Should you Invest in Trains, Planes and Automobiles?
As investors and members of our communities, it is important to understand how assets are priced and how capital and opportunity is allocated in the modern global economic system.
Someone asked why housing units of good quality typically generate income, like rent or owners' equivalent rent, while cars do not. While it is possible to rent out a car, that's where the similarities between a commodity like cars and a hybrid asset like land with a house on it end.
Housing affordability has become a prominent issue in recent years, with many people questioning why housing units of good quality typically generate income through mechanisms like rent or owners' equivalent rent, while other assets, such as cars, do not. This inquiry often arises in the context of debates about urban planning, zoning regulations, and the role of local governments in shaping housing markets. Some suggest that housing could be as affordable as cars if local governments did not have the power to enforce building codes and zoning restrictions. While it is possible to rent out a car, the comparison between cars and housing falls short upon closer examination, as housing behaves like a financial asset in ways that cars do not. Furthermore, the assumption that removing zoning regulations will automatically reduce housing costs is based on a misunderstanding of the complex nature of housing markets, asset yields, and the broader political and economic forces at play.
Unaffordable Housing; A Crisis of Distribution, Not Supply.
For over half a century, the dominant framework guiding public policy in most Westernized nations has been Neoliberalism—a system centered on free markets, deregulation, privatization, and a reduced role for the state. Neoliberalism promised economic growth, reduced inequality, and greater access to essential services, but in practice, it has failed to deliver on these promises. Nowhere is this failure more evident than in the housing sector. While many claim that there is a severe housing shortage driving up prices, the truth is far more nuanced: there is no housing shortage in the United States. Instead, there is a funding shortage that makes housing unaffordable and exacerbates housing inequality. This problem is entirely political, driven by a restriction on the supply of funding for high-risk consumers and compounded by decades of Neoliberal policies.
The Numbers Tell a Different Story: No Shortage, Just Inequitable Distribution
The belief in a broad housing shortage is widespread, yet a closer look at the data reveals that this narrative is misleading. In 1970, the U.S. had approximately 60 million households and 70 million housing units. By 2022, these numbers grew to 127 million households and 143 million housing units. This means that over the course of more than half a century, the households-to-housing ratio has barely changed. Despite a stable supply of housing relative to the number of households, the rent-to-household income ratio skyrocketed by about 242% during the same period. This staggering increase in the cost of housing relative to income underscores the fact that housing affordability is not primarily a matter of supply; it is an issue of distributional inefficiencies and economic inequality.
Neoliberalism’s Impact on Housing and Public Services
The primary cause of housing inequality is not a shortage of housing stock but a political and economic system that restricts access to housing for those most in need. Under Neoliberalism, public policy has shifted away from providing broad-based social services and safety nets, instead favoring market-driven solutions. This has led to a concentration of resources in large cities, where corporate interests and agglomeration economies drive up demand for both jobs and housing. Outside these urban hubs, access to essential services—such as education, healthcare, transportation, and housing—has been severely restricted, leading to increased inequality between urban and rural or smaller-town populations.
At the heart of this crisis is the restriction of funding for high-risk consumers. Low-income individuals and families, often seen as risky borrowers, are frequently denied access to the financing needed to secure affordable housing. The private market, driven by profit motives and risk aversion, has little incentive to cater to these consumers. As a result, millions of people are priced out of the housing market, not because there is not enough housing, but because the financial system has been designed to exclude them.
A Misguided Focus on Physical Agglomeration in the Digital Age
One of the key features of Neoliberalism has been its reliance on physical agglomeration economies—the clustering of people and firms in large cities to foster economic growth and knowledge diffusion. In the industrial era, this made sense: proximity to factories, suppliers, and labor markets created efficiencies that drove productivity. However, in the digital economy, this rationale no longer holds. The digital age has revolutionized the way knowledge is shared, reducing the need for physical proximity. Agglomeration in today's society can occur on a much smaller scale, as information flows rapidly through digital networks, allowing firms and individuals to collaborate across vast distances.
The continued emphasis on physical concentration of people and capital in large cities ignores the potential of smaller communities and rural areas, where jobs and housing could be distributed more evenly. The result is a system where jobs are concentrated in a few urban hubs, driving up housing demand and prices in these areas, while other regions suffer from underinvestment and a lack of opportunity. The belief that jobs and economic growth must be concentrated in a small number of large cities is a relic of the industrial past, not the digital future we now inhabit.
