The Dollar mansion (above), in the Alamo Square historic district, is an example of a large Fillmore area house that was cut up into small units.
© 2000 Tom Wetzel
Topics:
Home Ownership as Investment
Decline: Depreciation without Reinvestment
Redlining and Anti-City Biases
Explaining The Turn Around: Rent Gaps
Displacement
Learning from Vienna
Cities in a capitalist social framework are governed by cycles of investment and disinvestment. "Gentrification" refers to changes in a neighborhood that reflect an inflow of capital. Often the inflow of capital coincides with increasing numbers of the professional/ managerial class -- the co-called "gentry" -- living in an area. New condominiums are built, prices of real estate are bid up, old houses are rehabbed.
Among things that are bought and sold real estate is peculiar. A property is not like just any commodity such as potatoes or automobiles. If an item is "true" commodity, available quantities in local markets can be readily expanded if demand by buyers in those particular markets increases. Part of the idea of a "commodity" is that there are competing producers of the same (or equivalent) product. So each producer has an incentive to expand output if demand increases, lest they lose market share to the competing producers. To the extent that competition is effective, it tends to drive the price down with the labor costs of production acting as a floor. Items that would require more human labor cost to produce than the price they can command on the market are items that aren't produced by capitalist firms.
But the terrain in a particular place such as San Fancsico is finite and cannot be expanded just because more people would like to locate here. There is no limit on the price of terrain determined by labor cost of production. The price (sale or rental) is limited only by what someone is willing to pay the owner, based on the advantages of being at that location. Moreover, the only reason that any money at all can be commanded by someone for use of a piece of terrain is because the state has created an artificial "right" to that terrain. This means that the "owners" of terrain are given a claim on the entire society's production even tho they create no value from simply "owning" a piece of terrain. This particular economic inefficiency is an archaic remnant of feudalism tucked into modern capitalism.
A building, like a tool or a car, is a human-made commodity. Unlike other commodities, a building's price is tied to a non-commodity from which it (usually) can't be separated, i.e. the terrain. As a pure commodity, a 1,200 square foot house in Phoenix or Boise or Palo Alto should cost the same, assuming the same age and amenities, but of course it doesn't -- and it is mainly the non-commodity component, the terrain or location, that explains why it doesn't.
Commercial buildings, such as the local Walgreens, are like other producers' goods in that they depreciate or lose value as time goes on. Buildings lose value due to changes in style, or new technologies that make parts of the building obsolete, such as the electrical or water system. Buildings also suffer daily wear and tear. Parts must be replaced to maintain the same level of usability, that is, there must be new investment otherwise the buildings in an area deteriorate.
Of course homeowners may periodically upgrade their houses -- for example, by replacing old cast iron water pipes with copper. Or a company may upgrade the electrical or air conditioning system in its building. This amounts to re-investment in that real estate. A neighborhood where this is general is a neighborhood that is not in decline.
Houses serve a dual function to live-in owners. They are a source of shelter, a respite for private life, a realm of personal control. But in the context of a capitalist economy, house ownership is also a form of investment since it represents equity with sizable potential revenue from its sale. Owning a home is not inherently a speculative investment but the market governance of urban real estate gives it this character.
Houses can be rehabbed but another form of re-investment happens when older houses are replaced by apartment buildings (as happened, for example, in much of Hollywood in the '50s and '60s).
Sometimes the continual re-investment by owners stops occurring in an established urban area that had been built up at some point in the past. Sometimes there is a change in class composition of the neighborhood. An area where affluent people had lived may become unfashionable, and maybe the houses are sold and re-sold.
Even if the houses are not demolished, homeowners may be replaced by renters. And at some point larger houses may be cut up into separate units to increase the rental income. Bunker Hill in L.A. and the Fillmore district in S.F. were both areas with large houses that had become low-wage worker districts, with old houses divided into small rented lodgings.
The Dollar mansion (above), in the Alamo Square historic district, is an example
of a large Fillmore area house that was cut up into small units.
If the area is sufficiently out of favor, the low incomes of residents may not support rents high enough to enable the landlords to make a high profit while also continually re-investing in building upgrades. Thus the building stock deteriorates. The same structural factor that underproduces housing at rents low-wage workers can afford will tend to lead to poorly maintained rental properties in low-income neighborhoods.
The failure to continually upgrade buildings and replace the wornout building stock with new buildings amounts to a process of disinvestment -- shrinkage of capital -- in an area.
When commentators talk about the "blight" in low-income neighborhoods, such as run-down storefronts, they often fail to consider that "revitalization" -- in the form of substantial re-investment -- would most likely mean displacement for the current residents. In other words, in a market-governed urban setting, the areas where people of modest means can afford to live are most likely going to be areas that have suffered some degree of depreciation or disinvestment in the building stock. The advantage to older buildings is that the lower rents make them more affordable for residents or small or marginal businesses or artists or nonprofit uses (such as community groups).
Historically racism has been a factor in disinvestment in that it has made it harder to get loans for upgrades or new construction in black or racially mixed neighborhoods.
