By Nathan Tankus, a writer in New York City. You can follow him on twitter at @nathantankus
This week I spoke to Michal Rozworski, a Canadian political economy writer and researcher, on the political economy of New York City. I focused on why the simple supply and demand stories people tell about real estate don’t work. To summarize one key issue: A textbook supply and demand curve assumes not just one homogenous good, but a good that is unchanged by the process of supplying it. This assumption of course breaks down completely when talking about real estate. When you build a luxury high rise you aren’t just supplying new apartments. You’re supplying wealthy neighbors, more luxury services (as landlords raise commercial rents to the levels that high end retailers can afford) and a whole range of other things bundled up in what you pay for with your rent.
The second point I focused on here is that real estate developers care not just about their rental income but the value of their building, i.e. capital gains and losses. In a textbook it might make sense to accept the highest price bid you get for every apartment on the market but in reality renting out luxury apartments for cheap has all sorts of negative spillover effects. Wealthy classists (or racists…) leave or threaten to leave, people demand lower rents (since the guy in 4-A is getting a much lower rent) and it’s taken as a bad omen about future rental income which can lower the value of the building and negatively impact your access to credit. In short, what maximizes rental income in the short term can cause capital losses and negatively impact future rental income.
J.W. Mason also spoke to Rozworski about the ongoing controversy over the potential for economic growth in the United States. This is a followup to three pieces he wrote “Can Sanders Do It?”, “Plausibility”, and “Plausibility, Continued”. Naked Capitalism has also covered this topic extensively here, here, here and here.
You can listen to both interviews here.