How Housing Is Captive to Investment Demands

Two advocacy pieces in recent months both suffered from the same problem: sweeping assertions based on theoretical models and false assumptions and beliefs.

“Rent Control Will Harm the Poor” was an exercise in advocacy-based science. It picked studies by Conservative Libertarians that predictably supported the assumptions and goals of real estate promoters. “Rent Stabilization Is a Necessary Tool” was also an exercise in advocacy-based science. It picked studies by Liberal Progressives that predictably supported the assumptions and goals of social justice promoters.

The arguments on both sides were made as if we are litigators in a court of law rather than a society of human beings trying to achieve group functional outcomes. What they are engaged in is not scientific inquiry; it is advocacy-based science that uses selective scientific information to promote a predetermined position.

Public policy should be based on knowledge, not theory.

I have been a property owner, businessman, and resident in Santa Barbara since 1980. My family and friends want multigenerational communities in Santa Barbara County where our children can buy homes; we don’t want wealth ghettos surrounded by servant communities.

In the real world outside of economic theories, local property values float on top of 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 the capital markets as a financial asset by virtue of the fact that it can be easily rented out and generally produces a positive yield. Assets that produce cash flow are always treated as financial assets by investors. By contrast, oil, wheat, and gold are commodities that cost money to store and have no meaningful rental demand; they do not produce a positive yield.

The reason shelter is unaffordable for a majority of the Santa Barbara population in 2022 is that too great a share of the total housing stock is held by the private market and too great a share of the funding is extended to low-risk consumers: consumers with high credit scores. Housing costs have been driven higher as global wealth has experienced massive growth since the 1980s, while investable opportunities offering attractive returns to global capital have simultaneously become rare in the developed world. This flood of wealth, or accumulated capital, has placed great downward pressure on the cost of capital, or real interest rates, which has drastically reduced yields on high quality bonds. This in turn has drastically increased investment demand for rental yield.

Supply and demand have not stopped working in housing markets; the confusion is about which demand is instrumental. Investment demand is instrumental in modern housing markets, not shelter demand. The confusion is compounded by failing to account for the massive size of global demand for rental yields, relative to the potential supply of private sector housing units. The demand for financial assets dwarfs any potential supply that the private sector will ever produce!

Since housing is effectively a financial asset, it is also illogical to expect that such policies as rental assistance in the form of tax breaks or vouchers and so on will do anything but drive up housing costs. All public subsidies of the private sector, such as rental assistance, school vouchers, and health-care subsidies, drive up the cost of the product or service in question. Why? Because the private market responds to such public funding guarantees by setting prices based on whatever private businesses can get away with in political terms — not based on market value.

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

Unaffordable housing is entirely political due to the restrictions on the supply of funding for high-risk consumers. The federal government, as a sovereign currency issuer and treasurer of all future output of the nation, could achieve affordable housing for all Americans in a matter of a few years. It is the same with health care, childcare, and education. Sweden did this in the 1960s, ’70s, and ’80s. It’s very straightforward, but Conservatives and Libertarians have internalized an ideology that defines anything that exists outside of their narrow definition of markets as “Socialism.” They ignore the historical performance of the Swedish stock market, the fact that rates of innovation are higher in Sweden than in the U.S., and that thriving Swedish capitalism is a historical fact.

Instead of allowing incomplete markets and real estate speculation to destroy communities, communities should hold referendums on population limits and growth, set aside a certain percentage of every community’s housing stock for local residents, and lease that residential and commercial housing to local residents with proven seniority at an affordable percentage of the local median household income. Communities should also establish public trusts that offer financing to housing cooperatives owned by long-term residents.

Kristian Blom is a “fixer” at Blom Levy & Co., registered investment advisors.