Two recent occurrences:
- I started listening to the Slate Money podcast with Felix Salmon; and
- I heard David Harvey give an LSE public lecture on his new book: “Seventeen Contradictions and the End of Capitalism”.
- Slate Money is an awesome podcast, if occasionally a little overbearing around the edges.
- In particular, I get annoyed with the “Occupy” activist and former-finance-quant Cathy O’Neill – although I secretly suspect that her brief was to be irritating and make arguments like “I think it’s revolting that Ben Bernanke should get paid for his appearances – because, like, no one is paying me to come for dinner.” It almost sounds self-involved.
- Almost as self-involved as the people that show up at a David Harvey lecture. Because David Harvey is a geographer that got caught up in being a Marxist champion through his work in urban planning – and now he attracts the leftist fringe who feel the need to stand up and claim a microphone whenever it strays in their direction.
Why do I mention them? I mention them because they both brought up the scandalous hollowing out of London and Manhattan.
Specifically, they both mentioned Bishop’s Row near Hampstead Heath in London. This is a link to a video put together by the Guardian. But here are some of Graeme Robertson photographs of what things look like inside these hugely-expensive houses:
The scandalous story is that these homes were purchased by the Saudi Royal Family in the 1990s, and then left to rot. These houses were never meant to be lived in – they were held purely as investments.
And it highlights one of David Harvey’s 17 contradictions: the difference between value in exchange and value in use. It’s a contradiction I liked, because it’s approximately this post from January last year: Observation Number 4: More on the Value vs Price Misconception.
Almost everything has two values:
- A use value: which is basically a function of how much I need it/like it/want it.
- An exchange value: which is the price, set by demand (how my use relates to everyone else’s use) and supply (how willing someone is to fulfil that desire).
The contradiction comes from the assertion that the use value should be the primary determinant of the exchange value – and that things go horribly awry when the use and exchange values start to diverge.
So taking Bishop’s Row as an example:
- We presume that housing values are determined by their value in use – houses are valuable because people live in them; and if they are located conveniently and can sleep lots of people, then they are worth more.
- There is another group of people that have lots of money and want to do something with it. So they look at the house, and say “this is something that we could buy now and keep, because it will be worth something to someone at some point” – so it gets bought because it has value in exchange.
- For the investor, this has convenient upsides. By buying houses in desirable locations, they are limiting the amount of housing available for actual people to use; that is, they’re limiting supply, so the price will have to go up if the same people still want to live in the area. And they’re also gradually creating the perception that it’s a good area to invest in, which attracts more value-in-exchange investors, which drives up the price.
And you end up with uninhabited housing in good areas, because it’s become too expensive for the people that work there.
David Harvey reckons that we should just go and squat in these uninhabited houses. After all, what a waste of good resource. And worse, people are frantically building new housing, only for it to be bought by the wealthy and turned into empty housing. And in the best case scenario, the wealthy rent it out and/or visit for three weeks of the year. And in the worst case, you get the Saudi royal family.
But it’s not just Bishops Avenue in London. Here’s a picture of Europe:
And as for New York, there are large areas on the East Side in which up to 50% of the apartments are vacant for more than 10 months of the year.
As I wrote this, I realised that the post could come across as horrified. I’m not sure that’s true – it makes sense that housing investments would be made in big cities. I’m not even that surprised that these places aren’t being rented out. After all – if you take rental as a percentage of the home value each year, then the rentals are probably far outside what normal people are willing to pay – and if you’re only going to be paid a token amount, then why risk having a tenant that you can’t dislodge when you want to sell/visit?
But it does point to a question of sustainability – because at its base, the value in exchange for most things is predicated on a value in use. What happens when the split gets too large?
Do the rich just shut their eyes and hope that no one else notices before they have time to sell out?
Perhaps that’s the real problem. When you’re wealthy, investing is like a game of Russian roulette, where everyone keep bidding up the price to see who’s the last one holding the gun when the barrel revolution arrives with a bullet.
For more, some articles:
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.
Dylan-Lee Smith (@arrrgviking) June 12, 2014 at 11:40
Great thoughts on the situation Jayson. Bizarre distortion going on there, granted New York and London have nigh on always been prone to this kind of ‘wasted housing’ the situation seems to be heightened by the ‘free money’ expansion. It’s just another asset class getting fuel from global central banks and investors with little choice of where to put the money.
Not that any of this really means all that much in my opinion, it’s not sustainable in the long run so in the long run some will feel the burn others will get out soon enough and tout their great property investment skills and most won’t even realise what’s going on.Reply