Unaffordable Housing Puts the Compact City at Risk
The day I met Ray, he told me his drain was clogged. As we looked for a plunger in the apartment where we both rented a room, he told me he’d soon move from Manhattan to Queens. He needed a bigger place for his children’s overnight stays. The kids’ visits, though, would only be during the weekends. From Monday to Friday, they’d stay in Manhattan with their mom and everything a teen needs: school, sports, and social life. WiFi and iPhones are the foundation, but neither attaches people to a certain place. Ray was also born and raised in the UWS. His current office is in Manhattan, and the only reason he’s moving to Queens is that’s what he can afford.
Ray’s move seems counterclockwise. I don’t refer to the plunger. I mean his migration to Queens. Portland, Paris, and Melbourne, to mention a few examples, are obsessed with 30-minutes cities and 20-minutes neighborhoods. In compact cities, residents should be able to reach anywhere in up to half an hour, or so. It’s not a HIIT running workout plan. The model focuses on mixed-use zoning policies and bold transit infrastructure.
A paradox arises. Urban planners aim short distances but fewer and fewer people can afford to live in the city center.
Tackling the Commute
A city aims to be compact so that its residents can reach a range of services within a short distance. There’s no short distance as that which can be covered by public transit, bike or walking. Motorized/Electric Vehicles should show no advantage over the mentioned means of transport.
In a compact city era, an increasing number of people see their commutes are getting longer. Yes, there are anti-urban groups that still go for a house in the burbs, but we won’t discuss life choices here. We’ll focus on those who have no choice but to move away from the city center because they can no longer afford a flat there.
The starting point of the analysis is London. However, this housing market scene is echoed in another metropolis. I hadn’t planned writing about it until I talked with Mr. Michael Edwards. He works at the Faculty of the Built Environment, The Bartlett School of Planning University College London, and among other exciting things, he founded Just Space. I’ve also bought Rethinking the Economics of Land and Housing, by Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane. For economic neophytes like me, the book can be challenging. Nonetheless, from a point onward, things begin to make sense.
The Mechanism Behind Unaffordable Central Housing
The theory explains why an increasing number of people can’t afford a city center apartment. But how could more citizens afford a flat in such a location? That question is followed by well-intentioned ideas rather than certainties.
One out of five British homes is owned by a private landlord. That number, and many glorious pages of Rethinking the Economics…, explain it all. Buying a place to live in is expensive partly because buying a place to rent it out is a good deal. UK buy-to-let borrowers have an easier time accessing mortgage credit than first-time buyers. Owner-occupiers can no longer benefit from the 1969’s mortgage interest relief. Nevertheless, some relief still applies to buy-to-let (BTL) landlords.
Also, tax arrangements privilege the ownership of land and buildings. They incentive people to own bigger (second) houses. Moreover, as Edwards explains, homeowners can pass these properties to their children and use them as an accumulation capital without paying tax.
There is one more factor to contemplate when wondering why city center living is so damn expensive. No matter how much its demand increases, premium location is scarce and its supply fixed. Zoning and other planning regulations only make the scenery more complicated for homebuyers. But they are not the main reason for unaffordable housing. As explained in Rethinking the Economics…, unlike cars or computers, land tends to appreciate.
Higher land and house prices relative to incomes translate into speculation. People tend to take on more debt and buy land rather than considering other investments. Actually, with more money, people tend to look for even more space. In numbers, a 10% increase in income translates into a 20% increase in the place to live.
‘London is a big generator of poverty as well as wealth,’ asserts Mr. Michael Edwards. The growth of incomes among rich people increases the housing demand in nice places. Next, prices and rents rise. ‘What appears to be rather a rich city is actually a city of low and middle-income people working to enrich the other half of the population’.
Edwards points out a key factor: the pension system. UK’s retirement scheme doesn’t guarantee a reasonably good income. A house to rent out would finance future costs.
The Impact on the Economy
The aftermath of the current housing market in the UK limits productivity growth. Nikodem Szumilo’s ‘The spatial consequences of the housing affordability crisis in England’ (2018) develops this idea. Workers of key public sectors can’t move into areas where they’d be more productive. Besides earning good salaries, their wages aren’t enough to secure a mortgage, let alone buy a flat. So, firms can’t expand employment because housing is too expensive.
Szumilo says it’s uncertain what the economy would be like if housing was more affordable. However, he includes some numbers in his paper. England’s productivity could be 58% higher if all districts were equally affordable. Productivity would be way higher where houses are currently the most unaffordable. London’s productivity would increase by 84.6%.
Land investment threatens successful urban centers. That’s a central idea in Rethinking the Economics of Land and Housing. As the economy grows, rents increase to absorb all the additional value tenants generate. The thing is that land values rise faster than wages. The little effort and risk to extract rent encourage landlords to over-allocate their capital to land.
Why Not Just Build Additional Dwellings?
There are two reasons. First, density restrictions and neighbors opposed to new developments make it hard to find a spot where to erect a building. Second, and forget the first one, additional homes will be utterly worthless.
Some analyses point at inflexible density restrictions and strict land-use allocations as the leading causes of high housing prices in central areas. They blame, then, urban planning policies. For them, the solution would be a free housing market.
Besides zoning constraints, there are movements like NIMBYism, which isn’t a boy band of the 90s but an acronym that stands for “Not In My Back Yard”. This and other organizations reject the development of a particular neighborhood. We can agree that’s not the sweetest reaction. But we have to dig deeper to understand unaffordable housing.
Rethinking the Economics of Land and Housing insists on one idea. We can’t apply mainstream economic theories to land because its supply is fixed. Increasing demand for land won’t trigger a supply response and prices will go up. Supply and demand aren’t enough to study housing prices. It needs to bring up questions regarding land taxation and the role of institutions, for example.
Nikodem Szumilo also denies that new houses are the solution. In his paper, he concludes that policies have to focus on managing house demand. It should be driven more by wages. Policies must aim at reducing amenity value and increasing wages of the most unaffordable locations.
There’s a Plunger for Every Problem
By 11 pm, Ray could finally unclog his drain. If only plungers were the solution for anything… That’d be simple and disgusting, too.
Solving most problems is quite simple once we understand what’s wrong and what we need to mend it. If Ray didn’t know what a plunger was and how it works, he would be dealing with a flooded bathroom and sewer smell still today.
In the case of unaffordable housing in city centers, I don’t think measures are radical enough. We’ll keep struggling with the crisis unless we change the perspective. General consent is essential too. Everybody must be interested in changing the current scheme.
In theory, compact cities aim short distances to diminish commutes. Long commutes are bad for many reasons. First, they are costly and wasteful to the economy. Lyons and Chatterjee wrote ‘A human perspective on the daily commute: Costs, benefits and trade-offs’ (2008). The paper indicates an average British worker spent 139 hours per year commuting. That’s the equivalent of 19 standard working days.
Second, long commutes by car are unhealthy and make people insufferable. They provoke destructive symptoms: from high blood pressure to negative mood, including stiff neck, lower back pain, and reduced task performance. And you thought there was nothing worse than forgetting to floss.
Third, driving long distances is not only terrible for the environment. It can be bad for employers too. Time-consuming commutes can hinder the recruitment and retention of employees.
The arguments are irrefutable.
The thing about compact cities is that projects are focused on transit. Everything is about making distances shorter. But, shorter for who? Meanwhile, new buildings keep increasing the living costs and the compact city illusion breaks down as more people leave the center.
