A Housing Economy for the Many A Housing Economy for the Many Housing is a fundamental necessity, but a growing number of people are unable to afford the cost of living in major cities. To deal with the crisis, we need to roll back the financialization of housing. A construction worker at Hudson Yards, West 34th Street, New York City (John St. John/Flickr)

When the New York Times covered a 2017 paper on the high cost of housing by a pair of economists from MIT and Harvard, their reporter wrote: “People are sure to quibble with the economists’ calculations, but their general conclusion—that an abundance of new homes would result in lower prices—is not remotely controversial.”

In fact, that “general conclusion” has been challenged over and over again. While some American writers have dissented from the proposition that an increased housing supply would lead to lower costs, it’s in the UK, which faces a housing affordability crisis that compares with the one in the United States, where researchers have most systematically undermined that idea. Consider these statements from books published in London in recent years:

“[T]he fundamental problem in Britain—and in other Western countries—is not a shortage of homes.” —Danny Dorling, All That Is Solid: How the Great Housing Disaster Defines Our Times, and What We Can Do About It (2014) “The empirical evidence invalidates the economic truism that oversupply must lead to declining prices and that rising prices are a result of undersupply.” —Manuel B. Aalbers, The Financialization of Housing: A Political Economy Approach (2016) “The fixed supply of land for particular uses means it does not fit easily in mainstream economic theories where supply and demand set prices in a free market.” —Josh Ryan-Collins, Laurie Macfarlane, and Toby Lloyd, Rethinking the Economics of Land and Housing (2017) “I hope to expose the lie that the housing crisis is a market question of supply and demand.” —Anna Minton, Big Capital: Who Is London For? (2017)

There is no shortage of writing on the subject by British geographers, urban planners, sociologists, and heterodox economists. With such a large body of work critiquing the proposition that the housing crisis is a matter of supply and demand—and offering alternative explanations—how could the Times reporter insist that the idea was “not remotely controversial”?

As James Kwak wrote in the Washington Monthly last year, economics is, “for better or worse, the predominant explanatory discipline of our time.” And in the neoclassical mainstream of the discipline, the prevailing model holds that markets allocate goods and services efficiently through the operation of a supply-and-demand pricing mechanism.

Both the mainstream news media and most government housing policymakers usually adhere to that model. Conservatives insist that the market could take care of the housing problem, if localities would only do away with zoning regulations that limit where and how developers can build. Liberals add the proviso that some government requirements or inducements may be necessary to make sure that developers produce a certain proportion of below-market-rate units for moderate- and low-income residents. In his effort to alleviate New York City’s housing crisis, Mayor Bill de Blasio, an avowed champion of progressive politics, has followed the liberal blueprint. When urban planner Tom Angotti criticized the premise of the mayor’s plan, de Blasio’s housing commissioner, Vicki Been, responded: “[T]he assertion that building more housing is not necessary to ensure the affordability of housing” is “the housing world’s equivalent of climate change denial.”

Debunking Supply and Demand

The numbers suggest otherwise. Belgian geographer Manuel B. Aalbers surveyed house prices in Germany, Italy, the Netherlands, Spain, and the United States from 1995 to 2011 and found that, while the number of units increased in all five countries, housing costs increased in each country.

Aalbers writes that “The housing market, like any other market, cannot be characterized as a ‘natural’ entity, but should be seen as the social product of the institutions that shape it.” A variety of real-world factors complicate a simple supply-and-demand understanding of housing costs. As economist Christine M.E. Whitehead argued in a 2012 article, the housing market is characterized by inelasticity of supply; the lag time and financing required for new construction preclude prompt response to demand for new units. But what makes housing most distinctive is that its value depends heavily on the location of the land under it. Land in desirable locations is scarce, and you can’t produce more of it. This bears directly on the housing market. Nearly 80 percent of the UK population lives in urban areas that make up just 8.9 percent of the land mass. (In the United States, 67.2 percent of the population lives on just 3.5 percent of the land.)

Because housing costs are tied to land, owners are in a position to extract rent. More than just the money tenants pay their landlord each month, “economic rents” are the unearned benefits derived by an owner when land appreciates in value through no effort of their own. For example, recent extensions of London’s underground and over-ground rail lines have increased the value of nearby land by up to 52 percent. In this case the windfall to private landowners came from taxpayer-financed infrastructure improvements—not an uncommon situation. But economic rent can also be derived from improvement in an area’s general economic fortunes. Rents allow landowners to exploit unearned appreciation by charging more to tenants or asking a higher price from buyers. As economists Josh Ryan-Collins and Laurie Macfarlane and housing policy expert Toby Lloyd maintain in Rethinking the Economics of Land and Housing, these issues surrounding landownership get to the heart of “the rules and customs that underlie private property,” which “have actually very little to do with economics and much more to do with politics and power.”

Perhaps the history of British housing accounts for the unwillingness of so many writers in the UK to accept market-based thinking at face value. In the postwar era, the UK did not leave housing to the market. Instead, the government built plenty of council (public) housing, instituted rent controls for private housing, and passed planning laws to regulate development. Property taxes were high, and mortgage regulation was tight. The result was that most Britons—but not, in many cases, black Britons—were better housed than ever before.

