The role of diverse real estate markets in diverse cities


Similar to a variety of ecological niches providing for high levels of biodiversity, diverse real estate markets offer possibilities for a variety of different groups, which create thriving and interesting cities full of a mix of different opinions, approaches, cultures, etc.

Essentially, debates about gentrification and the loss of affordable housing are really debates about a loss of diversity in the housing market.

What do I mean by that? Well, when the worst quality housing gets renovated (in a free market situation, this would be the least expensive housing), then the lowest price in the price range for housing in that area rises, which shifts the entire market upwards. This situation has the potential to price certain individuals and groups out of the market in that area.

But back to diversity. What kinds of diversity are possible in a housing market?

  • Size: a homogeneous variety of dwelling sizes encourages an equally diverse mix of households – single households, couples, roommates, families with children, “empty-nesters,” etc. Households come in all sizes and shapes, and so should a diverse housing stock.
  • Age: ideally, buildings are built, replaced, and renovated piecemeal, not all at once. Buildings that are completed all at once age at the same rate and all have to be renovated at the same point – their value is also high at the same time and depreciates at about the same rate (all other factors held equal). Small grain, mixed age development helps to create diverse neighborhoods.
  • Profit-orientation: as a researcher of commons, I would be remiss to omit a mention of non-profit-oriented housing as an essential component of a diverse housing market. Housing cooperatives, in particular with housing stock in the same area as free-market apartments, can provide a good opportunity for access to affordable housing. Cooperatives can engage in construction or buy existing housing and remove it from the free market.
  • Standard: (Note, I didn’t use the word “quality” on purpose.) Returning to the free market situation: people have wide range of different tastes, therefore there should be a wide range of different housing standards to accommodate demand. What does that mean in concrete terms? It means that not every new construction project should be built with ambient heating and a designer kitchen.

Homo economicus, given a free market, will maximize profit. This profit maximization means that new construction and/or renovation has a high standard (luxury fittings) and is profit oriented. Loans were cheap to procure the last few years, which means that a lot has been built and renovated in a short time – that has driven up prices here in Berlin, and it also means that all those buildings will need to be renovated at about the same time. I can only hope that they learned from past mistakes[1] and built a range of apartment sizes.


[1] In the 2017 table of reference rent levels on which the rent-capping system in Berlin is based (the Mietspiegel), the field for “Apartments under 40 sq. meters built between 1991 and 2002” is empty because they did not find enough apartments of that type (the minimum was 10) to create a baseline. Due to the absolute glut of unrenovated apartments available in the city at that time, it was not lucrative to build in this size, a shortfall which we are acutely feeling today.

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