Is Affordable Renting Possible?
Nonprofits seem to think so, yet they have really not gotten us very far.
(This is the second of a series of essays regarding the modern housing market — why it’s exploitative, why it’s unaffordable, and why those aren’t exactly the same thing)
We argued last time that rent is always exploitative, because even though in the macro-sense, renting is an economic good (i.e. people should be able to temporarily use some commodities, including housing, without needing capital/debt/liability of owning), the rents actually charged in housing do not correspond to the value received by the tenant. Instead, the tenants are asked to pay off the housing itself, so that at the end of a mortgage period, the landlord owns the full value of the house without debt, even though they only invested a small down payment. Landlords should be paid for their labor, yes, and even compensated for the fact they took on the debt and have to pay interest etc. But they should not have their mortgage paid off by the tenants — if the tenants pay off the housing, they should own an appropriate fraction thereof. Review that article for a more full argument.
What we want to discuss this time is how and why the market continues to allow this; as in other cases (labor, healthcare, higher education), exploitation can always be explained to mean that someone in the market has the power to suppress “natural” free competition, which should cause commodities to be sold at their value. In non-exploitative markets, this is a natural correction factor. If someone sells a commodity above its value, they will profit above the usual rate and competitors, seeing this, will flock to that field, undercutting those first entrants but still making high profits, and this continues until profits are equalized and the good is sold at its value. What is stopping more “efficient” landlords (and nonprofits!) from undercutting the rental market? Certainly there are many entities who claim to be trying to do just this. The problem is the financing of housing, and specifically, the long-term debt which incapacitates organizations for decades before they can compete on realistic terms with existing landlords in the market.
The Capitalist Landlord and the Mortgaged Landlord
There are two kinds of rental housing providers; the ones who own their buildings outright and the ones who are granted a mortgage from a bank. When a landlord is under a mortgage, they are responsible for paying a fixed monthly payment towards a loan that they took out with a bank. The loan is paid back with interest, so the bank benefits by being paid back more than the initial value of the loan. The mortgage will take a relatively long time to pay off (usually, about 30 years), so by the end, if they have an interest rate of about 5%, the total payments will end up at around 2x the initial loaned value. The two kinds of landlords play structurally very different roles, and make different arguments in defense of their actions. We will analyze the mortgaged landlord first. Since those under a mortgage are in some real sense “paying” for housing, they set the scale of exploitation that the capitalist landlord, who is only pretending to pay for housing, then proceeds to follow.
The mortgaged landlord wants to be forgiven for charging tenants outrageously high rents, because they pay the vast majority of their collection to the greedy banks, and what they earn in excess is really just the compensation for their labor and maintenance. It thus appears that the landlord is more or less a “small business” paid for their labor and just passing on the “costs” of doing business (the mortgage payment) on to their customers. They’re sort of telling the truth; their monthly income, so long as they haven’t massively increased rents since the beginning of their mortgage period, is quite modest, and is in exchange for an honest service that they provide their tenants. The problem, however, is what happens after the unit gets paid off? It would appear that after the loan is paid off, while they didn’t profit at all over the course of their mortgage, the full value of the house just suddenly falls out of the sky and into their possession. Of course landlords under a mortgage are profiting! They get to keep the house that their tenants pay for. They obviously profit less than if they charged the same rent but owned their building outright, because they have to pay a large fraction of their earnings towards the bank’s interest. To temporarily adopt a capitalist perspective, that is only right and proper, however, because of course they invested almost nothing! They came into this arrangement with a down payment of let’s say 10% of the asking price, and after 30 years get the other 90% absolutely free (while being consistently paid for their labor and maintenance as expected). Their monthly payment, indeed, goes primarily to the bank, but this payment is broken up into part interest on their loan, and part principal. Their rent formula is:
Where pᵢ is the payment towards the interest on the debt, pₚ is the payment towards the principal, LMA is the actual service the landlord provides or pays for (labor, maintenance, and administration). s, on the other hand, is any surplus-value which exceeds the sum of the landlord’s mortgage payment and their actual provided value. All terms except LMA are exploitative, in the sense that they do not correspond to value the tenant actually receives. To avoid acknowledging this, we instead give these terms the vague responsibility of “paying for the housing.” According to a normal amortization schedule, at the beginning of the mortgage, pᵢ > pₚ, and at the end, pᵢ < pₚ. Whether landlords profit week-to-week, i.e. s > 0, depends on the relative power of landlords and banks (how much supply of capital is around, regulatory rules, and so on and so forth). Whether they make a monthly “profit” or not, however, it remains the case that all the value pₚ paid towards the loan is accumulated, full stop, by the landlord. The landlord wants you to see him giving that big check away to the bank and empathize with him, but indeed he’s just depositing it in his own account! “Profit” is found primarily in paying off the landlord’s mortgage for them, rather than paying their daily expenses. The value of the unit is paid off bit by bit, in this “non-liquid” form, until the whole thing is paid off. At that point, the landlord either transitions to a fully capitalist landlord, or if they don’t have the stomach or patience for this transition,¹ they just sell the asset to the next landlord. Then the next landlord begins the cycle anew, needing to “pay off” the unit, ignoring that the tenants are no longer paying anyone who “produced housing,” but instead paying off the last landlord, who neither invested anything nor constructed the unit they now live in.
