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Speculating on Race

How Systemic Inequalities in Housing Create Investment Opportunities

January 24, 2021

At this point, it seems like ages ago. In 2010, a Vietnam War veteran named Jimmy McMillan ran for governor of New York under what he declared as the Rent is Too Damn High Party. With facial hair that’s been likened to that of Papa Smurf, he caught the public’s attention for his theatrics and instinct for a good punch line. But McMillan was serious. “People are working 8 hours a day and 40 hours a week, and some a third job. Women can’t afford to take care of their children, feed their children breakfast, lunch, and dinner,” he told the audience during an unconventional gubernatorial debate. The reason? “The rent is too damn high!”

That phrase has stuck around, and for good reason. McMillan may have been an eccentric messenger, but his platform reflected an underlying housing crisis. It’s grown even more severe in the last decade—not just in New York, or even in the United States. The housing crisis is one of global proportions. “The rent is too damn high” could be our global anthem.

If some could’ve ignored the housing crisis before, that’s no longer an option. The present housing crisis is entwined with the other systemic failings we now confront. It’s created vulnerabilities that happen to make it easier for the novel coronavirus to reproduce itself. In the absence of a vaccine, governments around the world have responded by telling us to stay at home. But an estimated 150 million people globally lack such a home, leaving them at particular risk of infection, while another 850 million people live in crowded informal settlements.

What is more, high rents have made unemployment, the effect of stay-at-home orders and foundering economies, all the more intolerable. Tenants launched major rent strikes and other agitations early in the pandemic in cities around the world, such as Melbourne, Sydney, Madrid, Barcelona, London, Durban, Toronto, Vancouver, New York, Philadelphia, and Kansas City. While the United Nations has denounced evictions in Sao Paulo and Nairobi, evictions have also begun in the United States, moratoriums notwithstanding. The stakes are incredibly high for tenant movements around the world. A failure to achieve non-porous tenant protections will spark unbearable debts and mass evictions. The age of “the rent is too damn high” may come to be seen as an almost quaint prelude a new pandemic: of indebtedness and homelessness.

There’s something glaring that many of these rent strikes share in common: they’re centered in cities where housing has become a prime asset for investment by financial institutions, sovereign wealth funds, pension funds, and wealthy absentee owners. It’s a trend that geographer Manuel Aalbers has called the “financialization of housing.” It’s a phrase suggesting that the rising role of finance in the global economic system since the 1970s has transformed—or financialized—everyday life. “Historically gold was a great instrument for storing wealth,” Black Rock’s CEO Lawrence Fink thus remarked in 2015. Now, in addition to contemporary art, “the other store of wealth is apartments inManhattan, apartments in Vancouver, in London.”

In London, almost 25,000 homes have been officially identified as empty; the actual number is probably higher because this number excludes properties classified as “secondary homes.” The properties are investments that accrue value without investors doing anything. Economic researchers Rex McKenzie and Rowland Atkinson found that in the borough of Kensington and Chelsea—where in 2011, 10.5 percent of households had “no usual resident”—owners ranged from former New York City mayor Michael Bloomberg to a Ukrainian billionaire to various companies in offshore tax havens.

In metropolitan Vancouver, in 2017, 6.5 percent of housing stock was vacant or not used as a primary residence—a burdensome number for a rental market where vacancy rates hover around 1 percent. (Though the burden somewhat declined after the city imposed a tax on vacant houses.) Vancouver and London are among what urban planner Andy Yan calls “hedge cities,” where wealthy investors seek a place to park their money, as insurance in the face of such dangers as climate change, or social and political instability elsewhere. Cities like Hong Kong and Melbourne face similar pressures.

But residential real estate investors aren’t just individual very, very rich people. Far more powerful are private equityfirms, hedge funds, real estate investment trusts (REITs), and other financial institutions.

In 2017, U.N. Special Rapporteur on Adequate Housing, Leilani Farha authored a damning report challenging how global investors, cooperating with governments, have reduced housing to a mere asset, at the grave cost of its function as a place to live in health and security. Those findings have become only more relevant during the pandemic. Not only do tenants around the world currently face the actuality or threat of mass evictions and accumulating rental debts. And not only do homelessness and overcrowding facilitate the spread of Covid-19. Private equity and other real estate investors are also already gearing up for large-scale purchases of distressed real estate debt, in light of the economic fallout from the pandemic. Their business model feasts on systematic failure.

Real estate investors didn’t create the housing crisis alone. They’re a symptom of a global ethos that’s developed over the last 50 years that treats markets as the solution to all human problems.

