What Makes Housing so Expensive?
(This is the fourth 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)
Everyone knows about the modern housing crisis, at this point: affordable housing is becoming increasingly scarce, opportunities for young people to buy are nonexistent, and this persists despite the increasingly visible policy arguments and desperate attempts by governments and nonprofits to solve this problem. Let us turn to the urban housing question — why is it so expensive? We discussed last time how land gets its value. Now we have to look into the related, but not identical question: “how does housing get its value?”
The answer is not merely that landlords are exploiting their tenants through the rental transaction. We examined this in a previous essay, and found that while over the long run the properties should not accumulate to the landlord, even without that constraint, no nonprofit organization or affordable housing provider could possibly provide housing on the private market for any cheaper — they are still constrained by their mortgage, and alternatively since prospective landlords are competing with individual, prospective homeowners, they are equally limited by the same mortgage conditions.
But it also cannot be the case that housing simply contains too much value for normal people to buy. We don’t live in sacred temples which take hundreds of years to build. Human beings generally live in housing that takes only a couple of years to build at most, or a few thousand hours per unit; with materials costing a few thousand more. Clearly it doesn’t take more labor to build a house than the average human performs in their lifetime, so the average person should be easily able to afford it.
The answer, then, is the obvious one: housing is being sold above its value. Specifically, two objects are being sold as one, the two being buildings and land. Land is, as discussed last time, a pseudocommodity, meaning that it does not contain real labor-value, rather it grants the social privilege of extracting rents from the society it exists in. Buildings, on the other hand, are not pseudocommodities but real commodities. People perform labor to create them, and that labor must be adequately compensated (though, we should fight for that compensation to actually go to the builders, not just their employing capitalist). Housing is therefore what we will call a mixed commodity. While it does indeed contain value, it is concentrated in the real commodity, the building (and whatever other trackable improvements are added to the raw land, including plumbing, electricity, pavement, etc.)
What constrains the astronomical “value” of housing, then? If we are to take the theory of rent-as-profit totally seriously, we need to use the capitalist’s rent equation, R = s + LMA and invert it: last time, we introduced s as merely whatever value the capitalist decides to extract, and it is capped, if not determined, by the rent charged by their mortgage-paying competitor in the market. But now, the profit from the enterprise instead determines the property value. Thus if s is considered as “profit” on the “property value,” the property value of a particular unit should be:
where C is the property value, and r is the average rate of profit. This property value, being the sum of the value of the building and the “value” of land, is of course constrained by the fact that it cannot fall below the required labor to create the building in the first place, as this would cause construction, in general, to be unsustainable. But above that, this assigns the value of land to be the difference between the construction costs of the building and the property value as defined here.
There is an apparent contradiction here. We said last time that rents are set by the property values, and specifically by the requirement from banks that properties must be paid off in a 30-year timeframe even if the property is not nearly exhausted by then. A landlord cannot simply buy a unit and charge less, or they will be quickly foreclosed on. Now, however, we are saying that property values are not determined by the labor theory of value, or any other rational system, and instead are determined by rents. Which one appears first, the chicken, or the egg? But this contradiction is not as serious as it appears. The effect of landlord mortgage-financing is simply that no anti-capitalist service provider (or, hell, the capitalist market itself) can create effective competition and lower the price of housing down to its appropriate labor-value, but this does not create the original rent-generating properties of housing.
Rent is rather a truly free parameter, meaning it is not determined by any law of value, but instead by the relative power of the buyer and seller — wages are determined in the same way. Improving affordability of housing, i.e. preventing housing payments from destroying of the future of young people, is therefore not really an economic question, in the sense that building more housing, or less, or denser, or more efficient, or cheaper, or whatever, will necessarily change the rents people pay. Unlike computers, or cars, or air conditioning, housing does not become more affordable with technical and social progress as it starts to take fewer labor-hours to construct it. It is instead a political question, and while rent chargeability can be affected by “neutral” market mechanisms, it is not in any way determined by them. We must politically attack rents directly, pushing them to be constrained by the actual value-producing labor performed by landlords and property managers, at present insulated from the non-constraining behavior of the “free” market.
