linked to many people defaulting after 2008. Defaulting loans have become a huge market for debt collector companies, especially after 2015 and the directive from the European Central Bank for banks to clear their portfolios of non-performing loans (NPLs) and prepare for a new lending cycle. That’s when banks started selling big packages of NPLs to the debt collector companies. Today the majority of debt executions through mortgages that lead to property auctions are initiated by debt collector companies and not by banks. The vast majority of NPLs are already at the debt collector companies. This is something that is not present in the public discourse and it’s very complicated for individuals to oversee. Very often, they are confused about whether they owe the bank or the debt collector, and then at the end of the process there is the bailiff, the debt executioner who has the legal rights to execute the auction. The debt collector doesn’t have this legal right, it’s just a company with the “property rights” of the debt.
In these processes taking place between different actors, it’s very hard for an individual to understand who these companies are. Explaining the processes in an understandable way can have an empowering effect against this feeling of a huge black box in front of you emanating abstract threats. We need to understand a lot more of these processes than we currently do.
SS: While citizens and social movements criticize these companies for lack of transparency and abusive tactics, political elites express their satisfaction with the efficiency of the enforcement and debt collection system. With the lack of state intervention and state institutions for managing cases of over-indebtedness, these situations are handled only according to market logic. How do households cope? Are they completely powerless?
ZP: After 2008, movements and citizens haven’t achieved as much as they could or as much as they wanted to. However, it seems as if the moment has passed when you could organize around the issue of debt. The civic surge has lost momentum after a lot of efforts were undertaken to understand the issue of debt and to pressure the governments. I still think it’s an important issue, and in their everyday lives people keep struggling with it. At the same time it’s very difficult to put it on the agenda of public discourse. The media and the government are pretending that it was a specific problem related to the 2008 crisis, that it’s not a problem anymore, that the 2008 crisis is over.
Right now, smaller scale interventions would be possible, but probably not this kind of big political pressure (although, let’s wait and see what happens after the Covid-19 pandemic related economic crisis, because I think there will be a new wave of debt problems). In the meantime, an interesting thing to explore would be how some kind of collective action or collective negotiation with certain companies could work. Debt collectors are specifically interesting in this sense. On the one hand, the whole issue of debt collection is really scary, it’s completely marketized and it’s transferred to these corporate actors. On the other hand, this is also the possibility, because debt collectors have bought those claims at a relatively cheap price. It’s okay for them if they get something above the purchase price, and it’s better if they get a lower price instead of getting anything. Thus, I think there could be room for negotiation.
There are also forms of more direct involvement that are very interesting, such as an initiative in the UK that was operating their very own debt collector company. They bought these claims and then they canceled the debt they had bought. And then in the US there are also such initiatives. But financial regulations in these countries are more liberal, and thus you can create such bottom-up initiatives. In Hungary, for instance, financial services are very regulated, so you can’t just establish a bottom-up debt collector company or start buying debt. I think it can be worthwhile to think about how the very marketized and very liberalized nature of debt collection could actually be used in any way to our advantage. However, these are mostly hacking initiatives, while the issue of debt calls for bigger regulations.
There is also an example of a state debt cancelation mechanism developed in Slovenia. It determined what part of the debt was fair and what part was unfair. That’s a very interesting way to go because in this long black-boxed process there are lots of added costs, meaning that you end up with a much bigger debt than the one in the beginning. That’s something that could be politically claimed too: that you shouldn’t be required to pay all of the cost that is put on top of your debt. There should be a way to pay only the original debt and have the possibility to walk away.
So, yes, there are these smaller-scale initiatives that could lead to a package of recommendations related to the issue of debt collection.
SS: House prices and household debt levels have significantly increased in Europe over the past 20-30 years, with countries in the peripheries of Europe showing the highest surge. Today, after a decade of recession and European-scale austerity policies imposed by the Troika, households are dedicating a larger share of their budget to housing costs than they used to, while more and more people are not satisfied with the affordability of housing in the city or area where they live. At the same time, individuals from Western Europe buy holiday homes and retirement homes in Eastern and Southern Europe. To what extent is this exploitation orchestrated through the instrumentalization of “the East” by “the West”? Is there a potential for alternatives to these dynamics?
ZP: I wouldn’t bring it down to this level of individual responsibility of people coming here for vacation or buying homes when they are retired. At the same time, though, it does have an effect on the housing market, especially in Southern Europe. Airbnb has become a huge issue here in Budapest too, while pensioners who come and buy empty houses in the countryside are less of a problem.
It always comes back to income levels, and how different they are across Europe. People can just come here because it’s super cheap for them. At the same time, this has a drastic influence on our cities. In the past ten years, Budapest has also become so touristified. I wouldn’t say that this is the main reason for house price increases but it has contributed to it. I guess in Southern Europe it’s much more problematic. So, yes, it’s challenging and there could be more consciousness about this issue, since we are in this common European space together.
We should also consider that house prices and housing costs have been increasing in Western Europe, too. It’s becoming more and more of an issue there as well. In the case of pensioners, for example, there is this argument that they come and buy property in Eastern Europe because they can not sustain their level of living in the West, as everything has become more expensive. That’s something that would be very interesting to go into more deeply: how house prices and housing costs are increasing in the West, and what effects they have in the East and the South of Europe. I guess we should think about this whole issue more as an interconnected ensemble of cross-border problems and also think about transnational solutions and mechanisms of transnational solidarity.
For the latter I have a very nice example: we are involved in an Eastern European network for housing cooperatives called MOBA. MOBA got a grant two years ago from the biggest housing cooperative in Zurich, it was within their program for international solidarity with cooperatives. This kind of solidarity is rarely practiced and it is quite interesting to explore how the financial support among alternative housing initiatives could work.
International networks of housing movements are also important in this process of realizing that throughout Europe we are struggling with similar problems and that we must learn from each other. If we can show the European scale of the decisions that influence our lives locally, that’s stronger than coming from one country only.
The functioning of the EU does not equalize the inequalities that exist, it reinforces them in many ways. In the end, despite all the resources in the realm of structural funds that go to poorer countries, the reality is that the economic mechanisms in place within the EU favor the rich countries. This is something that needs to be highlighted from the perspective of Eastern and Southern European countries.
This interview is a contribution to the Berliner Gazette’s BLACK BOX EAST text series; its German version is available on Berliner Gazette. You can find more texts, artworks, projects, and video talks on the English-language BLACK BOX EAST website. Have a look here: https://blackboxeast.berlinergazette.de
Zsuzsi Pósfai is one of the founding members of Periféria Policy and Research Center, a critically engaged independent think tank based in Budapest, Hungary. She has experience in the field of housing activism, of housing policy in local administrations, as well as in academia. In recent years her research has focused on the mechanisms of investment in the housing market and the over-indebtedness of households. Based on her research she is also working on practical ways to channel investment into affordable housing, such as through the development of housing cooperatives.
Sotiris Sideris is the data editor of the investigative network Reporters United and co-founder of AthensLive, Greece’s first english-language non-profit media organization. His specialized interest lies in the data-driven investigation of the financialization of housing in Southern European countries and Greece in particular, and the socioeconomic inequities impacting the most vulnerable in society. He is also an external lecturer of online media at Macromedia University of Applied Sciences in Berlin and research associate in the Department of Communication and Media Studies at the University of Athens.