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This article originally appeared in Chandler Foundation’s Social Investor magazine, the only peer-to-peer publication serving social innovators and leaders in global philanthropy.
In his great history of the Bolshevik revolution, A People’s Tragedy, Orlando Figes observed how one of the key conditions for the collapse of czarist Russia was a sevenfold increase in residential rental values during the years preceding 1917. “Such was the demand for accommodation,” he wrote, “that workers thought nothing of spending half their income on rent.” With cities like Moscow and St. Petersburg prevented from expanding by vested interests, housing costs became intolerably expensive and with little to gain from the system, many gave up on it.
If you’re under 30 and living in a big city today, you might wonder what all the fuss was about. Only half their income? Those lucky Russian factory workers! Some young Londoners in the 21st century are paying up to 60% of their income for the privilege of tiny rooms that are often indistinguishable from prison cells in Europe’s more liberal countries. High-income nations today may not feel pre-revolutionary on the face of it, but if we wish to avoid history repeating itself, even as farce, there is one problem that should worry us more than anything else: housing costs. Indeed, it is the one issue that connects almost all the difficulties currently facing the postindustrial world — and is soon to affect emerging markets, too.
Grand theories of how everything works often make airport bestsellers but they tend not to stand up. Very little can be explained through one connecting idea, whether it’s inequality, environment, resources, or even national culture, because there are too many different factors in a complex world. Yet if there is one issue that threads through our current malaise, it is housing.
Slow growth, poor health, sub-replacement fertility (itself linked to economic problems), regional inequality, declining innovation, and even climate change — all are related to high housing costs. Once the problem becomes apparent, it’s hard not to link it to almost everything.
Despite the impression given by the news or social media, many things are indeed getting better: the costs of most everyday goods and services like cars, kitchen goods, technology, and travel, are decreasing. As a parent of young children, I can bore them for hours about how much better entertainment and technology have become since I was their age.
In most markets, increased demand leads to increased supply, keeping costs down. Housing supply is obviously more constrained than, say, washing machines, but the problem has grown far worse with the economic shift from manufacturing toward areas like software, technology, and other intangibles. It means that jobs tend to be concentrated in ever fewer urban conglomerations, causing housing demand to become overheated.
Housing costs are pushed up by a number of factors, including falling interest rates, easier credit, and rising salaries at the top. But the real problem is with supply — and, as with czarist Russia, this is the result of artificial restraints, in today’s case not with private landlords but mid-20th century land use regulations.
These have had a drastic impact. Had New York’s land use regulations not been changed in 1961, for instance, its population might have risen to an astonishing 55 million just in the five boroughs. It’s fair to say that many people would not especially enjoy such a dense megacity, which might feel like something from Futurama, but the other extreme is hardly ideal, either: Under the current system, which restricts densification outside of Manhattan, New York property prices have gone up eightfold since 1980, some 376% more than the U.S. consumer index and 326% more than wages.
London has seen even more extreme rises in the same period, with house prices up by 2,100% since 1980, or 1,500% more than wages. Sydney and Melbourne, Australia; Dublin, Ireland; and San Francisco, California have also seen similar, gigantic increases in housing costs over wages.
The effect of all this is to kill what attracts people to cities in the first place. As an illustration, and rather strangely to me, my children’s favorite sitcom is Friends. Quaintly dated now, part of its allure is the dream of 20-somethings with average jobs being able to live together fairly centrally in a big city. It was a fantasy even in the 1990s, but today is beyond even plausible dreaming.
Friends, like other great New York sitcoms — think Taxi, Seinfeld, Sex in the City — celebrates both variety and ordinariness. Our comedic cornerstones shine light on average people doing regular jobs that, while not always glamorous, are the essential thread of city life. Cities are dependent on such people; they are complex organisms that require a variety of skills, from the people maintaining its sewers and tunnels to the electricians and builders who service its households.