We must therefore ask how we got here in the first place. The short answer is that real estate investors didn’t create the housing crisis alone. They’re a symptom of a global ethos that’s developed over the last fifty years that treats markets as the solution to all human problems. They’ve benefited from the sway of the financial and real estate industries in the halls of government. But above all, they’ve turned shocking levels of inequality within countries into an investment opportunity. It’s crucial to understand this inequality, which is tied up with race, ethnicity, and caste. In inequality lies potential profit: the allure of turning a home into a wildly profitable asset.

To put it differently, it’s the structural inequalities in housing markets, rather than something in the nature of large cities per se, that have made rental properties magnets for investment. Consider two contrasting North American sites: New York City and mostly rural Northern Canada. While one is a center of global finance and a long-standing destination for domestic and international migrants, the other is a source of raw materials, sparsely settled, and mostly indigenous. Yet in both, the racial histories of housing and labor markets have contributed to stark differences between current rents and the rents investors could obtain from flipping a housing unit to a new demographic.


New York City

New York is significant because it’s not just the headquarters but also an old experimental station for the private equity firm Blackstone—now the world’s largest landlord. A recently released documentary called Push, directed by Swedish filmmaker Fredrik Gertten, provides a glimpse of the scope of Blackstone’s staggering housing empire. In one scene, we meet a tenant whose mega-complex in the historically Black neighborhood of Harlem in New York has been purchased by a Blackstone subsidiary. The new owners plan to raise the rent by $900. Paying rent before was already tough for the tenant: he’d been handing over about 90 percent of his income to the landlord. Now it’ll be impossible. “Where I’m going to go, I don’t have a clue. I don’t know,” he admits in an interview with U.N. Special Rapporteur Farha.

The tenant’s story is tragically commonplace, in various ways. In 2017, more than half of New York City renters were rent-burdened, paying at least 30 percent of their income to rent and utilities, while 28 percent paid more than half of their income to housing. High rent burdens were both more commonplace and more severe among low-incomehouseholds, and among those identified as Black, Hispanic, or Asian. It may now seem normal to fork over hugeportions of our earnings to landlords. But this hasn’t always been the case—even in Gotham. To put it in perspective,in 1960, at the median, New Yorkers paid 19 percent of their income in rent and utilities; by 2018, it had risen to 31 percent, an astounding increase.

To understand what happened, we need to go back to the previous century. As any U.S. urban historian can tell you, New Deal policies in the 1930s codified racism in the U.S. housing market.1Overviews include Kenneth T. Jackson, Crabgrass Frontier: The Suburbanization of the United States, (New York: Oxford University Press, 1985); Douglas S. Massey and Nancy A. Denton, American Apartheid: Segregation and the Making of the Underclass, (Cambridge: Harvard University Press, 1993). To encourage homeownership, and to prop up the foundering real-estate and construction industries during the Depression, federal officials created the Home Owners’ Loan Corporation (HOLC), which refinanced mortgages for homeowners in danger of default.

HOLC appraisers marked the value of a housing block as a potential beneficiary for its mortgage refinancing through an elaborate system of standardized maps: Green marked “best” and red marked “hazardous.” Crucially, they read racially mixed neighborhoods and African-American residents as markers of low or declining property values. Racial discrimination was already commonplace among bankers and brokers. HOLC drew on their practices and made them systematic, devising a common standard for neighborhoods across the country. Private lenders followed the HOLC maps, restricting their lending to neighborhoods that it had ranked more highly—a practice that came to be known as redlining. “Credit blacklisting maps…are accurate prophecies,” as Jane Jacobs once noted, “because they are self-fulfilling prophecies.”

The Federal Housing Administration (FHA) created soon after HOLC went even further. Not only did HOLC’s appraisals of property value guide where it offered insurance on mortgages; the FHA also encouraged the inclusion of restrictive covenants in deeds, which forbid homeowners from selling their homes to non-white—and especially Black—buyers. While the Supreme Court ruled restrictive covenants unconstitutional in 1948, they remained widespread, enforced through informal rather than legal means by a community. If the FHA thus deliberately subsidized the suburbs and kept them white, it also encouraged dis-investment from once multi-racial urban neighborhoods: City neighborhoods that were ranked unfavorably on its maps couldn’t get FHA loans to finance homeownership, while landlords had little reason to spend money on properties in redlined areas. The Veterans Administration, which insured mortgages for veterans after World War II, followed the FHA’s exclusionary policies. By the time the Fair Housing Act was passed in 1968, outlawing racial discrimination in housing, metropolitan housing had been starkly reconstituted on racial lines.

