We Cannot Build our Way out of the Affordable Housing Crisis through Private Sector Production
The United States is experiencing a crushing affordable housing crisis that is having a devastating impact on people across the country. Home prices have exploded, making ownership an impossibility for many in the working class, a great majority of whom are already saddled with extreme debt. People who cannot buy are then pushed into the rental market where they find that rents have likewise skyrocketed. In many ways, Washington DC is at ground zero of this housing crisis. Incredibly, in 2023 housing costs in the District were 144% higher than the national average.
Leaders, who have for decades promised a solution to this crisis, point to a lack of housing supply as the reason for rising costs. And there is no question more affordable housing needs to be produced. The question is how do we actually get this housing built? There seems to be a bipartisan feeling among most in Washington DC that the answer is to “unleash the private sector” to build our way out of the crisis, presumably through massive deregulation and corporate welfare. Still, we must ask ourselves whether the private sector, a group of people made up of Wall Street bankers, private equity behemoths, and large-scale development firms is the right sector to solve the housing crisis. Are these actors really interested in lowering housing costs? If they are “unleashed,” will they actually build our way to affordability?
If you are skeptical, you are not alone. I am right there with you.
Record Housing Production and Skyrocketing Rents
In the past decade Washington DC has seen an extraordinary amount of housing produced by the private sector. In fact, between 2010 and 2020 DC added the second most units of housing per square mile of any county in the United States. Despite this production, rents during this same timeframe increased roughly 55%. So what gives? Why didn’t increased production at least stabilize, if not reduce rents? The answer to this question becomes obvious when examining the type of housing that was produced during this timeframe. Specifically, Eighty-Four Percent of all new units built in Washington DC between 2005 and 2018 were Class A Units. “Class A” is an industry term used to describe the highest quality properties on the market.
What’s more, to make way for these high-end units, affordable housing was often demolished. In the industry, this is called “repositioning” and has been a widescale practice in Washington DC. In fact, the DC Government has been aiding developers to reposition entire neighborhoods for years, giving away nearly $1.7 Billion in subsidies to the real estate industry between 2002 and 2012. During roughly that same time period, the number of deeply affordable units in the District decreased by half and the number of high-end units tripled. Essentially the government gave developers public land and money to demolish affordable housing and build more expensive housing in its place. This process drove up housing costs astronomically, which made the real estate industry huge profits. It also led to the unprecedented displacement of working-class black Washingtonians from the District. This is what “unleashing the private market” looks like in practice- strong luxury housing production coupled with ballooning costs.
Housing as a Vehicle for Wealth Creation
The United Nations Special Rapporteur on the right to adequate housing has reported extensively on the “financialization” of the housing market. Housing financialization is defined as “a phenomena that occurs when housing is treated as a vehicle for wealth and investment rather than a social good.” Through complex financial instruments and investment models, Wall Street has effectively financialized the housing market, meaning the housing markets primary purpose is NOT to house people, but rather to create wealth for institutional investors. Money from these investors is pooled and then unleashed into global real estate markets with the mission to maximize return on investment. Real estate development takes different forms in different places, but in every case that financialized capital is involved, its sole motivation is to maximize growth above all else.
Herein lies the inherent contradiction in the argument that this existing framework is capable of solving the housing crisis. It is a system whose investment models are dependent on rising costs. The motivations of the real estate industry are at complete odds with taking voluntary measures to bring down housing costs in any substantial way. This industry has created a model that works on speculation and scarcity. Private equity’s involvement in housing production means the industry is increasingly focused on short-term gains which results in unsustainable bubbles. The industry engages in widespread price-fixing to create artificial scarcity in order to drive up housing costs. The reality is that financialization has completely destroyed the notion of a real estate sector that is responsive to the needs of the working-class housing consumer.
Overproduction and the Price Drop
Some people may read all this and still be thinking: “Despite everything you just said, the simple fact is that if the private sector continues to build, supply will outpace demand to such a degree that prices will have to drop. It is inevitable.”
Yes, overproduction will lead to a price drop. However, as stated above, the past decade has already seen a 55% increase in rents in Washington DC. If rents drop 2% or 3% because of overproduction in the next several years, it is immaterial. The entire dynamics of the market have been wholly altered through a decade of hyperinflation.
More generally, the housing bubble that has been created by investment strategies seeking unchecked growth will ultimately prove unsustainable. Quite simply, housing costs cannot continue to rise at the rate investors are demanding. At some point the multifamily housing market bubble will burst. This will have devastating effects much like the 2008 financial crisis.
The Path Forward
Housing production is key to solving the affordable housing crisis. However, we must disabuse ourselves of the notion that this can be accomplished through massive deregulation and public subsidization of the private sector. Instead, we must seek alternative solutions outside these profit-obsessed forces. These alternatives should compete with the private market. They should be more efficient than the private sector and produce housing that is more desirable for consumers to live in. And most importantly, we have to create an alternative system that has a core mission to actually house people- a system that eliminates the profit motive and puts people first. At the Center for Social Housing and Public Investment, we believe that social housing has the ability to do all these things. Our next installment will discuss how to set up a social housing system in the District of Columbia that is capable of achieving these goals.