Official government policies towards cities since World War II have also played a role in disinvestment.
Middle-class housing reformers of the early 20th century -- identified with the so-called "Progressive" movement -- were highly critical of the older city pattern, of practices of mixtures of uses, such as putting apartments over stores. This movement was inspired in part by the real problems of poor neighborhoods in cities, such as overcrowding, but also by a reactionary pastoralism that romanticized the alleged virtues of America's agrarian past. The detached house surrounded by a garden on a suburban lot was seen as the only "right" way to live.
This ideological movement contributed to official policies that accentuated urban disinvestment as the viewpoint of the reformers gained increasing official acceptance by World War II.
Areas with high density and lots of mixed uses were regarded as undesireable and this influenced both availability of government funds and financial loan policies towards these older city areas. This same middle-class reform perspective also led to government policies that discouraged living in hotels, and led to the decline in the stock of low-price single room occupant (SRO) hotels and lodging houses.
But these government policies affected the location or extent of disinvestment, not its existence.
As I mentioned above, the peculiarity of real estate, as a marketable item, is that the fate of the terrain is generally inseparable from that of the buildings on it. The terrain might be in a highly desireable central city location, with nearby employment centers (a downtown) or other advantages. But if the built environment in the area has suffered significant disinvestment, and has a large low-income population, the actual rental revenue from the buildings in that location may be quite a bit lower than what could be derived from entirely new buildings (and a different population) in that same location. The presence of the existing use pattern -- a large low-income population, and maybe problems like youth gangs and drug-dealing -- may form a barrier to new investment, making it difficult to convert properties piecemeal to more profitable uses.
The gap between the actual rental or real estate sale prices in an area, on the one hand, and the potential rents or prices if the area where generally rebuilt to its "highest and best use" , on the other hand, is sometimes called a "rent gap." When the rent gap in an urban area becomes large enough, the area is ripe for gentrification, that is, for a new round of investment. Exactly when or if this happens may depend on the extent of the barriers to re-investment.
The new inflow of investment can happen in a variety of ways. In the years after World War II, the owning classes tended to rely more on government action, and the strategy for promising low-income areas was eminent domain and the bulldozer. An urban renewal project would be defined, which would enable the government to assemble larger parcels. This would be more time-consuming and expensive for a private developer to do. The redevelopment agency sells the assembled areas at a subsidized price to a developer or company re-investing in the area. Yerba Buena and the Fillmore in San Francisco, Bunker Hill in L.A., and Ocean Park in Santa Monica suffered this fate.
An essential function of any state is to nurture the flourishing of the prevailing economic order. In the case of a capialist economy, this means assisting private profit-making. Urban rewewal programs are an example of this, acting as a facilitator of profit capture.
Another form of re-investment can begin with speculators buying properties with the aim of capturing the increase in value once gentrification gets underway. Even if they do no building, buying the properties is a form of investment.
In some cases middle-class people -- that is, professionals, managers, small business owners -- may buy older houses and renovate them. An example of this in L.A. is the influx of middle-class couples who have bought old Victorians in the Angeleno Heights area near Echo Park in L.A. The Silver Lake and Echo Park areas, adjacent hilly neighborhoods, saw a major increase in the proportion of professional and managerial class residents between 1960 and 1990, according to the census data.
Older areas may have buildings with older styles that had fallen out of fashion at some point in the past but have now become of interest to a different generation of homeowners (Victorians, Craftsman cottages). Re-hab work on houses is a form of re-investment.
Students and artists moving into a low-income area have also functioned sometimes as an opening wedge, in making the area feel safer for middle-class people, who have more access to mortgage capital for re-hab work. This was part of the process in the gentrification of Venice, California, beginning in the '60s and '70s. In 1960 the North Beach neighborhood of Venice had a median family income lower than south-central L.A., only 12% of the employed residents were professionals, managers or business-owners, and half the households didn't own cars. By the time of the 1990 census, the median family income had risen to $42,000, higher than the L.A. County median, only one in five households didn't have cars, and three-fourths of the employed residents are professionals or managers.
Market-led gentrification (as distinguished from government urban renewal) depends upon a bandwagon effect of numerous uncoordinated decisions by investors.
But displacement of the working class residents is part of the process. This is an act of force, whether in the form of eminent domain and the bulldozer or evictions of tenants by property owners who are upgrading for a more upscale clientel. It is fundamentally anti-democratic since it denies self-determination to an existing community.
Displacement usually doesn't happen without a fight. Tenant activists have pushed for things like anti-eviction ordinances, or vacancy control provisions for rent controlled properties (denying rent increases when an apartment is vacated), as measures to fight displacement. In the long run, these are not likely to be more than a speed bump in the process of displacement. Eviction ordinances or rent control cannot increase the supply of affordable housing.
To ensure that working class residents not be displaced, community ownership of the terrain would be necessary. Community self-determination presupposes community ownership. A number of cities in Europe and Asia (such as Vienna and Stockholm) have used the ownership of a large part of the city's terrain as a means to ensure they can provide affordable housing.