What does the prisoner’s dilemma have to do with housing markets?- Pete Wargent

Improving neighbourhoods

It makes sense that where homeowners or landlords make improvements to their homes or dwellings, then the perception or tone of the suburb is generally lifted and so too the values of their homes.

However, owners who act individually may or may not have the incentive to make improvements as there is a lack of certainty as to whether others in the neighbourhood will follow suit.

If all the homeowners in a street could make a co-ordinated decision to improve their houses, potentially they could all stand to benefit. That could be unlikely to happen, though. Here’s a quote from a classic housing economics textbook:

“It is possible that a landlord or owner will be deterred from improving his own property because of the fear that his returns will be jeopardized by the external costs imposed on his property by unimproved adjoining ones.

Because each landlord is faced with uncertainty about his neighbour’s activities, no one will be willing to risk in investing in maintenance and repair work. However, if they all did invest, both they and society in general would probably be better off.”

Source: R. Robinson (1979): Housing Economics and Public Policy

OK, we should strive not to get too bogged down in economic theory, but in my experience, this does ring true.

How many times do you visit a block of units where the interiors are beautifully presented, yet the common areas are in worse nick than what a student would typically find acceptable?

In terms of a neighbourhood, it’s possible that, say, a terraced row of half a dozen houses might be an example whereby the owners could feasibly come together to make an informed collective decision to undertake improvements or repair work.

But when you’re talking about a large number of houses in a neighbourhood, such an outcome will generally not occur, and instead we will see “atomistic behaviour” (individuals making their own decisions and acting alone) and inefficient outcomes.

 

Externalities

Such matters may have a light-hearted enough angle when applied to million dollar units with dodgy carpets in the stairwells.

However, when applied to lower demographic neighbourhoods where large-scale activity is needed to improve the poor quality of available housing (i.e. widespread demolition, re-design of housing estate plans, changes to infrastructure, new road layouts etc) then the problem becomes of a more serious nature, and one which is almost certainly beyond the scope of owners co-operating to resolve to make changes.[sam id=40 codes=’true’]

External factors which play a part in the value of dwellings, are known, logically enough, as ‘externalities’. A house in your village street that has been painted an odd shade of lime green might be a slightly annoying but trivial enough matter, but naturally there are far more serious externalities: neighbourhood crime, health, available schooling and education.

In such matters, there is commonly a need for positive action at the state or council level.

There appear to be echoes here of the carbon emissions problem and the pollution of our planet. It’s all very well ignoring the problem and letting our children or grandchildren deal with the fall-out.

But if collectively we all resolve to contribute to improving our attitude to the environment, then the problem can begin to be tackled effectively.

 

No value judgements

I have absolutely no idea what my conclusion to this post is going to be yet, so let’s see how we go here. As mentioned, I’m crossing over into social studies, and perhaps town planning a little, which is all well outside my field of expertise.

I’d also just like to note that when discussing lower demographic neighbourhoods and social problems, I make no value judgements.

I was sad to see that in the suburb where I spent my formative years, practically the entire neighbourhood has been demolished – blown up and razed to the ground.

More than a dozen giant tower blocks which formed the nucleus of the suburb eventually had to be exploded, since they had become overrun with drug abuse, youth gangs and crime.

Locally, there was even a well-known burglar known as ‘Spiderman’ who frequently climbed across to the balconies to clear out the upper floors of the towers. The suburb is barely recognisable to me today.

Two tower blocks demolished in Norfolk Park, Sheffield, to kae way for a major regeneration programme. Photograph: Trevor Smith/ PA

Photo: Guardian

The British high rise experiment had a number of such failures. The Jam’s working class hero Paul Weller unleashed a brutal summary in his song “The Planner’s Dream Goes Wrong“, blaming public schoolboys sitting at computers and planning for box-like social housing, while neglecting to consider the human element.

Sure, the final outcome in many of Sheffield’s high rise developments was seen to be an abject failure. Yet, if you watch social history archive videos of the early residents of the flats, they were often seen to be delighted at having their own bathroom, hot running water, access to new schools and facilities.

 

New developments today

Again, well beyond the area of my own expertise here but with somewhere close to a fifth of Brits living in social housing, in learning from the mistakes of yesterday, approved new housing developments today in the UK and elsewhere may require that a mixture of housing is provided, in order to prevent repeating the error of isolating the less fortunate.