Tenants don’t leave buildings at this rate unless there’s something worse than an uncontrollable rat infestation. As we know from widespread reporting, landlords sought to displace tenants through systematic harassment.

Many of the same neighborhoods that have suffered from historical redlining became targets of institutionalized gentrification in more recent decades. Because racial encoding had kept their property values kept low in the past, investors could make great returns by flipping the units to a new demographic.

The loosening of rent-stabilization laws has been the other crucial ingredient for high returns. The Harlem tenant we meet in Push lived in a rent-stabilized complex called Savoy Park. New York’s system of rent-stabilization, dating back to 1969, limits annual rent increases to moderate levels set by the city. Landlords of rent-stabilized units could expect a return of 6 percent on their investments, while large developers left the affordable housing market aside. Instead,they sought out greater returns in high-end rentals, hotels, and other non-regulated sectors of New York real estate.

All this changed in the mid-1990s, when privatization and deregulation were watchwords around the world. The cityand state governments passed laws that made it possible to deregulate rent-stabilized apartments if the rent roseabove $2000 (a limit that gradually rose to $2774.76). Landlords could get to this rate through various loopholes: for instance, a provision allowing significant rent increases for renovations, and a “vacancy bonus” allowing for rent increases of up to 20 percent after a tenant left.

Unsurprisingly, real estate lobbyists encouraged for passage of these laws. Their go-to argument was the small number of rich New Yorkers, like actress Mia Farrow, who paid low rents in their rent-stabilized apartments. But the laws did more than raise rents on the city’s Mia Farrows; they also created blatant incentives for landlords to hike rents on low-income tenants in order to deregulate in neighborhoods that appeared as frontiers of gentrification.

Private equity firms like Vantage Properties, Pinnacle Group, and Normandy Real Estate stepped into the opportunity in the early 2000s, purchasing large swaths of rent-stabilized units in the city. The purchases were often highly leveraged, drawing on low-interest financing available in the years before 2008. To generate the rapid double-digit returns that their investors expected, and to pay back debts, the firms intended to quickly replace rent-stabilized with market-rate tenants to increase a building’s revenue from rent. While normally, rent-regulated tenants left their apartments at around 5.6 percent a year, the New York Times reported in 2008 that vacancy rates in some building sowned by private equity firms had risen to over 20 and even over 30 percent.

Tenants don’t leave buildings at this rate unless there’s something worse than an uncontrollable rat infestation. As we know from widespread reporting, landlords sought to displace tenants through systematic harassment: they would refuse to make repairs, initiate loud construction, and cut off heat, water, or cooking gas. Some would charge that an apartment wasn’t the tenant’s primary residence, and therefore ineligible for rent regulation. Others would return orhold rent checks, then sue tenants for non-payment.

Between 1994 and 2019, New York City lost 291,000 rent-regulated units. The City Comptroller found that the overwhelming cause of deregulation between 2005 and 2017 was that landlords had used loopholes to increase the rent beyond the threshold for rent-stabilization. By 2016, according to an analysis of public records, four of the city’s five largest landlords were Related Companies, LeFrak Organization, Blackstone Group, A&E Real Estate: all investors that managed private equity or hedge funds. The fifth, Cammeby’s International, has also been one of thecity’s principal investors in rent-stabilized units. “They’re completely speculating on this future that they’re creating,” one tenant advocate who appears in Push notes of Blackstone’s influence in rental markets—a bizarre echo of Jane Jacob’s observations in 1961 on HOLC maps.


Inequality and Rent Gaps

The difference between an apartment’s current and potential revenue from rent—what geographer Neil Smith called the “rent gap”—has encouraged leveraged investors to try to flip rent-stabilized units in once redlined neighborhoods. That difference wasn’t created by some imaginary neutral market, but by policies of the real estate industries and federal government, which previously divested from these neighborhoods based on a racial coding of property values.

It’s also been shaped by rising income inequality among renters. In the United States, the top fifth of renting households now make 18 times as much as the bottom fifth; 30 years ago, it was 12 times as much. Many upper-income renters can no longer afford homeownership but are out-bidding low- and increasingly even middle-income renters.

While it’s tempting to reduce the housing crisis to an Econ 101 question of supply and demand, inadequate housing stock is only part of the problem – and a complicated one at that. When low-income neighborhoods of Brooklyn in the early 2000s were rezoned to permit taller buildings and attract wealthier residents, rental rates didn’t decline but rose, as neighborhood property values increased. Furthermore, developers in New York and elsewhere in the country have been expanding the supply of multi-family rentals through construction, but they’re primarily geared toward the more profitable, high end of the rental market.