This attack will, by necessity crash property values. Let me put this as plainly as possible: Housing can become more affordable, for the general public, only if property values go down. “Solutions” which do not appear to crash property values are based on simplistic pseudo-market reasoning which does not respect the free parameter of rent, and in most cases they do not get at this basic problem at all. In a future article, I will show that the battle over density between YIMBY and NIMBY movements is in this category — both of them claim, with some market-esque reasoning, that even though they are for increased property values in one form or another, they still stand for the resolution of the housing crisis. We should reject this as a contradiction in terms.
What are homeowners paying for?
One might still have some doubts that property value is determined only by rent. After all, not everyone buys homes as a capitalist, but rather some people buy homes primarily for their own use. These owner-occupants will argue that in fact they paid more for some amenities or other accidental qualities; not due to any kind of expectation of rent-generation. Even with renting abolished, they say, or in other words even if land were no longer capital, people will still be willing to pay more to live by a beach, or to be in a major city, or to have a bigger lot. I cannot reject this out of hand, but I strongly doubt that critics have thought in a fully material way about this. “How much more would one pay?” we ask, and they reply that well, the current difference is 25% more for coastal properties, and obviously this means that’s the additional “value” of this amenity. But this is, itself, determined by rent-generation. If it only cost an additional 12% instead, people would say that is its value. We are falling back into this free-market reasoning, which we have already explicitly rejected, which claims that the value of a thing is equal to the amount people are willing to pay for it. No, people are willing to pay all sorts of outrageous prices for things, but we have defined value as a social quantity: the value of a commodity is equal to the amount of labor it takes to construct it. The “market forces” which we claim originate in our own rational decision-making and self-valuation are really just reproducing the value that comes from land-as-capital. We buy things at prices which are determined by capitalism, and then we retroactively insert non-capitalist reasoning to justify why we pay the capitalist’s price even when we don’t get the capitalist’s benefits. That the sum of the “value” of having a bigger lot, and better amenities, and a nicer location, etc. happens to equal the “value” of the potential rent the unit can generate is not a coincidence.
This is not apparent to homeowners for the simple reason that, as a pseudocommodity, land does not depreciate in value over time and thus their paying more for their “better” land doesn’t usually come back to bite them. When they sell again, they get back the extra value they paid in (increasingly, from a capitalist, rather than another owner-occupant) and thus the falseness of the land-value resolves itself. Non-capitalist homeowners get treated like “investors” by capitalist owners who buy and sell from them, and they are encouraged to think about their property as capital regardless.
There may be some reality, even in the case of land-value being abolished, to people paying more for some properties. But in order to keep land-value from growing back as a pseudocommodity, this is one of those places where the State ought to step in and interfere with the market. We cannot, and should not, stop people from being willing to pay more than the official value for more desirable properties. But, we can and should use taxation to prevent them from recovering this excess back on resale. Thus, we lock in the fact that buying housing above its value is an expense, not an investment. If a house sells below its estimated labor-value, this should be interpreted as real value-decay (and thus not be specially taxed or incentivized). If, on the other hand, it sells above its estimated labor-value, this should be interpreted as value-excess concentrated in the land, and this value should be suppressed through heavy taxation, so prior landowners only receive a nominal fraction of the excess (increases which come from actual improvements to the land or housing, of course, should be counted as real value). Thus “better” land can remain traded at different prices, and people with strong desires for this or that kind of property can satisfy them, but the land is permanently rendered incapable of passive value-growth and thus “capitalist” investment.
If land does not have value, paying money for it is, by its very nature, exploitation (of new homeowners, by existing ones). It might appear that this is only repaying the exploitation perpetrated on those same existing homeowners back when they were younger. There is some truth to this, but it is far too facile to assume that the scales perfectly balance, as if by some magical karmic principle. In fact, any Millennial who buys a house will tell you that the deal they are getting is much worse than the one their parents and grandparents got, and indeed if it is to pay off in the long run, they can see it will only be by making the deal even worse for their own children and grandchildren. This is not a sustainable practice.
