Real Estate

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Molotch’s theory

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emphasizes the ways that the competitive pressure for growth provides the “glue” that maintains consensus and coalitions amongst locally-dependent elites. Institutions and coalitions that disagree on many fundamental issues will set aside their differences when it comes to seeking growth and investment for their locality.

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Functions of urban real estate markets:

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1. Provision of facilities for economic and social needs.2. Allocation of locations among competing needs.3. Investment and a long-term store of value.

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Johann Heinrich Von Thunen (1783-1850)

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A German farmer in the early nineteenth century, Von Thünen became concerned with ways of improving the cost accounting used on his estate. He devised a way of understanding the relations among commodity prices, transportation costs, and farm-to-market distance in deciding the optimal use of a particular parcel of land.

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But the most important theoretical point is the mechanism by which market processes create spatial structures:

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“(1) land uses determine land values, through competitive bidding among farmers; (2) land values distribute land uses, according to their ability to pay; (3) the steeper curves capture the central locations.”

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William Alonso adapted and refined the agricultural land use models, and formalized a modeling approach that became highly influential in economics, regional science, urban geography, and in city and regional planning.[1] Another analyst, Richard Muth, was working along the same lines, and sometimes the general approach is referred to as the

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“Alonso-Muth” model.

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Alonso replaced the von Thunen concern for different crops with the different land uses found in the modern city, and replaced the idea of a central market with the concept of a central workplace and “central business district” (CBD).

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“if the curves of the business firms are steeper than those of residences, and the residential curves steeper than the agricultural, there will be business at the center of the city, surrounded by residences, and these will be surrounded by agriculture.”

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At the time Alonso was writing, the dominant urban trend was suburbanization of the industrial city:

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low-income workers were forced to crowd in close to centralized industrial workplaces, while middle-and high-income workers were moving out to the suburbs to newer, more spacious homes on the expanding urban fringe.

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The Alonso model, therefore,

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assumed that middle- and upper-income workers would not bid as much per unit of land at the center -- but would take advantage of low land costs on the urban fringe to get large lots to build large houses.

With less flexibility to afford the costs of automobiles and commuting, and the need to be close to industrial workplaces, lower-income workers were assumed to bid more for centrally located homes -- trading off space for accessibility.

The paradox: poor people live on expensive land, while rich people live on inexpensive land.

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The simplest version of the Alonso-Muth model involves restrictive assumptions – such as the concentration of all jobs in a single city center.

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But the model can be adapted to account for polycentricity and other features of contemporary cities.

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The key point for Harvey is

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the inescapable contradictions between two of the three main functions of real estate markets that began our discussion -- the provision of spaces and places for economic and social needs, on the one hand, versus the need for investment and capital accumulation on the other hand. The dynamic tension between the use value and exchange value of urban land is at the root of urban change -- and thus, urban inequality and political struggle.

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Harvey Draws on the work of

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the philosopher Henri Lefebvre, who suggested in the late 1960s that industrial society – dominated by the Fordist economic, social, and political institutions of commodity production – were transitioning to urban society, on a planetary scale – as more and more of societal resources were devoted to the production of urban life.

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Harvey explored

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a particular hypothesis known as “capital switching” between industrial production and investment in urban real estate. Real estate functions as a sort of safety-valve for capital in times of crisis: as profit rates fall in the ‘first circuit’ of industrial production, capital must seek higher rates of return in the ‘second circuit’ (the built environment, fixed capital for production and consumption) or the ‘third circuit’ (science and technology, research and development, etc.). For Harvey, then, real-estate building booms provide vivid warning signs of crisis in capital accumulation: falling rates of profit encourage massive capital switching, but then overinvestment and overbidding in the real estate market depresses profit rates here too.

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Harvey once described the speculative office towers that were built during the crisis years of deindustrialization in the 1980s as

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“postmodern-national debt-bottling towers.”

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Conclusions

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1. The economics of real estate markets structure urban form through the competitive bidding for land and housing. The most dominant model – the Alonso-Muth framework – portrays the spatial structure of the metropolis as a series of trade-offs between accessibility and space/amenities.

2. Economic models explain the competitive bidding that shapes land markets, but ignore the social relations of property ownership that maintain urban inequalities.

3. Economic indicators of real estate are often taken as signs of the good health of a city. But the benefits are not equally shared, and Lefebvre and Harvey’s analysis of “circuits of capital” reminds us that the “real estate growth machine” can often be a sign of distorted and de-stabilizing trends. The clearest example was the Global Financial Crisis triggered by aggressive lending practices in the United States.