In northern Canada, what accounts for the difference between prior and potential rent revenue isn’t redlining or the weakening of older rent-stabilization laws, but incremental colonization.

In New York, the tide has fortunately been turning. Pushed by a remarkably mobilization of tenants under a state-wide coalition called Housing Justice for All, the New York state government passed a historic tenancy law in 2019 that reversed many of the provisions introduced in the 1990s. Among other provisions, the law eliminated the ability to fliprent-stabilized units to market-rate; they now remain protected indefinitely. It’s this same coalition, driven by the financialization of rental housing in New York, that’s organized the state’s current rent strike for tenant protections during the pandemic.

Indigenous Northern Canada

The trend of financialization in housing may be most noticeable in big cities with vibrant tenant movements, but it isn’t confined there. It has shaped housing markets even in Canada’s northern territories of Yukon, the Northwest Territories, and Nunavut, where many rural communities are only accessible by plane or winter ice roads. Of the region’s mostly indigenous population, a large concentration of First Nations peoples live in the Northwest Territories, while Inuit make up most of Nunavut’s residents. Much like in the United States, Australia, and New Zealand, indigenous people also happen to be vastly over-represented in Canada’s homeless population. In the Northwest Territories, for instance, where indigenous people make up half of residents, an estimated 90 to 95 percent of the visible homeless population are Dené, Inuit, or Métis.

In northern Canada, what accounts for the difference between prior and potential rent revenue isn’t redlining or the weakening of older rent-stabilization laws, but incremental colonization.

To understand the region’s rental markets, we need to look at the transformations wrought by the rise of northern Canada’s resource extractive economy, which overturned the older world of the fur trade. Until the early twentieth century, indigenous people hunted and procured nearly all of the fur behind that lucrative trade. Companies like the Hudson’s Bay supplied trappers with materials on credit. In the fur-trading season, the trappers would then return to trading posts with furs to settle their accounts and acquire more credit. But after the First World War, a depletion of fur-bearing animals and rising overhead and subsistence costs made it more difficult for indigenous hunters to secure a livelihood from fur trapping. They also began facing competition from white trappers during the boom years in the fur trade in the 1920s.

Mining and other forms of resource development grew upon the dying embers of the fur trade. While mining began with a gold rush in Yukon in 1896, it was twentieth-century global war that would inspire a massive investment in resource development in northern Canada. The region served as a supply route between the European and Asian theaters of war during the Second World War, then as a buffer area between the United States and Soviet Union during the Cold War. The construction of highways and air transport infrastructure served military needs, while also making northern oil and metals available to people in more populous regions of Canada and the United States.

Resource development would create two very different kinds of spaces—the urban and the rural—in a region that previously knew no such polarities. It’s these polarities that are at the heart of both housing profits and homelessness.

In urban centers, small real estate markets emerged that, at the end of the twentieth century, would draw in investors in boom times. The cities and towns of northern Canada developed around military and mining sites. For instance, Yellowknife, now a city of nearly 20,000 people and the capital of the Northwest Territories, was settled as a gold mining town in the 1930s. The construction of a U.S. airbase in Iqaluit sparked non-Inuit settlement there during World War II. It’s since become a community of less than 8,000 and the capital of Nunavut.

More recently, resource development projects in the North since the 1990s, after the signing of the Canada-US Free Trade Agreement, have prompted an influx of workers, often from Canada’s South, into northern cities. This migration has made real estate investors glow with excitement. In 1991, a Canadian company named Urbco Ltd. acquired 11 northern real estate companies, anticipating that diamond mining, timber development, and fossil fuel extraction would spark spill-over profits in housing.

In 2002, Urbco became a Real Estate Investment Trust and renamed itself as Northern Properties (NP REIT). Created in the 1990s, with inspiration from a similar institution in the United States, REITs in Canada allowed investors to pool their capital to purchase and trade real estate—much as one might purchase and trade stocks in a corporation. According to calculations of urban planner Martine August, REITs and other financial institutions have acquired nearly one-fifth of Canada’s multi-family rental stock and account for 18 out of the country’s 25 largest landlords.

In northern towns and cities, what’s pivotal to NP REIT’s investments is that these urban centers are “emerging” areas: a modern colonial frontier with limited real estate development. The conscious strategy of its managers is to invest little on upkeep, while charging high rents to workers who don’t have much choice in the face of short housing supply. August estimates that the REIT—recently renamed again as Northview—has captured 74 percent of privately-initiated rental structures in Iqaluit and 85 percent of those in Yellowknife.

It’s the deep structures of inequality in our society that have made speculative investments in housing so potentially profitable. And when it comes to housing, in North America, those structures were shaped by the age of welfare state, from the 1930s to 1970s.