What really sets land values, then?
We have already explained the answer to this question in broad strokes, but have not examined it in detail. In a capitalist market, the value of both pseudocommodities and mixed commodities are determined by rents, but what determines rents? This is subject to a number of factors, which we will examine in more detail next time. Let us summarize some here, and analyze a few ways that they could be impacted by the effects of policy or social change. Let us assume for now that bigger lots will scale proportionately (i.e. a lot with double the area will sell for twice as much as an identical lot with identical features, except for size).
- Density: The more housing units can be placed on a lot, the more money the lot makes, even if the individual units are cheaper than the larger low-density options. 3 units at $1500/month each brings in more value than 1 unit at $3000/month, and 10 units at $1200/month brings in more still. In principle you could eventually make units so unacceptably small and non-private that even multiplied by their large number, they would not rent for enough to balance out their low value, and thus there will be a natural equilibrium unit size. YIMBYs are probably correct that most major cities in the US have not yet reached this equilibrium, but NIMBYs are also obviously correct that increasing density will only increase, rather than decrease, land values, and with worse quality of life to boot.
- Desperation: The more people are trying to live in a region relative to the number of housing units, the more they will pay for a space, either by becoming roommates (a hidden, unofficial form of increased density) or paying a premium to avoid them. This has more to do with the availability of jobs in the area, and the willingness to commute long distances or live in terrible conditions to get to them. Making homelessness less of a viable alternative to renting, with criminalization, fines, and police violence, also drives this aspect up.
- Desirability: If people are well-paid or middle class professionals, they might be simply willing to spend “disposable” income on “nicer” or “cooler” units, with better amenities, natural beauty, nightlife, or some such thing. These people create their own jobs, or do jobs which can be done from anywhere, rather than moving to a location following the job openings. This may be a small number of people, but they fix prices by representing the “ideal” tenants, against whom all comparisons are made.
What is to be done to fix these? The problem with both the YIMBY and NIMBY movements is that they attempt to target one of these three aspects at the expense of the others, and thus drive land values up through the other channels despite their “good” intentions (not coincidentally, making a tidy profit for themselves or their sponsors). We must quit attempting to solve the market challenges via minor tinkering with these three levers.
Instead, we should attack land-as-capital itself. This means using market interference, like subsidized public housing, rent controls, vacancy taxes, graduated property taxes, and the like, to basically make charging rents unprofitable. We do not want to allow a smooth functioning of this market, we want to drive land values back into the ground. Land is literally beneath, (or, if you prefer, above) official valuation, and paying more or less for a particular parcel can be done only with a wink, nod, and massive tax disincentive. Economists hate this kind of thing, because they want everything a person owns or uses to be treated as their own personal “capital.” After Citizens United, we started to say “to the law, corporations are people too,” but for economists it is the inverse: “in the market, people are basically corporations, too.” They have some amount of capital and should make rational investments to grow it, at the expense of everyone else. We reject this reasoning. Human beings’ lives are for them to live, not for the purpose of making a profit.
The Community Land Trust as a case-in-point
The revolutionary land distribution is the simple one: abolish the buying and selling of land, taking it permanently off the market. The buildings on that land can still be exchanged more or less freely, but the land no longer changes hands. It is not a commodity, and cannot be “owned.” The rights to use land, control who can go on it and when, to build or destroy structures, etc. can all remain more or less with the homeowner, that is we are not saying “take away the privileges of land ownership.” No, we are saying to take away its value, and enshrine those privileges in some other way in the law. I understand the skepticism of this idea, and the likelihood that a centralized, bureaucratic State mismanages and abuses their power over land. But, it does not need to be abolished all at once. Let us examine an existing organizational structure, which can implement this in a more gradual way.
