Free Market VS Capitalism (Market Corrupting Capitalism Part 1: Investment Property)

[Part 6 of 10, Free Market VS Capitalism essay series.  Part 1 here]

One of the most fundamental of the ways state intervention tilts the field to encourage large snowballs to increase in size ever faster has been rather poignant for me here in the real world recently - where I live now there are quite a few homeless people who spend most of their time on my block, one of whom I have found squatting in various places in my building several times in the past few months. He used to live here years ago - as the building manager, its my job to have him leave.  Most recently a family friend of his that was moving out let him stay in her apartment for a night in exchange for helping to pack and move.  A couple days later when I went to get the unit ready for new renters, I discovered he was still there.  What difference does it make if I stay? he asked.  Its not like new renters are going to move in tonight.

Well, actually, we had contractors and cleaners coming in the next morning, but as a more general question, it seems like a pretty valid one.

There are some things that we all agree are common goods.

No one can own the ocean, or even a piece of it.  No private beach extends below the water line.

No one can own a river.  It doesn't matter how rich you are, you can't buy a river.  It belongs to the state as a whole (or, if it crosses state lines, the nation), and every resident can use it.  If you own your own land, you can dig a well, and if you hit water, you can drink it.  No one owns the aquifer. 

Water is a basic necessity of life, and there is a large, though finite, amount of it.

Most of us pay money for water, but that money is for the infrastructure that allows you to turn a tap and have purified water come out of a tap. No one will stop you from going to the nearest body of public water and distilling your own.

No one can buy all the oxygen in the atmosphere.  Not for any price. 

No one can make you pay for the sunlight that lands on you or your plants.

Mr Burns tried.  He was exemplifying cartoonish super-villany (or, extreme capitalism, which often times looks similar - see Who Framed Roger Rabbit).

There are various regulations and restrictions that vary place to place, but in general you can gather food for your own personal consumption on public land, and you can grow your own food on private land.  It is the convenience of having someone else grow food, and then deliver it close to where you live that you pay for at the supermarket.

Food, water, sunlight and air are basic necessities of life.

But there is actually something more basic and fundamental than any of those:

Just by virtue of being made of matter, it is necessary to occupy some physical space in the world.

Even if you aren't alive, you still need a space to exist.

All the other basic necessities of life, air and water and food - either they are free for everyone all the time or there is a way to acquire them, legally, for free.

There is no place where a person can live, indefinitely, without paying some other person.

Pay for the "privilege" of having a space to exist in the world.

We all take this for granted, so nobody notices that this is completely insane!

The single biggest reason Europeans came to the American continent in the first place was to escape feudalism.

And yet, despite the grand ideas of freedom and democracy, of leaving behind the oppressive and exploitative  system of Kings and Nobility, born into power, wealth and privilege - we immediately set about setting up almost the exact same system.

Its right there in the freggin name:  LandLord.

This is not just by coincidence, a funny relic of etymology.

The lords of the middle ages owned the land that other people lived on, and those people were required to give a portion of the product of their own labor to the landlord in exchange for the privilege of living there.  This ownership and payment was enforced by the State, backed by military force if necessary.  Once a particular individual owned a particular tract of land, they could pass it on to their children, who would then become the landlord without having had to ever have done anything to earn it, and could go a lifetime living off of the labor of their tenants.

When we think about the "feudal" system, we universally condemn it as unreasonable, unfair. 

But what part of the above does not apply to us today?

It seems more acceptable not because the actual facts are different, but simply because we all take it for granted.

Of course, land ownership predates feudalism.  It predates civilization.  Some claim (or at least imply) that prior to colonization various "native people" had no concept of land ownership and there were no conflicts over territory, which is of course absolute non-sense.

Physical space is a resource, and a limited one at that.  It's inherently valuable.

The idea that an individual can lay claim to a particular portion of it predates human beings.

For some reason when it's non-humans we give it a different word: "territory" instead of "property", although it is really the exact same thing.

An individual claims a particular tract of land as their own.  No one else (of the same species) gets to be there without permission of the owner, who gets exclusive access to whatever resources it contains (although exceptions are sometimes made for water, if it's scarce, since, as previously noted, it is a basic life necessity).

In fact, it is even true among other species that higher status individuals generally have larger properties than lower status.

But there is one enormously fantastically stupendously big difference between our version and every other creature in the history of life.

No one else claims ownership of land they don't actually live on.

Even if they have an enormous range, perhaps even more than they could transverse in a day, no one else has ownership of non-adjacent tracts of land.  No one owns something they aren't using.

Others will generally respect established property lines, but no one can own more than they could at least hypothetically personally defend.

A cat can't own the land that a different cat lives on.

A bear doesn't charge rent to other bears on its land, nor pay rent to another.

If you are anything other than human, you own the land you live on, no more and no less.

In America only slightly more than 1/2 of adults live on land that they own.

This is substantially less than the official "home ownership rate" (which is about 2/3rds) because of how the Census Bureau calculates the rate: the number of total housing divided by the number of homes occupied by the owner.

That means that if you own a duplex, and live in one unit and rent out the other, your tenant is counted under the "owner occupied" category, since the owner lives in the same building.  If you can't afford rent, and move back in with your parents, you get counted under the home-ownership rate, because you are part of a household where the owner lives.

