Cities After… The Problems with Supply and Demand in the Housing Market

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"Housing is a basic human need and the market tends to ignore social needs, as it prioritizes individual profit.” - Prof. Robles-Durán

There is a widespread belief that the central culprit of the housing crisis in most metropolitan regions around the world today is the lack of supply. This notion has been well spread by mainstream media outlets and urban professionals, such as urban planners, architects, housing developers, and real-estate agencies. For those disseminating this idea, ending the housing crisis is straightforward: more and more housing needs to be built. In this episode of Cities After…, Prof. Robles-Durán contests this belief, explaining that this solution is built on the false notion of a stable market free of externalities and inherent contradictions. Addressing the housing crisis solely through supply and demand dogmas makes little sense in the era of real-estate financialization and mega-landlords. There is a much deeper systemic issue brewing than simply an unequal relationship between supply and demand.  

Transcript has been edited for clarity

Thank you for streaming Cities After, a radical exploration into the capitalist contradictions of our urban world and the many anti-capitalist futures to come. This is a Democracy At Work broadcast, and I'm your host, Miguel Robles-Duran.

There is a widespread belief that the central culprit of the housing crisis that consumes most metropolitan regions around the world is the lack of housing supply. This notion has been well-spread by mainstream media outlets and in urban professional circles, such as urban planners, architects, housing developers, real estate agencies and the like, commonly citing housing deficits together with competition and the economic law of supply and demand, to explain the lack of affordability of housing. For those disseminating this insight, ending the housing crisis is straightforward: more and more housing needs to be built. I want to use this episode to contest this notion, but most importantly to argue that addressing the housing crisis solely through supply and demand dogmas makes only partial sense in the era of real estate financialization and mega-landlords.

Decades of global politics in favor of free market housing, with all its imaginary ideals of self-regulation, open competition, no government intervention, private-public partnerships and the absurd supply and demand price-setting rhetorics, now precede today's striking increase in
housing prices and interest rates, which have made purchasing a home an unattainable feat for low- and middle-income earners. This dire economic scenario, coupled with the expansion of untethered global finance and predatory rental practices, such as the ones I spoke about in the
previous episodes about mega-landlords, have also made renting a decent urban home inaccessible to anyone without high earnings or governmental subsidies. Simply put, housing – which is an elemental human necessity – is widely out of reach of those that need it the most. Due to its planetary scale, the current housing crisis is arguably the biggest and most critical in history, which adds to its unfathomable nature. Whether you are in Auckland, Seoul, Jakarta, Cape Town, London, Berlin, Buenos Aires, Mexico City, Toronto or almost every major metropolitan area in the world, you will see that it's experiencing a significant housing emergency, and in the USA it is as dire as it has ever been.

According to the recent First-Time Homebuyer Metro Affordability Report by Nerd Wallet, out of the 50 largest cities in the United States, only two are within the financial means of the average income earner. And on the side of the rental market, the latest data from the U.S Census Bureau reveals that close to half of American renters allocate more than a third of their income towards housing costs, and among them almost a quarter spent a minimum of 50 percent of their income on housing. In the 2022 Annual Homeless Assessment Report To Congress, the U.S Department of Housing and Urban Development (HUD) estimated that close to 600,000 people are living in the streets every night.

Now, the current housing crisis is a common headline in the news. Opinions abound as to what should be done to solve the housing crisis, and perhaps the most common consensus
cites the classic economic principles of supply and demand, which go a little bit like this: there is insufficient housing stock in relation to the significant number of people in need of housing, thus what should be done is build more homes as quickly as possible, and the real estate prices will naturally decrease. If it only was as simple as this!

Before I continue, I want to disclose that the following minutes of this broadcast are a preliminary attempt to make sense of these issues, and by no means do I feel I can portray a complete picture. More than any other podcast that I have made, I am taking the liberty to sketch as I speak, and have fun developing some ideas in relation to the current crisis in the supply of housing. I mention this because I am asking you to critique and help expand these ideas in the comments below in the YouTube stream. Also, I'm afraid I will need to use some
economic concepts that you might not be familiar with. If this is the case, please don't be afraid to ask me about them, and if you are familiar with the concepts but think they could be explained better in a different way, please let me know how. I guarantee you this won't be the only time that I will address this topic. And now let me get back to the show.

Since Adam Smith's 1776 book, The Wealth of Nations, the concept of supply and demand has been central in guiding the principles of the free market dogmas that dominate our political economy. At its core, it states that the availability of goods, or “supply,” and the level of demand from consumers, determine the price and quantity of commodities in a market.

According to Smith, when the supply and demand are consistent, the market is in a state of equilibrium, resulting in the stability of prices. However, when there is an imbalance between the
supply and demand of commodities, it unsettles the market, producing undesirable price fluctuations, and this imbalance is what most housing analysts today love to cite as the core of the crisis. As it is common with classic economic concepts, supply and demand is predicated upon the hypothetical goal of achieving a state of perfect economic balance or equilibrium, fueled by free market competition.