As a result, its managers can not only influence rental rates to investors’ advantage. They also have a peculiar ability to affect who gets housing at all: to improve the security of its investments, its managers establish long-term leases with government and corporate tenants who then sublease to their employees—often from the South.

Such exclusive housing markets particularly burden indigenous people who migrate from rural to urban centers. In the 1950s, the Canadian government embarked on a project of settling formerly nomadic indigenous hunters around old fur trading posts, in part as a solution to their immiseration with the decline of the fur trade and the rise of resource development. But settlement promised to fulfill an even grander objective: their assimilation into Canadian society and the wage economy. Without any sustained economic base in settled areas, however, rural northerners lacked opportunities for secure employment.

In the twenty-first century, rural indigenous people have continued to rely on seasonal, part-time jobs and unstable sources of income in industries like arts and crafts and tourism. Their dependence on credit in the fur trade has thus morphed into reliance on government relief and services. Not the least of these services is social housing, which is poorly funded and thus inadequate in quality and quantity. Poor housing, along with paltry incomes and related social and psychological strain have incited many rural northerners to move to urban centers to seek work, education, housing, or government services. “[F]or me, it was too crowded at home,” as one migrant to the town of Inuvik told ethnographer Julia Christensen. “I couldn’t get away from all the problems.” But once they’re in the towns and cities, the monetary and institutional barriers to entry into the private rental market can be difficult to surmount. Reenacting an old colonial scenario, urban housing markets restrict the control of indigenous people over their shelter and bodily security.

Bustling New York City and arctic northern Canada couldn’t be more unlike. But in both, systematic racial inequality has been essential to valuable real estate investment. It’s not that the inhabitants of redlined neighborhoods in New York, or indigenous northern Canadians, have been in the way of real estate investors. On the contrary, the prior devaluation or non-valuation of their homes and lands have enabled profitable investment at later moments in history.


The Global Financialization of Housing

The stories of financialized housing in New York and northern Canada are merely pieces of a bigger story.

In the U.S. single-family housing market, Black and Latinx homeowners disproportionately received the subprime mortgages at the heart of the 2008 housing crisis—an instance of what historian Keeanga-Yamahtta Taylor calls “predatory inclusion.”  After 2008, private equity firms bought up the foreclosed homes of such homeowners across the U.S. sunbelt in bulk, then turned them into single-family rentals. They managed to capture significant portions of markets in such metropolitan areas as Charlotte, Tampa, and Atlanta, and they’ve followed methods to squeeze out higher returns that tenants of private equity firms elsewhere know all too well.

The reach of institutional investors in rental markets is by no means limited to North America. Elsewhere, they’ve often followed the strategy of privatizing social housing. In Germany, for instance, private equity firms purchased apartments in Berlin en masse from state-owned housing companies beginning in the early 2000s. In Sweden, Blackstone’s arm Hembla has acquired over 21,000 apartments in Stockholm since entering the market in 2014. In a different strategy, in Spain, Ireland, and the U.K., private equity firms and REITs swooped in after the 2008 crisis to purchase soured real estate assets, much as they had in the United States. Following a major purchase in 2017, Blackstone became the largest private real estate firm in Spain.

If financialized housing is international, so too are the investors. Besides the global economic elite, sovereign wealth funds of nations such as Abu Dhabi, Norway, and China have heavily invested in real estate. Public pensions are also major investors, either directly or via private equity funds. According to one estimate, the Canadian Pension Plan Investment Board, the California Public Employees’ Retirement System, and the National Pension Service of Korea are among the top twenty-five largest investors in private real estate. All this can get quite convoluted. As a Toronto couple who appear in the 2020 documentary Push can attest, a landlord trying to displace you may be the very pension fund in which you’re an investor.

We’ve arrived at the scope of the problem.

Within the span of just several decades, the asset value of housing has rapidly risen in significance, relative to its functional value as a place to live. That valuation has become so deeply woven into our global economic system that many of us—not just the one percent—have, perhaps unwittingly, bought into it—literally, metaphorically, or both.

What is more, it’s the deep structures of inequality in our society that have made speculative investments in housing so potentially profitable. And when it comes to housing, in North America, those structures were shaped by the age of welfare state, from the 1930s to 1970s. That’s an age many of us today too willingly embrace as model, even while acknowledging its flaws. But it’s worth remembering the ways in which the policies of those decades are less an alternative to than a historical basis for the troubles we’re now in: with its utopian vision of endless growth and consumption, and its reality of racial exclusion and dispossession.



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