In Europe the percentage is even worse, closer to 1/3, but 1/2 is already pretty amazingly terrible.

But wait it gets even worse - of the homes lived in by the "owner", almost 3/4 of those are really owned by a bank or other lender.

That means that really only 12%, 1/8th of the American population (25% of 50%) actually owns the land that they live on.

Everyone else has to pay some other person every month for the privilege of having a space on the surface of the Earth on which to exist.

Generally people will point out that - even if the monthly mortgage payment is less than the rent - the landlord is providing a service to the tenant because the landlord put up the down payment, which meant the tenant didn't have to.  It's that down payment that earns the right to charge rent.  Capitalism at it's purest.

Land is the perfect example of how the justification capitalists use is circular in the way I pointed out at the end of my last post: supposedly the landlord is providing the service of providing the large down payment (capital) to buy the land the tenants live on, because the tenants don't have the capital to make the down payment themselves.  But if capitalists weren't there buying up land as investments the exact same land would still be there, and living there wouldn't require any down payment.

In a free market, prices are determined by supply and demand.  When the supply is already inherently finite, and then is artificially reduced - by, say, speculative investing, people with amassed wealth buying more of it than they need solely so that they can rent it out to others at a profit - that will necessarily drive up the price.

Its hard to work backward from the home ownership and headship rates, but the amount of homes owned for the sake of investment (including multi-units in which the owner lives in one) is somewhere between a third and half of all of them.

Obviously that is going to have an enormously profound effect on price.

Imagine if all 43 million rental units were all put on the market at once.  Supply is instantly increased by over a third: the law of supply and demand means that the price of buying a home plummets. 

Between 2007 and 2010 there was a foreclosure rate of around 2% - essentially increasing supply by that amount.  This corresponded to a 34% average drop in home price!
(Granted, this is a gross over-simplification: the supply and demand curves are complicated by the construction of new homes, population increase, interest rates, and the availability of credit - on the other hand, new home construction slowed during this time, and population grew slowly and steadily as always, both these factors should push prices up)

If a 2% increase in supply leads to a 34% drop in price...

But wait... in housing, the very fact that it is so expensive makes it even more expensive - on a typical 30 year mortgage, a home buyer pays anywhere from 50% to 200% of the actual purchase price to the bank in interest payments, on top of the principal. 
Another 3% - $4500 average - goes to realtors and brokers.  There's PMI and inspectors and insurance and taxes to pay, all scaled to the cost of home.

When the purchase price plummets, the interest, as well as all the other fees, drop as well.  Which in turn allows  the possibility of buying in full, in cash, and paying nothing for capital - which means the interests payments are zero, and the buyer doesn't need to be concerned with interest rates at all.

Because of all these extra costs reduce or even disappear, the effect of eliminating speculation and profit on the basic human necessity of having a place in which to exist is even higher than suggested by supply and demand by itself. 

I honestly have no idea how the numbers would work out.  I'm going to go out on a limb and make a wild guess that if all residential homes were owner occupied and all apartments were made into condos, the cost to own the place where one lives would be somewhere between 1/10th and 1/4 what it costs now.  In other words, what it costs now to make a down payment would cover the entire cost. 

The first objection most people will have to this idea is that the "value" of all the millions of currently owner occupied homes would fall just as dramatically as investment properties, and that this would supposedly hurt the middle class as their net worth falls.

But, as I pointed out back in Jan of 2008, a home that you live in is really not an "investment", the way stocks or bonds or a rental property are.  It's not even an "asset", the way cash or gold or art or collectibles are.  All of those other things can be cashed out.  If you sell your home, you need to find a new place to live, and however much your home appreciated, every other comparable home has appreciated by the same amount.  You come out neutral at best (really less, because of transaction costs).  The "value" of a home isn't determined by what the real estate agent says you can sell it for, its value is in providing a warm, dry, legal place to sleep and keep your stuff in.  That value does not vary with the market.  If a person wants to move, this change is to their advantage, as transaction costs are reduced substantially.  You have less capital from the sale of your old home, but your new home is so cheap that it doesn't matter.  On paper you lose out, but in practical reality you come out ahead.

As it stands today, monthly mortgage payments are usually lower than rent on an equivalent home (it has to be, in order for landlordship to provide positive cash flow).  If prices fell enough that down payments and the title transfer process became relatively trivial, there would be no incentive for anyone to pay more to rent than it would cost to just buy the same home.  Landlords are effectively creating the need for themselves by buying land they don't actually need (or even want) to live on, driving up prices high enough that homeownership needs significant capital.

Now, I realize that a lot of regular middle class people own a rental unit or two, and a lot of people are likely to feel defensive about this.

Landlords include my bosses, who I have had only positive experiences with, long time clients, friends, my mother, and possibly someday myself.

What I am writing is theory, about society as a whole and how it works - and how it could possibly work better.

I am not accusing any particular landlord of being deliberately evil or manipulative.  Most actual individual people who own investment property are good people, and - on an individual level - they are providing a form of service by (slightly) risking capital and giving a place to someone to live who doesn't have the capital of their own to buy. 

It is the cumulative effect of a society set up to give advantage to those with existing capital at the expense of everyone else that causes the phenomenon I am describing, not the actions of any one specific individual.

[Next up: Market Corrupting Capitalism Part 2: The Corporation]