Inequality has been building in cities and property is why

07/08/2019 - 12:00

For years, wealth and income inequalities have been rising within industrialised countries, kicking off a broader debate about technology and globalisation. But at the heart of the issue is a fundamental good that has been driving social and economic inequality for centuries: real estate, writes Harold James

Inequality is the leading political and economic issue, yet debates about it are imprecise.

For example, the standard measure of inequality, the Gini co-efficient, reduces a country’s entire income distribution to a single number between zero and one, and is thus highly abstract.

Similarly, while inequality is rising, there is no simple correlation between that and social discontent or unrest.

France is much less unequal than the United States, and yet it has similar or even greater social polarisation.

Today’s inequality debate began in 2013 with the publication of French economist Thomas Piketty’s Capital In The Twenty-First Century, which found that the rate of return on capital tends to outpace the rate of growth, thereby causing inequality to increase over time.

Specifically, appreciating real-estate values are a driver of rising inequality. But here, too, there is imprecision. Real estate is not a homogenous good, because its value famously depends on ‘location, location, location.’ There are elegant castles and palaces that now cost less than small apartments in major cities. Wealth stirs the most controversy where it is most tangible, such as when physical spaces become status goods: the corner office is desirable because others cannot have it.

More broadly, as major cities have become magnets for a global elite, they have become increasingly unaffordable for office workers, policemen, teachers, nurses, and the like. While the latter must endure long, tiresome commutes, elites use global cities as they see fit, often hopping from place to place. Large swathes of Paris and London are eerily shuttered at night. Manhattan now has nearly a quarter-million vacant apartments.

Whenever violence and revolution have consumed unequal societies, real estate has been a focus of discontent. In the later years of the Western Roman Empire, vast estates catered solely to an aristocratic elite. In a famous homily from this period, St. Ambrose of Milan, reflecting on the ‘Old Testament’ story of Naboth’s vineyard, decries elites for making “every effort to drive the poor person out from his little plot and turn the needy out from the boundaries of his ancestral fields.” Likewise, the French social historian Marc Ferro has demonstrated that many urban Russians were driven to the Bolsheviks in 1917 not out of ideological zeal, but because the old regime and the new constitutional parties had proved incapable of providing food and housing.

Over the course of World War I, Petrograd had developed an enormous munitions industry, manned by peasant labour conscripted in the countryside and brought to the newly expanded factories. But production planners had neglected the question of where these workers would be housed, and, in 1917, the worker committees (soviets) offered an answer: apartments would be confiscated from the aristocrats and bourgeoisie.

A similar pattern played out in other cities where rapid, unplanned wartime industrialisation had occurred (Budapest, Munich, Turin). Today’s equivalents are the centres of the new economy, such as Silicon Valley and its high-tech imitators in Europe and Asia.

These cities have produced many jobs, but they have utterly failed to accommodate the people who live there. Even middle-class professionals are living in cars, vans, and trailers.

And this malaise is not limited to the global cities. Support for Brexit in south-eastern England owes something to the perception that London and its immediate surroundings have become unaffordable because of immigration, international financial activity, and tourism: in short, globalisation.

The political response to the real-estate problem has been inadequate, even counterproductive. Some large European cities are introducing rent controls, despite the poor track record of such policies. When New York tried similar measures in the 20th century, the open market dried up, and property was hoarded, or traded at a premium on the black market. When the UK rolled out a fiscal subsidy for first-time homebuyers, home prices rose accordingly, offsetting any potential benefit.

Removing tax privileges — as the US did recently by imposing a $10,000 cap on the state- and local-tax deduction — is a slightly better approach. But it will not solve the problem of supply. Radical, even Bolshevik-style, proposals are making a reappearance. A popular initiative in Berlin, for example, would socialise the holdings of large-scale real-estate owners (those managing more than 3,000 apartments).

The solution is to build more housing. But new construction can conflict with environmental protections and a city’s architectural heritage, and is often opposed by property owners, who do not want the value of their own property to fall.

Eventually, the cities and urban areas that are driving the bulk of new wealth creation will provoke a counter-movement. If they price-out or otherwise exclude those who earn less, they will have sacrificed the openness that made them attractive. So, if they want to survive and thrive in today’s egalitarian political climate, they will need bold solutions.

During a previous period of urban-based dynamism, in the early 16th century, rich merchant families built low-rent housing that was then allocated to the poor. One such project, the Fuggerei complex, in Augsburg, Germany, still provides low-rent social housing.

If enough such housing cannot be supplied, might a lottery allocation of public accommodation help to stem the encroaching homogeneity of today’s global cities? It is certainly worth a try.

Harold James is professor of history and international affairs at Princeton University and a senior fellow at the Center for International Governance Innovation.