Starting in the 1970s, however, council housing began to be privatized, rent control was phased out, planning laws were weakened, and housing benefits were lowered. In addition, in the 1980s financial deregulation resulted in the liberalization of mortgage lending; for banks, housing replaced industry as the major focus of loans. As Laurie Macfarlane pointed out in a 2017 TEDx Talk, “An ever increasing supply of credit interacted with a fixed supply of land, fueling the house price boom,” and housing prices pulled away from income. With the “house price boom” came a corresponding rise in rents.

The extent of the resulting affordability crunch is vividly captured by journalist Anna Minton in Big Capital: Who Is London For? “If the price of food had increased at the same rate as house prices in the UK over the last forty years,” she writes, “then today a chicken would cost more than £50” (over $65). In London, where housing prices are twice as high as in the rest of the country, that chicken would now cost £100.

Having witnessed such a stark contrast between a successful government-supported housing regime and the calamity of a market-led housing order, no wonder so many British writers have been moved to question a theory that insists on the efficiency of the housing market.

At the Heart of the Housing Crisis: Financialization

The negative effects of changes in housing policy have been compounded by financialization, which the authors of Rethinking define as “the penetration and increasing influence of financial markets, motives, institutions and elites into new areas of the state, economy and society.” Deregulation of housing finance has been a key development here, with more credit available to individuals and to firms, and fewer rules concerning the disbursement of that credit. The liberalization of mortgage lending has resulted in greater availability of credit, which in turn has led to inflated prices. Deregulation also led to the subprime and predatory lending that played such a big part in the financial crisis of 2007–2008.

Financialization has tended to promote the exchange value of housing over its use value. Eased by the ready availability of credit and developments in finance technology, investment in housing has surged. Ordinary homeowners now see their homes as assets that will appreciate in value. In some cities well-to-do investors buy houses or apartments with no intention of living in them; they simply want a safe and profitable place to park their money. The securitization of mortgages has facilitated investment in housing by far-flung shareholders. Private equity and other types of firms have gotten in on the act, buying up rental housing across the globe, jacking up rents and fees, and doing their best to rid themselves of any rent-controlled tenants who may live in their properties. Speculation—the purchase of assets with the expectation that their value will increase—is now a central feature of the housing market, with dire consequences for affordability.

Why is housing considered such an attractive investment? As the authors of Rethinking explain, “The permanence and inherent scarcity of land make it a good asset for the storing of value. . . . Most capital assets depreciate in value over time due to natural wear and tear but land tends to appreciate.” In The Financialization of Housing: A Political Economy Approach, Manuel Aalbers shows how these characteristics, hyper-charged by financial deregulation, undermine the conventional economic analysis of the housing market:

House prices are not primarily driven by the development of the demand and supply of housing units . . . but rather by the demand and supply of finance to both housing consumers (primarily in the form of mortgage loans) and housing producers (through a range of financial instruments to real estate developers, construction firms and different types of landlords).

Mainstream economists have failed to accurately account for the housing crisis not only because of their inadequate conceptualization of land and housing, but also, in the words of Rethinking, because of their failure “to properly conceptualise the role of the banking system in the economy and the flows of credit and stocks of debts it creates.”

The Alternative

A whole host of policies implemented in recent decades have pushed up costs for ordinary homebuyers and renters and turned investments in land and housing into some of the safest avenues for profit for the wealthiest people around the globe. With financial interests seeking to increase housing asset values at any social cost, it becomes clear why simply building more housing cannot solve the affordability crisis.

What is the alternative? In the United States, housing advocates and activists not pursuing the “build more” agenda are already occupied with pressing immediate concerns such as resisting landlord harassment, discrimination, and eviction, and promoting rent control, public housing, community land trusts. and other forms of decommodified housing. But there is a related, and potentially more difficult, task that requires our attention: the rollback of the financialization of housing.

Aalbers suggests four measures to start this process: first, a housing policy that would not favor homeownership, as current policy does, and instead “shift fiscal support from mortgage loans to building and maintaining social [public] housing”; second, promotion of alternate forms of housing such as limited-equity coops and community land trusts, to prioritize “housing as a social good over housing as a commodity or financial asset”; third, regulation to tighten requirements for mortgages, which would ultimately bring down housing costs; and fourth, regulation of mortgage securitization and interest rates. Others have endorsed an additional reform: a land-value tax to address “the problem of rent.” If this were enacted, land would be taxed, but not the housing or other improvements on it, returning socially created value to the public.

These measures go beyond mainstream thinking and policy on housing. Indeed, they would be considered disruptive to major economic interests and insufficiently respectful of property rights. But as Aalbers and geographer Brett Christophers have argued, “there can be no meaningful and sustainable progressive socio-economic change without the housing question being directly addressed.”

Housing is a fundamental necessity of life. But in a market system, you can’t have it if you can’t afford it, and today an alarming number of households can afford it barely or not at all. A recent national poll found that an overwhelming majority of Americans now believe that assuring adequate and affordable housing should be a “top national priority.” In a moment of resurgent left politics, it’s time for a movement to roll back the financialization of housing.

Elizabeth Capelle is a writer living in New York City.