The Community Land Trust (CLT), in its most basic form, is pretty much the instantiation of this model. The CLT acquires land and then makes a promise that they will never under any circumstances sell it. What they will do is sell (and build, if necessary) buildings on top of the land, and maintain a continued relationship with the residents. The rules vary between CLTs as to what that relationship is, but the usual story is that the homeowner gets to make additions to their home, is responsible for maintaining its value, and can control who gets to access their property as if they also owned the land. However, unlike a normal property owner, they cannot sell for an increased price on their original value, and they pay a lease fee to the CLT to run their community operations. The trade-off is simply that the property is accordingly cheaper. The resident only pays for the structure, which has an actual labor-value, and not the land, which has no labor-value. The CLT’s task, as far as governance, is to represent the best interests of the community with respect to use of this land. So its decision-making is three-part: residents, non-resident community members, and outside voices representing marginalized points of view (minorities, indigenous groups, conservationists, etc.).
Since they are unable to sell their land, the CLT effectively treats the land as if it does not have any value. While they collect some ground-rent as a lease fee, this does not necessarily make the land a pseudocommodity. We do not have to see the lease fee as legitimizing the CLT’s land-value, but instead as financing their pseudo-governmental operations. Unlike the standard bourgeois government, this organization, in prioritizing different interests on account of their actual relationship with the housing and the market in which it lives, can model what socialist local decision-making ought to look like. Not all existing CLTs live up to this ideal, and certainly I do not mean you should look to your local CLT to understand socialism, but simply if there is any way that individuals could own their own homes, with privacy, dignity, and self-reliance (but without exploitation), it must be through this mechanism.
How does the CLT gain land? It must either buy out land from existing owners, or seize it uncompensated. The first is the only one relevant without a revolution. The funding for this, then, has to come from governments or other grants, and cannot be expected to be repaid. But this one-time cost will be buried all at once, and the CLT will never again need another grant for that property. Ideally, as the CLT begins to buy up land and thus list the properties for an affordable price, the rent-generating ability of land in the area will start to dry up, as the existing for-profit real estate industry is forced to compete for buyers. The land value will start in this case to decay to zero, and as it gets cheaper it will be easier and easier for the CLT to buy it.
Of course by no means can we assume that CLTs will secretly socialize the market underneath everyone’s noses. The truth is, as CLTs get more powerful, they become more and more politically charged. In regions with strong CLTs, there is already some discourse around buying CLT properties being a sort of “deal with the devil” — you get cheaper housing, yes, but you miss out on the massive value increase that in a normal homeownership scheme you could pass on to your children to make them successful in their future lives. For better or worse, this is basically correct. If it isn’t stopped from growing or forcibly dissolved, an effective CLT will eventually crater the entire notion of land value, replacing individual land-value-ownership with representation of the commons itself. Thus it will eventually become a political decision: will we choose individual prosperity (even though it is tenuous and unsustainable) through homeownership, or will we choose common prosperity (which can be made secure and self-sustaining) with the CLT? The right decision must be made to make lasting progress, but unlike the old Communists, I make no claim that the working class is guaranteed to choose the latter. A full social revolution may be necessary to overcome the workers’ natural reticence and insecurity about this prospect.
The current political battle
When you open up the news on California’s housing politics, you don’t generally see fights over CLTs, or any of the other value-crashing reforms we have alluded to (rent control, etc.). Instead, you see (to radically oversimplify the issue) YIMBYs trying to build more housing, and NIMBYs trying to stop them. As we said before, both of these sides are trying to suppress one or two aspects of rent-generating properties without a meaningful attack on the others, and so neither can lead us to a sustainable place, or indeed even make a meaningful impact on affordability. However, this does not mean this fight is pure theater, or devoid of real conflict. It is still a site of real contestation between big developers, small landlords, homeowners and (middle-class professional) tenants. In the next essay, we will dive into the two sides of this debate, and examine who’s perspective might be missing. Instead of being roped into alliances with class enemies, fighting their fight for non-solutions which benefit mostly themselves, we ought to try to rope those well-meaning activists into our fight — to crash property values, and thus end the tyrannical rule of land-as-capital.