The capitalist landlord, in principle, has no such financial constraints. If they so choose, they can rent their property for just the actual costs of labor, maintenance, and administration. They are under no financial obligation to do otherwise, unless “maximizing your own profits’’ is counted as a financial obligation, which as a socialist I reject. But they are not forced to rent at this appropriate value. Instead, they can charge whatever they want. Their formula appears as:
Where in the last equation there was a mortgage payment, now all the rent in excess of the landlord’s labor and expenses is surplus-value s. The capitalist landlord gets away with this because they just set the rent R to be equal to the rent charged by the mortgaged landlord. The mortgaged landlord cannot charge any less, even if they wanted to, because of their required monthly payments, and now the capitalist landlord makes themselves indistinguishable from the other, masking the fact that they absolutely could charge less. Most insidiously, no “ethical competitor” can come in and beat their price, forcing them to reveal their hand and charge a rent closer to the actual value of their service, unless that competitor themselves has the capital on hand to buy a unit outright. If the competitor must pay the full value through a mortgage, they must be playing an extremely long game (we will compete with you by charging really affordable rents, as soon as this 30 year mortgage is over!) which tests the patience of any nonprofit staff or their shortsighted funders.
The capitalist landlord will attempt to justify their profits as a result of the fact that by “risking” their money investing in the housing market, they make housing profitable and thus “provide” it. But the capitalist landlord’s money only rarely goes into production, when they pay a construction company to develop a new unit. All their investment does, the rest of the time, is keep property values arbitrarily high, and the only “risk” they endure is the risk of property value collapse — an absolutely positive thing for the working class and their potential ascent into homeownership. Capitalist investment in real estate, far from “providing” housing, actually makes housing more inaccessible and drives prices up, rather than driving them down as in usual competitive markets. This is because unlike in most markets, the value of the commodity (in this case, housing) never belongs to the tenant, and thus there is no incentive to drive it down.
The tenant of course should not care which of the two landlords they have, because their rent is the same. In the capitalist case, the rent settles in the hands of the landlord, who uses it for whatever it is capitalists want more money for (Expanding their real-estate empire? Buying luxurious private jets? Donating to anti-malaria campaigns? Who knows). In the mortgaged case, on the contrary, some of their rent settles in the hand of the banker in the form of interest, some of it is used to pay down their landlord’s debt, and some of it goes to the landlord as cash. But the apartment units are totally interchangeable, and so too are the rents. The profit for the capitalist landlord, in the one case, is equal to the profit for the bank plus the profit for the mortgaged landlord, in the other case. It shouldn’t matter to you which capitalists are sucking you dry.
We must stand firm in our socialist convictions — no one is entitled to income which exceeds the value of the labor they produced, whether they own a lot of stuff, or nothing at all. The spectre of risk is always just a smokescreen. If the danger is that without investors no housing will be created by the capitalist market, the community will just have to come together to invest in production of housing when necessary, markets be damned. No “innovation” is needed to build housing; we already know what housing looks like, and we often find that we build better, safer, and more reliable housing with public money than the capitalists do on the premise of maximal extraction.
Is Affordable Housing Possible?
