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Univ. of Kentucky College of Law

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Tuesday, April 15, 2014

Renting is Expensive . . .

. . . and appears to be getting even more so:

Nationally, half of all renters are now spending more than 30 percent of their income on housing, according to a comprehensive Harvard study, up from 38 percent of renters in 2000. In December, Housing Secretary Shaun Donovan declared “the worst rental affordability crisis that this country has ever known.”

Apartment vacancy rates have dropped so low that forecasters at Capital Economics, a research firm, said rents could rise, on average, as much as 4 percent this year, compared with 2.8 percent last year. But rents are rising faster than that in many cities even as overall inflation is running at little more than 1 percent annually.

One of the most expensive cities for renters is Miami, where rents, on average, consume 43 percent of the typical household income, up from a historical average of just over a quarter.

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Housing rent is consuming an increasing share of the income of residents of major cities, and of those who live in other places as well.

It is important to remember that the rents people pay for housing are made up of three parts:

# payment for the location
# payment for the building and its contents (e.g., elevator, hallways, shared amenities, appliances within the apartment) and their maintenance
# payment for the services provided by staff (e.g., doormen, concierge)

These correspond to the three factors of production -- Land, Capital and Labor. Many people today fail to make the distinction between land and capital, either thinking of land as a subset of capital, or as in insignificant factor in comparison to labor or land. And those who live in places where a lot for a single family home might sell for $50,000 or $100,000 might be shocked to find that land in and near our largest cities can sell for many hundreds of thousands of dollars, even millions of dollars, per acre, and a small city lot can cost more than the most luxurious home in a small city.

In luxury apartments (lots of media coverage, but a relatively low percentage of city dwellers), there may be a lot spent on building and services, but they are also generally on very valuable land. Highrise buildings share that land value across many apartments. But where the rest of us live, including many of those who are paying a high percentage of their income on housing, the building itself may be quite old, with fewer amenities, older appliances and systems, and poor maintenance, and few if any services provided. The locational value likely represents 75% or more of the rent.

It is worth thinking about what the landlord brings to the party. In a luxury high rise, the landlord may provide a lot of services. At the same time, that high rise is very unlikely to have been built on low-value land. In an older building, with few shared amenities, no elevator, perhaps older appliances, the landlord supplies very little, and most of the rent is for the location.

Meanwhile, the building itself is depreciating. Its systems grow older and less reliable. Yet the rent continues to rise year after year. As more people are attracted by the job opportunities or other amenities the city offers, unless sufficient housing is built to satisfy the demand, rent will rise. This happens unless tenants can find other more affordable housing, or better housing for the same price within a reasonable commuting range.

The landlord, though, is not the one who makes the location more valuable year after year. It is the vitality of the city, and the supply of housing that does this. So why should the land owner be the recipient of this windfall? ("Tradition!" is not a sufficient answer! A lot is at stake. )

We ought to be pursuing public policy that promotes redevelopment of underdeveloped sites, policy which doesn't simply enrich landlords in their role as landlords (that is, there is nothing wrong with landlords expecting to be paid for services staff provides (labor), or for the use of the building and its contents (capital), but the landlord doesn't create the land value, and should not be the beneficiary of this natural process of demand for urban sites rising. (It was once commonly known as the "unearned increment.") Rather, the community should be the recipient, collecting the lion's share of the rental value of the land month in and month out, and leaving untaxed the value of the structures on the land as well as the wages of the building owner and his employees, and their purchases.

Posted by: Wyn Achenbaum | Apr 15, 2014 10:07:36 AM

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