The Global Financial Crisis and neighborhood decline

Abstract

The Global Financial Crisis (GFC), which started in 2008, has had a major impact on many Western European and North American countries. In the years preceding the crisis, many countries in the Global North experienced rising house prices, accompanied by an expansion of mortgage financing (Wachter, 2015). As the financial market has become increasingly global, the collapse of the subprime mortgage market and house price bubble in the United States (US) has had repercussions on a global scale (Martin, 2011). While there were significant differences between impacted countries in the timing and macroeconomic processes underlying the GFC, the characteristics of the subsequent economic recession have been similar: stagnating economic growth, a sovereign debt crisis, and rising unemployment (Aalbers, 2015). Many governments have responded to the declining economy and growing unemployment levels with the implementation of major budget cuts for social provisions (Peck, 2012). This has contributed to both relative and absolute growth in the number of economically disadvantaged households and has exacerbated poverty on both sides of the Atlantic. While the average income of the top 10% of the populations of OECD countries was essentially unaffected by the crisis, the average income of households in the lowest income decile experienced an annual decline of 2% between 2007 and 2010 (OECD, 2013a). In many countries, the GFC has also had a major impact on the housing market, evidenced by a large drop in home prices and declining sales of both existing and new-build housing (Van Der Heijden et al., 2011). Today, many countries are slowly recovering from the first shocks of the GFC and the economic recession that followed. However, in many Southern European countries, unemployment rates continue to be very high and, although unemployment is declining in places like the United States and Germany, long-term unemployment appears to be a persistent problem in many countries (OECD, 2014; Shierholz, 2014). Similarly, despite graudual stock market recoveries and some modest increases in house prices, repercussions from the GFC and economic recession persist in all countries. In many countries, the GFC has had predictable effects on the supply side of the housing market - the willingness of banks to lend money to prospective owners has generally declined. In some countries, investors in real estate became more selective, avoiding projects with too much risk; in the United States, in contrast, investors of another ilk have bought large numbers of foreclosed, real estate owned (REO) properties with the main goal of making a profit (e.g. Mallach, 2010b). Regeneration and restructuring initiatives have been put on hold throughout Western Europe (Boelhouwer & Priemus, 2014; Raco & Tasan-Kok, 2009; Schwartz, 2011). While some governments, such as the United Kingdom and the Netherlands, implemented stimulus programs to generate more (affordable) housing in the years after the crisis, recent budget cuts have put an end to these programs (Scanlon & Elsinga, 2014; Schwartz, 2011). The demand side of the housing market has also changed. Banks have tightened lending terms, making it more difficult for many households to obtain a mortgage (Goodman et al., 2015). As a result, there is more demand for private rentals and social or public housing. The GFC has affected employment on both sides of the Atlantic, in terms of either high unemployment levels or a shift toward more casualized labor contracts such as zero hour or temporary employment contracts (Aalbers, 2015; Puno & Thomas, 2010). This has led to financial strain and housing affordability problems for many households (JCHS, 2015). In the United States, households that are behind on their mortgage payments, and that are unable to obtain a mortgage modification with their lender, are faced with displacement due to foreclosure. This results in a large group of residents with badly damaged credit ratings who are in search of post-foreclosure housing in nearby areas (Martin, 2012). In other countries where the option of foreclosure is often not available, households that are unable to pay their rent or mortgage often have to move to cheaper dwellings and less attractive neighborhoods, while others have to stay put, because moving is too expensive or alternatives are not available, or because negative equity makes it impossible for them to move. All of these developments have contributed to rising inequality in the Global North, particularly in terms of income and housing (e.g. Immervoll et al., 2011; Bellman & Gerner, 2011). The GFC therefore raises questions about the future development of neighborhoods, especially because inequality tends to have specific spatial outcomes including increased segregation, increased spatial concentrations of low-income groups, and negative neighborhood effects (e.g., European Commission, 2010; Glaeser et al., 2009; Van Eijk, 2010; Zwiers & Koster, 2015). While there has been little research on the effects of the GFC at the neighborhood level, the evidence described above suggests that the effects are distributed unevenly across urban areas (Foster & Kleit, 2015; Batson & Monnat, 2015). As households in the bottom income decile have experienced the sharpest drop in income, the effects of the GFC are likely to be felt most acutely in the most disadvantaged neighborhoods (see also Rugh & Massey, 2010; Thomas, 2013). In view of these concerns, this article sets out to identify factors that affect neighborhood decline in the aftermath of the GFC. Many economists have pointed to structural changes in national housing markets and to the changing role of states as important consequences of the GFC (e.g. Wachter, 2015), yet, few researchers analyze how these changes play out at the neighborhood level. Similarly, housing researchers have identified multiple drivers behind neighborhood decline, but many of them focus on within-neighborhood processes at the expense of developments at higher scale levels (Van Beckhoven et al., 2009). In this paper, we aim to bridge this gap by presenting 10 hypotheses on how changes at different geographical scales affect neighborhood decline. Our goal is not to create the next ideal-type model of neighborhood decline processes; rather, we seek to further the intellectual debate on neighborhood decline call for more research on the spatial consequences of the GFC, specifically on neighborhoods as an important territorial dimension of increasing inequality. Our hypotheses mainly pertain to the Global North. Although these countries have very different political, economic, and social structures, research on neighborhood change in different contexts in the Global North has often led to broadly similar findings. This suggests that many of the underlying processes of neighborhood change are comparable across countries. In the same vein, the increasingly global nature of financial and housing markets (Aalbers, 2015) yields similarities in the effects of the GFC and the economic recession between countries. However, the effects of the GFC are mediated by national policies, local (housing market) circumstances, and intra-neighborhood processes, meaning that the GFC has different outcomes in different places. The next section of this article presents a short discussion of definitions of neighborhoods and neighborhood decline. We then highlight important elements from existing studies to formulate 10 hypotheses about the effects of the GFC and the economic recession on neighborhood decline. These hypotheses are divided over three sections, each with a different geographical focus. The conclusion brings our arguments together and calls for more contextualized longitudinal research.