We have not, so far, actually talked about housing “affordability.” We have been assuming that we only pay for the value which actually goes into housing construction, even if for some unknown reason we are expected to pay this again and again without ever getting or needing the buildings replaced. The average cost of construction of a home in the US, including labor and materials, is $280,522. Valued at $78/hour (the average value of an hour of labor), this is 3,596 combined hours of labor — about twice as many hours as the average American works in a year (1,777). Thus, by the labor theory of value, housing should cost about two years of salary if you are not exploited at all as a worker, and maybe four years if you only receive half of the value you generate. There is no substantial difference in housing quality by region, so while the costs may be different in other states, the labor-hours should be the same. To put it simply, this is not the value you pay for housing, especially not in substantially less valuable (per unit) rental apartments — instead we pay 50% or more of our incomes paying off a mere 1/30th of a unit each year. But this doesn’t mean the difference is surplus-value which goes to the landlord’s pocket. They really did pay that ludicrous price, or in other words, the housing wasn’t affordable for them, either.
The ethical rental scheme we went into in the previous essay should make the newest housing the most expensive, and as it is used, the value of housing decays slowly with time, until it reaches 0 — this way there would always be housing at all income levels, even if the poorest citizens will need to live in objectively run-down conditions. While terrible conditions are still with us (overcrowded, uninhabitable units still come up, and with increasing frequency, as we will detail in a future work), it is not because most housing is decreasing in value with time. Instead, prices are increasing faster than inflation, even as housing declines in quality. How, and why, housing prices go up like this is outside the scope of this essay, but to put it very simply land, which is not a commodity, is being sold at increasingly ludicrous prices, and at the same time housing supply is being kept arbitrarily low with feverishly restricted zoning. The net effect is, landlords keep buying and maintaining the same units, and keep extracting greater surplus-value from their tenants, while at the same time more and more people are becoming homeless and desperate every day.
It is clear that the value landlords create in maintenance and administration is only a few hours per month, clearly much less than the number of hours tenants tend to work. Even for tenants who are exploited already in their workplaces, this value should be affordable. But when you also have to pay off the wildly inflated price of the property on an aggressive 30-year timescale, all bets are off. The only ones who can actually provide affordable housing are the capitalist landlords, who are not indebted to the bank. Thus, the answer to the question posed above: competition between landlords is not strong enough to lower rents because new entrants to the field will be burdened with debt and their rents are prescribed for them. No new actor, whether they are a “progressive” landlord or an affordable housing nonprofit, will be able to get debt financing for a project and guarantee that their monthly payment will be something their tenants can afford. If property values are sufficiently out of reach of tenant wages, they will remain out of reach regardless of whether they are mediated through the mechanism of an administrator who takes on the loan (and the “risk”) for them.
We will see in the next article that it is even worse than this. If a more ethical “competitor” did have the cash on hand to buy a unit outright, they have to be willing not only to suspend their use of that money for other things, but invite huge, outright losses. If rents are determined by mortgage costs, mortgage costs are themselves determined by property values. We will argue next time that, completing the circle, property values are determined by rents, and so making housing affordable necessarily requires lowering property values in a whole region.
You can promise affordable housing in the current market only in the case that the price is at least partially subsidized, either by the government granting you unusually favorable loan conditions, or by getting the building for free or a highly reduced price. You cannot, under capitalism, buy housing at full price, rent it out at an affordable rate, and break even, because the affordability crisis is coming not from the gradual paying off of landlords but the overall cost of land and housing. This remains true even though landlords really do extract a huge amount of surplus-value from their tenants over the course of many years, acting as a sponge for absorbing what would otherwise be savings for the tenants. To be clear, other policy and class-struggle actions besides government subsidies can play a role in changing the affordability landscape. But they can only do so on the basis that the actions in question will lower property values. Any successful policy will do that; and conversely being unwilling to do that means affordable housing can only operate on increasingly tenuous and unsustainable subsidies. We will analyze this in the next two papers, but for now we will say all that can be done is subsidized housing (which is not nothing!)
What does subsidized housing actually look like? To begin, what it often looks like in practice today, but which must be challenged, is rent subsidies, in which a landlord takes out a loan to buy a property, the tenant contributes what they can in rent and the government contributes the rest, so together their rent is brought up to market rate. The landlord, once the “affordability restrictions” are removed (i.e. the end of the mortgage, or soon after) still gets to keep the unit, and now sell it for full price to a landlord who can charge market rate rent. Thus, the government literally gave taxpayer money directly to a landlord and a bank, for a benefit that evaporated as soon as the payments stopped.