Recently, I looked at the sorry state of affairs in parts of the once-thriving coal mining town of Stoke-on-Trent in England’s Midlands.

Houses on some estates are selling for a headline figure of one British pound sterling and the local council is practically imploring buyers to take on loans to renovate the dilapidated housing.

It’s a pretty sorry state of affairs in this part of the Potteries, and you can only hope that the scheme is a success.

 

Today’s trends in Australia

There are some implications for our own housing policies today. I’ve noted before that independent studies have found a trend towards fringe housing estates in our capitals experiencing poor or even negative capital growth, while the suburbs closer to the capital city CBDs consistently appeciate in value faster, leading to ‘cones of wealth’ around the city centre hub.

The long-term implication of this may be that younger buyers who are forced to or elect to buy in fringe estates become trapped on that rung of the housing ladder as the gap between prices on the fringe and closer to the cities widens to a gulf.

As my buddy Catherine Cashmore has elucidated in previous articles, this concerning trend has led even first homebuyers to require something of an investor mindset when making their first tentative steps on to what they used to call ‘the housing escalator’.

 

Gentrification

I don’t have all the solutions (or even perhaps any of them), but one thing I have noted over the years is that gentrifying suburbs close to the city can often represent a better bet. Take the example of Redfern in Sydney.

When I first came to Australia in the 1990s, Sydneysiders that I knew back then  in The Shire discussed the suburb in hushed tones: “It’s a terrible place. You’ll be harassed for money” they said. And, in fact, in my own limited experience of visiting Redfern, I was.

Yet look at the suburb today, where terraced houses sell for well over $1 million dollars. Ultimately, there is so much upwards pressure on land located just 3km to the south of one of the world’s most desirable and thriving cities, that land values (and thus house prices) are practically forced to follow.

Surrounding suburbs such as Surry Hills and Alexandria have become trendy and expensive. Accordingly, Redfern’s land values continue to be dragged north.

I’ve seen very similar trends unfolding in London. Suburbs such as Whitechapel and Shoreditch even in my memory were seen as middle class no-go zones for a lot of professional types, who tended to associate these East End areas with the Kray Twins, immigration and crime. Yet, again, look at these areas today. Popular, trendy and extremely handily located for the City.

Even one of my many brothers lived in what was essentially a Bangladeshi/Somalian/African estate in Bethnal Green – well over 40% of the entire suburb is of Bangladeshi descent and the street signs reflect that fact – and why not?

Increasingly, younger people would rather experience an easy walk (or short public transport journey) to the city than undertake a gruesome hour-long train ride from suburbia with Tube journey to follow – I did that for 3 years, and can confirm that it was crap.

This is particularly the case I suspect, if like my brother, you have a penchant for chain-smoking Silk Cuts while making your leisurely way into town.

 

Shifting trends

Although I’ve studied some economic and social history in my time, I’m no town planner and so can only note the challenges we face rather than provide viable solutions.

It does appear to me that land values in some locations are destined for an altogether different trajectory than others.

In particular, my experience has shown there to be a risk of an adverse outcome for landowners in towns that are heavily reliant on a few industries and lack diversity of employment, as well as remotely located regional centres.

There also appears to be an increasing global trend towards the more widespread use of residential real estate in capital cities as a means for storing or building wealth. Britain’s housing market is now a verified basket case.

It’s been fine, of course, for those of us fortunate enough to own properties in and around London, but what of the parts of the other half of the country where prices have often collapsed and remain a third lower than they were in 2007?

Gosh, have I really just written all that? Got to nash…meeting in Surry Hills at 10.30. I’ll wander over that way, of course, but no Silk Cuts for me. For all my bad habits, that’s one I’m glad to have left behind.

[post_ender]



Want more of this type of information?


Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


'What does the prisoner’s dilemma have to do with housing markets?- Pete Wargent' have no comments

Be the first to comment this post!

Would you like to share your thoughts?

Your email address will not be published.
CAPTCHA Image

*

0
0

Michael's Daily Insights

Join Michael Yardney's inner circle of daily subscribers.

NOTE: this daily service is a different subscription to our weekly newsletter so...

REGISTER NOW

Subscribe!