What’s Really Causing Our Housing Crisis? Part Two

Let’s (Blame) the Landlord

By Andrew Dobbs

Read Part One: A Radical Look at Supply and Demand here.

Having laid out quite a complex look at supply and demand, we need to immediately contradict ourselves. Labor power and value of this sort is not actually relevant to discussions of housing costs.

Yes, expending labor on a piece of real estate by improving it or building something on it does increase its value, but the present housing affordability crisis is not being caused by people renovating their houses too much. In fact, these improvements usually follow a substantial increase in “value” in the pedestrian sense — the assessed price of the property — not the other way around.

This assessed price is based on rent, not value. “Rent” in this case doesn’t only mean the money extracted from tenants every month. It means more broadly the premium — the surplus profit — that a property owner can claim for controlling access to a limited good or service.

Think about it: if there was an infinite amount of land, then everyone could have some for free. Because it is finite, however, those who have title to land in our society can charge everyone else that premium for access to it. Tenants pay this rent to their landlord every month, and homeowners collect it when they sell their property to someone else.

In the meantime, this rent is the key factor in the assessed worth of the property, and when property taxes are levied based on this assessment, higher rents mean higher taxes. Homeowners are outraged by soaring property taxes, but these have nothing to do with tax rates, everything to do with spiking rents.

Rents are caused by monopolies, and when it comes to real estate and housing the monopoly is one of an entire class. The landlord class controls virtually all housing — public alternatives are strictly limited and intentionally made undesirable — and so they charge a rent to anyone that wants to live on private property, either in the form of what we call rent in the everyday sense or in a premium paid to the landlord when they sell their property to a new landowner.

This collusion doesn’t have to be conscious, any more than the collusion of employers to make their workers produce as much as they can for the least amount of pay has to be conscious. Any landlord that doesn’t charge rent won’t be a landlord any more. The existence of this class necessitates the collection of rents, and their conquest of all housing means that everyone else without property is being exploited for their benefit.

Supply, Demand and Entitlement

At this point it looks like we have contradicted ourselves in an even bigger way: rent can only be charged when supply of a demanded good is limited, so rising rents are a function of limited supply. The neoliberals are right after all. The solution, however, is to remember that supply and demand are not what they seem.

Supply and demand in this case work differently from what we saw with value; prices, the other non-rent factors in them notwithstanding, can’t be higher than rents because a rent is a price. Capital nonetheless flows towards markets where rents are climbing, creating a drive for increased supply. If rents are high enough and climbing fast enough this investment will not only mean new housing stock, it will mean renovating existing housing stock into higher end housing — gentrification. Substantial capital flows into a market thus reverse the tendency of properties to “filter” into more affordable housing over time.

The neoliberal urbanist argument says that this only happens because of an artificial limit to new supply through local land use regulation — ”NIMBYism” etc. — and if landlords could build enough new housing it would saturate the market for luxury housing, leaving the older properties with lower rents. But this raises the question of why landlords would build so much that they would have to lower rents rather than building just enough to keep rents — their income — as high as possible?

Supply-siders argue that competition between landlords solves for this, but the landlord class is a monopoly, remember, and the concrete mechanism for their collusion is the core institution of monopoly capitalism at large: the financial system. There are indeed many competing real estate developers and landowners in any given market, but there is a comparatively very small number of banks capable of financing their efforts. Furthermore, as we will see in the next part, the real estate market is increasingly dominated by large investment funds, including real estate investment trusts (REITs) and private equity funds. Both will cool their buying when markets experience “overbuilding,” something they fret about often in their trade publications.

The forces that produce supply have a fiduciary obligation to their investors to hold off on building when rents are not rising — regardless of whether they have entitlements to build or not. Again: production drives the economy, and capital controls production — capital rules.

This should be obvious: if rents are not rising those capitalists are not going to invest there. They can invest instead in office space, industrial properties, retail, or some other sector besides real estate. Supply isn’t a solution to high rents, high rents are a signal that supply should be increased. When rents turn around the supply will too so long as the market is controlled by bankers and private developers. Rents stay high and get higher because that’s what is good for landlords and landlords control housing.

Useful… Urbanists

These interests do appreciate the “YIMBY” movement, however, which is why the key political institutions of the financial and landlord class — the Real Estate Council, the Board of Realtors, the Chamber of Commerce — and dedicated mouthpieces of the ruling class such as the New York Times have put so much effort into promoting their arguments. They benefit from the gross misunderstanding at the heart of this movement, that entitlements are the same thing as supply.

Just because landlords have entitlements doesn’t mean they’ll actually use them. They nonetheless always want them because they allow for the kind of investment flexibility mentioned above, they expand the markets for the same piece of property, and they make the property a factor of production for other industries and not just a consumer product for tenants or homeowners. In short, they make the property more productive, and this raises its rent.

Wholesale deregulation of land-use through broad “upzoning” has the added short-term benefit of sharply increasing these rents and therefore assessments and property taxes, forcing remaining homeowners to sell quickly and causing foreclosures — all of which allow landlords to collect properties at a discount. Code NEXT’s attempt to solve an imaginary supply crisis is a convenient tool for just such a scheme.

The bottom line is that supply and demand don’t primarily produce increases in housing prices, but instead FOLLOW such changes in the market. They are the responses the landlord class make so that they can maximize their ability to exploit the rest of us. Focusing on these mechanisms and not on this class power is a guaranteed way to secure their rule, and the policies that result from this misunderstanding are every bit as absurd as making UT cheaper by screwing up admissions standards.

Part 3: The Finance is Too Damn High. Follow me on Twitter. Support me on Patreon.