By Paavo Monkkonen, Urban Planning Assistant Professor and GPA FCL of Global Urbanization and Regional Development
There is a growing disjuncture between urban spaces without people, such as the haunting ghost towns in China or bizarre newly built, vacant subdivisions in Mexico, and urban spaces that continue to set records for real estate prices like Manhattan and Hong Kong due to the intense demand to live there. Is this contrast a symptom of the rise in income inequality within world regions, recent changes in global economic geography, or simply the increased financialization of real estate markets?
There has been a marked increase in the differences in housing prices across cities of the United States over the last two decades. In the so-called Superstar Cities like New York, San Francisco and Los Angeles prices have surpassed those of the boom almost a decade ago, and it is argued this is the result of a continued increase in demand from the increasingly wealthy combined with a supply that does not increase in a corresponding manner. Meanwhile, houses in other regions of the country sit vacant and are sold for pennies on the dollar. This trend is observed globally, with increasing inequality within regions at the same time that differences between countries decline. Increasingly, the phenomenon occurs within metropolitan areas. ‘Superstar neighborhoods’ experience skyrocketing price increases while real estate in districts of the same metropolitan region has failed to recover from the recent recession.
It is clear, and not surprising, that increasing income and wealth inequality is making an impact on the real estate landscape. Anecdotally, we know that the wealthy invest great sums in real estate and many fortunes are also built through real estate investment. An important question remains, however. To what extent do these spatial discrepancies in real estate markets contribute to and exacerbate inequality? Or are they merely a symptom. If a review of the Forbes list of the 500 largest public companies in the world is indicative of anything, it suggests that they might be more symptomatic than causal. There are only five real estate companies in the largest 500 and the largest of them is number 238. In the Forbes list of the 100 wealthiest individuals in the world, real estate was the source of wealth for only seven. An analysis by The Huffington Post shows a steady decline of real estate as a source of wealth since the 1980s.
On the other hand, in a recent research paper that has drawn much attention from planners and economists, Matthew Rognlie argues that real estate – especially housing – investment holds an under-appreciated importance in the now canonical simplification of Thomas Piketty’s argument that inequality is somewhat inevitable because the rate of return to wealth (r) is larger than the economic growth rate (g) during periods of slow economic growth. Only during rare moments of human history has r not been greater than g. Rognlie shows that housing has been a key and overlooked component of the rise in income generated by capital in the seven developed economies for which data are available.
The debate and discontent over the role of real estate inequality in actual wealth and income inequality is captured in a nutshell by the uproar over Airbnb. Will Airbnb get you evicted? Is Airbnb to blame over the high rents in certain neighborhoods of metropolitan areas? It is irrefutable that some long-term tenants have been evicted because the landlord can earn more through short-term rentals. But to what extent is the phenomenon of short-term renting a symptom or a cause of increasing inequality? A century ago, as many as one half of households in urban America took in boarders to make ends meet. Perhaps a renewed focus on the income side of the housing affordability equation is merited.