But, increasingly, plumbers, electricians, and other tradesmen choose to live outside of large cities, where they could earn far more, because housing is too expensive — the net effect being to make everyone, service providers and customers, poorer. The economic impact of big cities being overpriced is enormous, most studies suggesting it reduces American gross domestic product by at least 10% but perhaps as much as 20%.
It also aggravates the problem of regional inequality: poorer areas of a country become relatively poorer because only their most skilled and most educated leave; it makes no sense for a cleaner or a plumber to move to the big city, as all of their extra income would go to rent. In the U.S., this is slowing the rate at which low-income states catch up with rich.
Then there is innovation. The huge acceleration in technology and invention toward the end of the second millennium was directly related to urbanization, because of the agglomeration effect. Put simply, the more opportunities people have for meeting like-minded others, the more sparks fly creatively.
Today, just a handful of U.S. cities account for the vast majority of the country’s patents, and breakthrough inventions in particular tend to come from people living in higher density. Proximity and in-real-life serendipitous meetings encourage innovation. Sociologist AnnaLee Saxenian wrote in Regional Advantage that San Francisco outcompeted Boston as the home of technology because Silicon Valley just had better bars where people could meet, including the Homebrew Computer Club, the spot where Steve Wozniak first came up with the idea of the Apple microcomputer. Among Homebrew’s other regulars was one Steve Jobs.
Boston’s firms were too far from each other, leading to fewer opportunities for people to meet and exchange ideas. And that is what is happening now as housing costs push people out from New York, London, and San Francisco.
The restraint of housing supply also means that most economic growth in the West is going to landowners, which is linked to another growing problem — political radicalism. Most high-income countries now have a problem with large numbers of disaffected younger people turning to more extreme politics: in the English-speaking world these tend to be on the left, while in much of continental Europe they are on the right, but the common thread is the unaffordability of housing.
Political extremism is linked to housing costs because one of the biggest forces pushing people toward moderation is marriage and parenthood. Young men with no hope of settling down with a family have historically been a source of instability in various societies, from the Vikings to the “bare branches” of medieval China to modern-day “involuntary celibates,” or incels.
Each 10% increase in house prices reduces the birth rate by 1.3%, and according to one study in Britain, runaway housing costs have prevented hundreds of thousands of children being born.
San Francisco, meanwhile, now has more pets than children, and many other cities are following this pattern. There is something haunting and dystopian about the absence of children in some cities.
My children might never get to live as Chandler, Joey, and Rachel from Friends, but they’re also unlikely to witness a communist revolution. The problem might become more dangerous in emerging economies, where less established political systems and younger populations make comparisons with czarist Russia more relevant.
Countries like India, Egypt, and Nigeria have seen huge increases in urbanization in recent years. By midcentury Lagos, Nigeria, will be home to 32 million — still smaller however than Kinshasa, Democratic Republic of Congo, which will have 35 million people, in one of the lowest-income countries on earth. Housing supply will struggle to keep up with demand, potentially creating very dangerous conditions.
What is to be done? Edward Glaeser, author of Triumph of the City and a leading urbanism expert, suggested in a recent co-authored paper that in emerging economies the most effective way of ensuring affordable housing is to make property rights clearer and more secure.
But probably the most effective thing a social investor could do is fund one of the various startups or campaigns with plans to fix the problem (it goes without saying that these startups are heavily concentrated in densely-populated large cities). One such plan is already developing in England.
Here, as in other high-income countries, the biggest obstacles to affordable housing are land use regulations that restrict densification, which are very popular with existing residents who have nothing to gain and everything to lose from new, more dense development. Luckily there are a lot of creative minds on the case. One interesting solution is Street Votes, a proposal of the YIMBY Alliance, which will allow neighbors to collectively decide to increase densification on their street, crucially giving them power over the design (and making them all better off). This would allow for the sort of gentle density favored by most people, but which is currently hard to build because of land use regulations.
These are the sort of places people want to live in, and will be the key to innovative, wealthy 21st century cities. The alternative might not be revolution, but it would certainly be a tragedy for millions of young lives denied a chance to live, meet, collaborate, and make friends, all the things our innately social species loves to do.