Capital Scarcity Is Over: Why Housing Inequality Persists
The idea that there is a shortage of capital available for housing development is outdated. In the digital economy, capital scarcity is over. Global financial markets are awash with capital, but this wealth is being hoarded by a small elite who have benefited from Neoliberal policies, while the majority are left struggling to secure affordable housing. The problem is not that there isn’t enough money to build housing, but that the financial system is designed to prioritize returns on investment over meeting social needs. Housing, like stocks and bonds, is treated as a financial asset, and investors seek to maximize yields by keeping rental prices high.
Moreover, the housing market is shaped by global investors—individuals, corporations, and financial institutions who view real estate as a key component of their investment portfolios. These investors compare yields on real estate, stocks, and bonds across different markets and adjust for local risks. This global competition for yield drives up housing prices in desirable areas, making it even more difficult for low- and middle-income families to afford homes. The housing market is no longer about meeting the basic need for shelter; it is a financialized asset market, where profits take precedence over people’s needs.
The Failure of Neoliberalism: Income Inequality and Housing Inequality
Neoliberalism’s failures are evident in the rising income inequality that has persisted over the past five decades. Despite promises of increased opportunity and wealth for all, Neoliberal policies have resulted in a system where the rich have gotten richer, while the poor have been left further behind. Housing inequality is a direct result of this growing income gap. As the wealthiest individuals and corporations have accumulated more assets, they have driven up the price of housing, making it increasingly unaffordable for those on the lower rungs of the economic ladder.
The restriction of public services outside large cities is another symptom of Neoliberalism’s failure. Access to affordable housing, quality education, reliable healthcare, and efficient transportation should not be luxuries available only to those living in major metropolitan areas. Yet, under Neoliberalism, these essential services have been concentrated in a few urban hubs, leaving smaller communities and rural areas underserved. This concentration of resources in cities exacerbates socioeconomic inequality, as those living outside urban centers are denied the same opportunities for economic advancement.
The Solution: A Diffusion of Public Services and Resources
The solution to housing inequality, and socioeconomic inequality more broadly, lies not in deregulation or further market liberalization, but in the diffusion of public services and resources to all viable communities. Jobs do not need to be concentrated in a small number of large cities because, in the digital economy, agglomeration occurs at much smaller levels than in the past. We no longer live in an industrial economy where physical proximity to factories and labor markets is crucial. Instead, the digital age allows for the decentralization of economic activity, enabling people to work and live in a wider range of locations.
Public investment in infrastructure, education, healthcare, and transportation should be directed toward smaller towns and rural areas, where it can provide the foundation for sustainable economic development. By improving access to these services in underserved regions, we can reduce the pressure on housing markets in large cities and create more equitable opportunities for all.
Knowledge Hoarding Is Over: The Democratization of Opportunity
In the past, the concentration of knowledge and resources in certain geographic areas was a significant driver of inequality. However, in the digital age, knowledge hoarding is over. The internet and other digital technologies have democratized access to information, making it easier for people to learn, collaborate, and innovate regardless of their location. This shift offers a powerful opportunity to rethink how we distribute jobs and housing. If knowledge can be shared across vast distances, there is no reason why economic opportunity should be concentrated in a few urban centers.
By harnessing the potential of digital technologies, we can create more distributed networks of economic activity, reducing the need for massive urban agglomeration. This, in turn, would alleviate the pressure on housing markets in large cities and make housing more affordable for everyone. The key is to shift our focus from concentrating resources in a few cities to distributing them more evenly across regions.
Conclusion: A New Vision for Housing and Economic Equality
The persistent belief in a housing shortage is a myth. The real issue is a funding shortage that stems from Neoliberal policies prioritizing profit over social needs. Decades of corporate-driven public policy have concentrated resources in large cities, exacerbating housing inequality and leaving many communities underserved. In the digital age, agglomeration is no longer necessary for economic growth, and capital scarcity is a thing of the past.
To address housing inequality, we must decentralize economic activity and invest in public services across all communities. Jobs and housing can be distributed in ways that reduce inequality and improve quality of life for everyone. The time has come to reject the Neoliberal model and embrace a more equitable, inclusive approach to housing and economic development.