Destabilizing speculation

How housing is captive to investment demands

In recent months, two advocacy articles have both suffered from the same problem: sweeping claims based on theoretical models and false assumptions and beliefs.

“Rent control will hurt the poor” was a science-based exercise in advocacy. He selected studies from libertarian conservatives who predictably supported the assumptions and goals of property developers. “Rent stabilization is a necessary tool” was also a scientific exercise based on advocacy. He chose studies by liberal progressives that predictably supported the assumptions and goals of social justice proponents.

Arguments from both sides were presented as if we were litigants in court rather than a society of human beings trying to achieve functional group results. What they are engaged in is not scientific research; it is a science-based advocacy that uses selective scientific information to promote a predetermined position.

Public policy should be based on knowledge, not theory.

I have been a homeowner, businessman, and resident of Santa Barbara since 1980. My family and friends want multi-generational communities in Santa Barbara County where our children can buy homes; we don’t want ghettos of wealth surrounded by communities of servants.

In the real world outside of economic theories, local property values ​​float above the global stock of properties; housing is a financial asset and financial assets are valued based on the willingness of investors to hold the stock of the asset. Housing is treated by capital markets as a financial asset because it can be easily rented and generally produces a positive return. Assets that produce cash flows are always treated as financial assets by investors. By contrast, oil, wheat and gold are commodities that cost money to store and have no significant rental demand; they do not produce a positive return.

The reason housing is unaffordable for the majority of Santa Barbara’s population in 2022 is that too much of the total housing stock is owned by the private market and too much of the financing goes to consumers. low risk: consumers with high credit ratings. Housing costs have risen as global wealth has grown massively since the 1980s, while investment opportunities offering attractive returns to global capital have become scarce in the developed world. This flood of wealth, or accumulated capital, exerted strong downward pressure on the cost of capital, or real interest rates, which significantly reduced high-quality bond yields. This in turn has significantly increased the investment demand for rental yield.

Supply and demand have not stopped working in the housing markets; the confusion relates to the request which is instrumental. Investment demand plays a key role in modern housing markets, not housing demand. The confusion is compounded by the failure to take into account the massive size of the global demand for rental yields, relative to the potential supply of private sector housing units. The demand for financial assets dwarfs any potential supply the private sector will ever produce!

Since housing is indeed a financial asset, it is also illogical to expect policies such as housing assistance in the form of tax breaks or vouchers etc. to do anything other than increase housing costs. All public subsidies from the private sector, such as housing subsidies, school vouchers and health care subsidies, increase the cost of the product or service in question. Why? Because the private market responds to these guarantees of public funding by setting prices according to whatever private companies can do in political terms – not according to market value.

The fact that the unregulated private market is a destabilizing force in the economy should be obvious to rational people. Unfortunately, it is equally obvious that we are generally not governed by rational people. We are governed by political ideologues. Complete markets require healthy competition between the private and public sectors. Over the past 50 years or so we have witnessed the weaponization of economic theory for political purposes. And the effects of misguided privatization and subsequent deregulation have been disastrous for multigenerational communities; residential and socio-economic segregation exploded.

Unaffordable housing is entirely political due to restrictions on the supply of finance for high-risk consumers. The federal government, as sovereign currency issuer and treasurer of all the nation’s future production, could achieve affordable housing for all Americans within a few years. The same goes for health care, child care and education. Sweden did it in the 60s, 70s and 80s. It’s very simple, but conservatives and libertarians have internalized an ideology that defines everything outside of their narrow definition of markets as “socialism”. . They ignore the historical performance of the Swedish stock market, the fact that innovation rates are higher in Sweden than in the United States, and that flourishing Swedish capitalism is a historical fact.

Instead of letting incomplete markets and real estate speculation destroy communities, communities should hold referendums on population limits and growth, set aside a certain percentage of each community’s housing stock for local residents, and rent out those residential units. and commercial to local residents with proven seniority. at an affordable percentage of local median household income. Communities should also establish public trusts that provide funding to housing co-ops owned by long-term residents.

Kristian Blom is a “Fixer” at Blom Levy & Co., Registered Investment Advisers.