Every day, some 200,000 people are moving into cities across the globe. Finding an affordable place to call home is not just a worry for young people in the developed world. It has become a global problem, affecting everyone from the least advantaged to the middle-classes.
In fact, housing inequality may well be the biggest contributor to rising economic inequality. According to urban economists David Albouy and Mike Zabek, the main catalyst to housing inequality comes from the growing gap within cities and metro areas. Factors such as safety, schools, and access to employment and local amenities lead individual actors to value one neighbourhood over the next.
California has a cumulative housing shortfall of 2 million units. In New York City, some 1.5 million households cannot afford the cost of what is defined as a decent apartment at market rates, according to research by McKinsey Global Institute. In London, annual home completions have increased by just over 10% in the last 20 years, falling far short of demand and driving prices five times higher. This will eventually constrain economic growth.
As cities become more economically powerful, the demand for urban land is leading to escalating housing costs and competition. With housing as an investment vehicle, there is an oversupply of luxury housing and a lack of affordable housing in many cities across the world. The global housing crisis is defined by a chronic shortage that could lead to urbanization without growth, something that has happened before in history. But there are actions we can take to prevent housing from being the main obstacle to growth.
Demand side efforts such as subsidies and financing solutions cannot close this housing gap alone. Instead, cities urgently need to ramp up home building to ensure that housing shortages do not become a drag on economic growth or fuel social tension. However, this is easier said than done, as shown by efforts over the past decades in most of the world’s growing cities.
Have you read?
Every city has to address three common challenges: finding available land, removing barriers to development, and making the construction sector more productive. Local governments are sitting on part of the solution to grow supply, given the vast portfolio of real estate owned by the public sector in every city. Indicative valuations of some US cities have shown that urban real estate owned by the public sector has a value equivalent to annual urban GDP, and represents a quarter of the total value of the urban real estate market.
However, most cities do not know what they own in terms of real estate assets, partly because these are owned and managed in a fragmented way. Local governments do not have a consolidated list of assets, let alone a comprehensive balance sheet that values these assets. Furthermore, the misguided accounting standards of GASB is opening the door for the resources of America’s state and local governments to be mismanaged and wasted, and their obligations hidden.
With a consolidated list of assets in hand and a proper understanding of their market value, it would be possible to design a business plan for how best to use these assets, and to evaluate which of them could be better redeployed for housing, either through conversions or brownfield developments. Pointing out that governments themselves are actually sitting on what is the biggest source of available land may sound like a simplistic solution to the problem of how to increase supply.
An 'urban wealth fund'
But a government’s ability to overcome the challenges to a successful build-out of housing stock does not stop here. To help increase supply, the best way forward would be for local government, as the owners of such a vast portfolio of real estate, to consolidate publicly owned assets in a common investment vehicle - an "urban wealth fund".
This fund or holding company would be managed at arm’s length from short-term political influence, in a transparent, accountable manner, guided by a city mandate but directed by dedicated professional staff to keep it free from political influence. This vehicle, provided it is given a professional governance structure, would be able to innovate and make housing production more efficient, given its size and the potential volume of construction.
As a publicly owned holding company, it will cooperate with the private sector on every individual construction project, sharing the risk as well as the upside on an equal footing, and aligning the interests of every stakeholder. This will do much to remove the barriers to streamlining the complex execution of every relevant task, from urban planning, infrastructure development and land use regulation to financing, delivery and contracting approaches.
This sounds challenging, but it can be done. Two examples - Hamburg’s HafenCity GmbH, and parts of Copenhagen that were revitalized by the City & Port Development Company - have used this type of development mechanism. These efforts not only increased the amount of residential housing, they also funded vital infrastructure such as schools, universities, and the Copenhagen Metro, benefitting all of society.