Subsidies should at the very least focus on institutions promising permanent affordability, so that after the mortgage period is over (i.e. the time when affordability is finally possible not on the basis of a subsidy) we can continue using that housing for the working class. Perhaps this just means we need institutions willing to commit to the long-term, with community-led decision-making processes, and which do not rely on a few “founders” staying committed to their charitable interests. In the modern affordable housing landscape, it is my opinion that the closest institutions to this kind of long-term sustainability are Community Land Trusts (CLTs). CLTs and other “permanent” housing nonprofits are designed with long-term democratic processes and community leadership in mind — but this is not merely to fulfill vague liberal aspirations about community input. Instead, it is for the much more practical reason that the organization needs to outlast its founding cadre to actually pull off its basic mission, which only really works effectively a few decades after its founding.
What Should Renting Look Like?
While housing is not “affordable” without subsidies or a property value crash, it is still possible to make it non-exploitative. The “subsidy” question can actually frame our whole thinking on the issue of creating a housing market with rentals, but which follows an ethical framework.
At one extreme, you could have “fully subsidized” or “public” housing, meaning that the state (or a sufficiently stacked NGO) finances an entire apartment complex outright, and then either runs it or gifts it to a permanent affordability group with the following condition: The rent of this building will be designed to never pay back the initial investment, and only pay the costs of labor, maintenance, and administration. The initial structure goes unpaid, but honestly, who cares? This can and should be seen as social investment, and when it really comes down to it, this is much, much cheaper than the constant drain of rent subsidies which are invested nowhere, but instead pocketed by “progressive” landlords. The rent remains such that the project is fully sustainable, i.e. rents cover all operating expenses, but the expense of the “initial construction” is simply absorbed by the state.
At the other extreme, totally unsubsidized rental housing can and should still exist (even if its utility would be much higher after we have handled our inflated property values). In this model, some nonprofit, CLT, or other entity buys a unit through mortgage financing as normal, but what makes this model unique would be that the principal, as it is paid off by the tenants, remains in the tenants’ name. This means that every time a tenant pays rent, while part of their rent goes to maintenance and administration, and is thus ethically paid to somebody who contributes real work, another part of their rent will build up in the form of equity, and that part should be returned to them when they move out. The formula in this case is:
Where pₚ is repeated on both sides to signify the tenant keeps (and builds up) that component in a separate account. The bank’s interest still exploits the tenant (abolishing exploitative finance is another very important, but separate, socialist project), but the housing provider never does. If a tenant stays long enough that their equity payments pay off their entire portion of the property’s value, then their rent diminishes to be really only maintenance and administration fees LMA, and when they move out they get their fraction of the property value returned. This buyout is financed either by money that is saved up in a tenant equity payment fund (assuming not too many tenants move out at once, this could be workable), or if not enough cash is available, the lender extends a new loan to pay them back. Who pays off that loan? The next tenant. The person who gets paid out by this activity is not a capitalist, who accumulated the unit for free, but the tenant themselves, and they get paid out according to the money they paid in. Thus tenants build wealth, and pay off the housing they live in, without ever needing to go into debt. This is (an adapted form of) the model of the innovative new housing venture, the East Bay Permanent Real Estate Cooperative (EB PREC). To be clear; EB PREC’s real plan is to have housing subsidized by low-return small investments from community members, and thus their mission is to use subsidies to serve low-income households. But EB PREC also shows a vision for the only way market-rate rents could be non-exploitative: by allowing the tenant to build up equity for all their payments in excess of the services they actually absorb.
Can we go further?
We have laid out what the ethical requirements of renting are, and what an ethical renting market for housing would be. But we have not yet made the leap to making housing actually affordable for the majority of the population. We cannot just jump into the housing market ourselves as socialists, and plan to offer housing without exploitation — we will still find that we cannot provide housing at an affordable monthly rate, even if in the long term we can help a few tenants build up their wealth and potentially gain some long-term power. It is clear that human beings can create beautiful housing with only a small fraction of their working lifetimes, so therefore adequate, affordable, and thriving housing must be possible. But under the current system, a huge portion of our value does not actually go to paying for this housing. It goes to landlords, yes, and many times, which is manifestly exploitative. But even more importantly, most of it goes to landlords in exchange for something which is not even a commodity, and which no one should be paid for, because no one labored to construct it: Land.
See the next essay in this series at the link below:
Footnotes:
¹ Remember, mortgages tend to be around 30 years long, and only begin when someone is both established enough to get credit, and immoral enough to use it for landlording (i.e. middle age) — by the end of the mortgage period, they are often quite unable to maintain it themselves.
