The Perils of Gentrification

Gentrification occurs when there are increasing numbers of affluent people moving into an area. These people can afford comparatively expensive housing. Less affluent people cannot, and are forced to move, or to leave the area completely when housing cost rises beyond their ability to pay. The process by which cities are turned into havens for the rich, with the poor and working class forced out, has a long history. It has happened in every city of note, and is at the top of every mayor’s to-do list today.

San Francisco is showing signs of stealing the tech throne from Silicon Valley. More and more companies realize that their employees want to live where the action is, which is not in Cupertino. But high tech pay and their increasing numbers have resulted in rising housing costs that many longtime residents can’t afford. That said, it’s an error to blame it all on IT people, because it’s a general trend, happening everywhere. I take the position that protests against the 40 big white busses that shuttle tech workers to their jobs every weekday are useful as symbolic protest against gentrification in general, but that recent escalation of protests has the wrong target. In fact, there is no target, and the city is on their side, working to provide affordable housing as well as a fee system for tech busses that use Muni stop spaces. But time is short, and quick action is needed.

…the battle to preserve affordable housing
for people who are not rich.

There are two drivers of gentrification: housing needs for the additional numbers of the affluent, and profit for those who provide it. Builders could build affordable housing, but luxury housing is far more profitable. Provision of housing for the affluent therefore always trumps affordable housing, resulting in increasing numbers of units of luxury housing and diminishing numbers of units at moderate cost. The losers are always the working class and poor.

Here is how it happens. Owners of housing and commercial space become enamored of the possibility of significantly increased income, so they double or triple the rent, forcing tenants out. They then either find someone who can afford the new, higher cost, or sell dear to a developer who will rebuild for a luxury market. Developers are highly motivated to provide luxury because it’s far more profitable. This doesn’t matter much if the new housing goes up on an abandoned warehouse site, but has huge consequences for occupied affordable housing.

Owners sense they can get a lot of money.
They double or triple the rent.

Design costs are highest in the kitchen and bathrooms, especially when these costs become part of the mortgage. Few people need a big kitchen with a six-burner Wolf range with double oven, a double-wide Sub-Zero refrigerator, each of which costs more than $10,000, or marble countertops, or the latest in sinks and cabinetry. Good appliances can be bought for 10%-15% of these prices. Nor do we need tile and glass shower enclosures, or any of the other luxury bathroom fittings. These things don’t do their job any better than much less expensive fittings, but the profit margin is far higher. Likewise, every element of luxury housing uses building materials that are far more expensive than more common goods.

The cost of outfitting and finishing a luxury kitchen and two baths can easily exceed $100,000. Now, you will pay more than double the value of the home in interest for a standard 30-year mortgage, which includes the luxury costs, so you could easily pay well over $200,000 including interest for your kitchen and baths. Most of the interest is paid over the first years of the mortgage, so that’s when your kitchen costs you the most.

It is common in many parts of the country for new housing to be sold unfinished and without appliances or cabinetry, and there’s no reason that urban affordable housing can’t be sold the same way. The new homeowner can either pay to have the home outfitted and finished, or do it himself. The more the buyer choses to do, the lower the unit’s cost. If he buys appliances with cash at Home Depot or a similar place, and if the new home has non-luxury cabinetry and bath fittings, and is completely unpainted, the cost would be considerably lower, and he could finish it as he pleased. If he did the work himself, in essence he would be paying himself a double or triple hourly rate by not having to pay for labor, by not paying interest on appliances, and by purchasing good but modestly priced appliances. In SF, free paint in nearly any color desired is available. His savings could be close to $200,000 compared to finished luxury housing.

Urban housing could be sold
unfinished and without appliances.

But that lower price he pays is not attractive to developers, because that’s where a lot of their highest profit comes from. This problem can be addressed in two ways: establishing ways for low price housing to be mandatory through laws, regulations, and planning (see article mentioned below); and providing financial and other incentives for developers to build affordable housing.

If the city government recognizes the importance of preserving affordable places to live, and they all do, arrangements such as partnership agreements with developers to provide affordable housing could be devised that would benefit both, for example by giving approved builders preferential treatment. There might be some public money paid to these developer partners to compensate for their lower profit margins.

Cooperative housing
is one of the best ways
to preserve affordable housing.

Many local governments have found public-private commercial business partnerships extremely beneficial. Taxes and fees on a large new commercial construction project are forgone in favor of a share of future profits generated by the business. In the long run, this profit share is much greater than the lost tax revenue, and allows the owners to avoid some significant costs. Some of the profit paid to the city could then be used to underwrite affordable housing.

There is no complete solution to the problem of gentrification, but there are several ways in which affordable housing can be preserved. Cooperative housing is one of the best. In this arrangement, a homeowner does not own her unit. Instead, she owns shares of the co-op. Terms of the co-op prevent selling that would contribute to gentrification.

Combating Gentrification Through Equitable Development is one good article that lists a number of these various ways. A web search will provide others.

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