However, this paints a very abstract picture of a static or motionless real estate market,
where we must assume that there will be no internal contradictions or externalities at play in the system. Therefore, housing economists tend to integrate external factors or forces in their equations to understand or predict the real market. These externalities are typically variables like interest rates, employment trends, demographics, government policies, infrastructure development, and general economic conditions such as growth, recessions, etc. For over a century, supply and demand housing market analyses have incorporated multiple external factors to enhance their comprehensiveness, developing complex formulas and graphs that provide the industry with that reliable illusion of control and prediction over real estate needs, pricing, and profit. However, during a crisis, such analyses often failed to preempt or explain the
influx of problems and contradictions inherent to capitalism's housing market and its inability to provide decent and affordable housing for the general population. And despite their many clear limitations, these formulas continue to serve as guiding lights and accepted truth in the industry. Pro-capitalist economists and their proponents often point to external factors such as the housing construction slowdown, stagnant wages and the pandemic-related impacts to defend free market economic theories in the current housing crisis. However, their focus on these factors results in a failure to examine the numerous internal contradictions that are inherent in the destructive ways in which capitalism functions. By attributing blame of the housing crisis to external factors, they suggest that if these externalities did not exist, the internal mechanisms of capitalism would function well and without issue. In the eyes of the proponents of this dogma, the crisis is a market fluctuation that would correct itself, if externalities are taken care of and the housing industry achieved equilibrium between supply and demand – of course, providing there is free competition, thereby causing home prices to drop and fall within an affordable range determined by the economic capacity of the general consumer.

I would like to highlight two substantial contradictions on this line of thought. First, on the production and realization side: it is unlikely that there will ever be a moment where all the external factors that disrupt the theoretical equilibrium of housing supply and demand will be
controlled or eliminated. Undesirable external factors will perpetually emerge whether they originate from natural causes or appear out of capitalism's proclivity to generate crisis after crisis, in its unstoppable drive to limit labor costs and creatively destroy everything it touches, for profit.
I briefly mentioned the second contradiction but I want to elaborate further on it. By focusing on the ways to control or eliminate undesirable external factors for achieving that theoretical supply and demand equilibrium of housing, pro-capitalists turn a blind eye to the
highly conflictive internal contradictions that are fundamental to capitalism's profitable operations in the housing market. So let me draw on the work of Marx and that of my dear friend, David Harvey, to illustrate just five of the many internal contradictions I am referring to:

The contradiction between the exchange value of the house and its use value. The exchange value of housing in the market is increasingly disconnected from its social use as a place for shelter and living.

The contradiction between the social function of housing and the individualistic needs of the market. Housing is a basic human need and the market tends to ignore social needs as it prioritizes individual profit.

The contradiction between the demand for housing and the ability to pay for it. This one is simple. Home prices rise faster than wages and income, making housing unaffordable for many people.

The contradiction between private property and social needs. Private property conflicts with the social needs for shelter, cultural production, social reproduction, leisure, and overall welfare. Thus, constant clashes emerge when public entities or governments intervene to address housing shortages and other urban inequalities, and…

The contradiction between the monopolization of housing markets and the need for competition. As large landlords and developers acquire more properties and dominate the market, their profits increase substantially, leading to critical inefficiencies in housing provision and reduced affordability for consumers.

These are just five of many contradictions that are essential to the inner workings of capitalism, and it is very important to understand that their dysfunctional nature cannot be blamed or attributed to external factors, but only to the system itself. Capitalism cannot eliminate these conflicts as they are integral to its reproductive logic. This is why its growth commonly depends on the control of external factors to help it sustain the illusory sense of equilibrium on which the global economy rests, for this – the isolated logic of supply and demand – becomes an essential tool to help maintain that illusory sense of equilibrium.

So far, I hope I have done well to explain how capitalism's fixation on the control of external factors to approach that theoretical supply and demand equilibrium as the solution to the housing crisis is narrow, flawed, and full of irresolvable internal contradictions, but apart from all of the conundrums that I have showed, there is a particular property in the contemporary forms of financialized housing that make basic supply and demand arguments largely irrelevant to any form of conceivable solution.

Let me use some extreme examples from where I live, New York City, to dramatize the
particularities rendered by the financialization of real estate. Let me begin with Billionaires’ Row, which is a relatively new stretch of seven ultra-luxury, residential, super-tall skyscrapers along the southern end of Central Park in Manhattan. These towers are supposedly home to some of the wealthiest people in the world, including numerous celebrity billionaires, but the reality is that more than half of the units in those buildings are empty. Either they haven't been sold or simply no one lives in them.

Of course, Billionaires’ Row is the cusp of a luxury housing market that for more than a decade has been building to satiate the demands of global investors in search of real estate investments. The result of this dynamic is that New York City currently has an extreme surplus of luxury housing, but a severe shortage of housing for the great majority of its population. To put this in perspective, according to a report by The New York Times, more than 50 luxury residential developments with apartments priced above $10 million were completed in New York City between 2010 and 2020. Just one of these developments, called Hudson Yards, offers 4,000 units valued from $2 to $60 million, and tens of thousands more of this class of apartments were built across the city during this period. Additionally, as reported by The Real Deal, there continues to be a significant increase in the number of new luxury residential projects in Manhattan in recent years, with more than 8,500 new units planned or under construction as of August, 2020.

So, if you have more than $2 million to buy a home, I guarantee that you will find an excess of places to choose from, but if you're part of the 50 percent of New York City that earns close to the poverty line, you won't find anything remotely close to your budget. Currently, there is no specific data to determine the vacancy of luxury apartments in New York City, but many reports estimate that half of all the luxury units built in the last ten years are empty, and as if these numbers were not dramatic enough, in May of last year, the City's Department of Housing
Preservation and Development released a report that stated that there were nearly 43,000 vacant but unavailable rent-stabilized units in the city. These are units that are owned by landlords that have decided to not offer them to the market.

What I'm trying to illustrate with these examples from New York City is that the last decade has demonstrated that residential vacant properties are not unproductive investment assets for wealthy landlords. Contrary to the teachings of classic housing economics, these properties without buyers or without tenants are very profitable, once a wealthy landlord utilizes
advanced financial operations to treat them as a type of liquid asset that can be financialized further to hedge the property's theoretical value and extract capital gains from other markets. Of course, this isn't just a New York City phenomenon. With different degrees of intensity this has been occurring in most major metropolitan regions around the globe. In the advanced state of global finance, an asset management corporation can convert a portfolio of empty residential properties, i.e. fixed capital, into liquid investable capital in a matter of a few operations. This is a principal reason why we have seen an overall tendency of wealthy landlords to warehouse or hoard residential properties into thriving global real estate portfolios, and also is an underlying cause of why the price of the empty property does not fall and continues to be inflated, despite it not being occupied by people – its use value.
The development of advanced speculative financial instruments is rapidly allowing the treatment of homes closer to pure exchange value. In the global financial system, a house is just a commodity that can be accumulated and hedged for others in the pursuit of profit. Like many other derivatives or commodities, housing is a speculative instrument and this is its main purpose. The more the industry can separate its exchange value from its use value, the better it performs as a speculative instrument, and this is what I see as the general tendency of the housing market under the rule of finance. Simply put, the housing of people is not its main business. Tenants and owners to manage are, in fact, a nuisance.

So where does this leave the fundamental economic concept of supply and demand,
that everyone seems to be falling for? As you saw with the New York City examples, the market has been supplying enormous quantities of luxury housing to satiate the demand of global investors for these seemingly secure assets. However, this demand mostly is concerned with the exchange value of housing as a commodity and not at all with the real demand of people for housing to be used as a home. One could argue that global finance has created a new type of housing demand that due to its higher profitability, has slowly replaced the original demand of
people for housing. So as long as the demands of global finance are prioritized over the people's needs for decent and affordable housing, the housing industry will supply more and more luxury property or whatever is necessary to fulfill the needs of global finance. It is now a competition between the demands of people and the demands of finance.

Who do you think will win? To put it bluntly, in the age of mega-landlords and advanced finance capital, balancing supply with demand addresses a very different thing than resolving the housing crisis. Cities don't need more supply of the speculative housing they [finance capital] want built. This is actually the root of the crisis. What cities need is a flood of affordably-priced, decent housing, and I'm sorry to say but this will not happen just with well-intended YIMBY or “Yes In My Back Yard” manifestations towards more supply. The demand has been hijacked and the belief that more supply will fix it is simply irrational. Of course, all of these financial shenanigans underscore an enormous housing bubble filled with trillions of dollars of fictitious valuations and manipulations of what should be accessible homes. Be sure that when it bursts – and it will, it will produce a much bigger global crisis than the one we experienced in 2008. It will happen. But for the moment, as long as financial institutions are allowed to gamble with housing, there is no manipulation, control, or elimination of external factors that will be able to supply affordable housing at the urgent rate that is needed. I am convinced that the only way out of this crisis is to first, take housing out of the hands of asset management corporations, private equity firms, and all the other shady forms of speculative finance, and second, we must unite with housing movements around the world to lobby for the fiscal reallocation of resources into the construction of community controlled, non-speculative housing units. These are the two areas where I think most of our activist energy should be spent in the short and medium term. In the long term, of course, we should spend it on an urban revolution.

Transcript by Cindy Mitlo

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