Building Inequality through the Housing Industry
Updated: Mar 14, 2019
I am now in the fourth week of my trip to China as a student fellow of the India-China Institute. As a student of urban infrastructure, one of the first issues which I immediately noticed was the impressive amount of redevelopment going on in Chinese cities. I started to dig in into this issue by asking questions to my informants during our conversations. What I heard convinced me that a useful angle to start understanding this phenomenon is to look at it as a Chinese industry in its own right: the housing industry. I also forced myself to identify the social consequences of the workings of this industry and to look at it in a comparative way with Mexico City.
My conclusions so far are that 1) the governments in both cities are playing a very different role in the management of this alleged housing industry; 2) that there are key institutions in the urban institutional setting that can potentially explain the particular paths taken by both housing industries; and 3) that the distributional costs of policies are having an effect over what I call here as the transaction costs of the city, decreasing them for the wealthy but increasing them for the urban poor. In short, the policies and the workings of the housing industry in both cities are actually building inequality.
In what follows, I explain the theoretical approach for the comparison. I then discuss the case of Shanghai and identify four key institutions that can potentially explain the workings of the housing industry in this city. Afterwards, I discuss how those four institutions play out in the case of Mexico City and which are some of its social consequences. I finish the text by discussing three lessons that can be learned from this comparison.
Theoretical approach: The production of urban space via the housing industry
The process of production of urban space is very complex. Cities produce their urban space through a mix of different mechanisms and the outcomes can take many forms. The result ranges from the production of gated communities to informal settlements; from large green public spaces to central business districts; from industrial zones to kids’ playgrounds; and so forth. However, once it takes material form, the urban space does not remain fixed across time. On the contrary, urban space arrangements are constantly contested and reconfigured and, therefore, urban space is a dynamic aspect of urbanization (Agiurre, 2018).
One of the most powerful social forces pushing for the reconfiguration of urban space is capital. People and firms are constantly looking for new urban spaces to make a profit. Location plays a key role in most businesses, and therefore the search for profit inescapably has an influence over the configuration of the built environment. David Harvey (1978) put it insightfully: “capital represents itself in the form of a physical landscape created in its own image” (p.124). But here lies a paradox, identified by Harvey (1978) in his theory of the spatial fix. In order to do business and make profit, spatial structures have to be constructed –encompassing the urban built environment as a whole–. However, once spatial structures take material form they constrain the possibility of having new and different spatial structures for other kinds of economic activities –unless what is in place gets destroyed–.
Every city produces a different combination of goods and services. Nevertheless, there are cities in which the main economic activity is to build themselves. The industry of building itself can thrive through the development of public works or productive infrastructures. But it can also prosper through the production of a subtler output, yet less identified as a productive infrastructure: the housing stock. In the field of urban policy, we tend to think of housing as a durable good intended to provide a service to the urban population. We think of housing as a right, and that it is the role of the state to ensure that there is enough housing for everyone. We are worried about affordability, improved housing conditions, and creating a supply that will match the demand. However, what would happen if we shift our thinking of housing from a durable good that provides a service, to an industry? What if we also look at housing stock as the output of capitalist production within cities?
When seen from this standpoint, we can start to map the different inputs needed for production in the housing industry. We can see the need for architecture firms’ services, construction materials, construction equipment, labor power for construction and, oh surprise, land to develop. If location is so important in this industry -remember the classic mantra in the field of real estate business: location, location, location–; and if the best locations are already occupied by existing material structures; then this industry has no other way to make room for their business than through contesting the current arrangements of urban space.
Now, what are the social consequences of this mill of urban space production for the sake of revenue and profit? There might be many, but one of the social consequences that have been on my mind for a while is what I will call here the transaction costs of the city. In the field of economics, transaction costs are defined as the costs of making trade when participating in the market. According to North (1992), the rules in a society are key to determine the transaction costs and the institutions that lower the transaction costs will boost economic growth. However, when I say the transaction costs of the city I am referring to the cost associated with living in the city to be able to participate in urban-based economic activities. This includes costs like transportation, rent or mortgage, housing services, education, food, time spent to get to the workplace, or any other cost that populations have to pay in order to access their economic activity. In addition to institutions, the spatial configuration of the city also plays a key role in determining the transaction costs of the city. The institutions and spatial configurations that lower the transaction costs of the city will increase urban wellbeing.
Nonetheless, the transaction costs of the city will not go up or down uniformly across urban populations. Instead, I argue that urban institutional settings and spatial configurations can potentially lower the cost of transaction of the city for some urban populations while increasing them for others. For example, if a person lives in the city center and its job is at walking distance, that person has lower costs of transaction of the city than a person that has to work in the same place but lives in the periphery of the city. The latter person will spend more money and time to access the location of its economic activity. Therefore, the workings of the housing industry –by constantly destroying the spatial structures that constrain new business and by creating new configurations of urban space for the sake of profit– can play a role in the distribution of the transaction costs of the city across urban populations. This, in turn, can potentially translate into increasing inequality of urban wellbeing.
A comparative look between the cases of Shanghai and Mexico City allows us to see that the policies implemented in the housing industry in both cases are having an influence over the patterns of production of urban space. A pattern that is different, but that is ultimately having an effect on the distribution of urban wellbeing.
What is going on in Shanghai?
One of the first things that I learned about China’s public administration is that there is a race between provinces, cities, and even districts within cities to show to the party leadership who are the best public administrators. The way to measure who is winning this race is to assess which province, city, or district is increasing the most their Gross Domestic Product (GDP). Thus, governments of all levels in China have opted for the housing sector as a safe bet to achieve fast and significant GDP growth. In conversation with Mary Ann O’Donnell –an American anthropologist based in Shenzhen with twenty-year experience studying Chinese urban development–, we reflected on how developing the real estate sector is a much faster way to boost GDP as opposed to developing a whole new industry.
In the case of Shanghai, the race to be the best public administrator takes place between the district level governments, and they are racing by developing the housing industry. All this production needs urban space to develop. Given that most of the territory of some Shanghai districts is already built, the only way to make room for the housing industry is to tear down what is already in place. Redevelopment is a very common business in Shanghai. This is possible because the land belongs to the central government but deciding the land use is a prerogative of district-level governments. Districts develop their master plans, and they get to decide which urban spaces are subject to redevelopment, when, and how.
Following the land-use right model (Yuan, 2004), once a district has decided which area to redevelop they organize a bid for firms to participate in it. The district government puts out terms of reference for the project and firms have to present a technical and a financial proposal. The technical proposal has to comply with the technical requirement requested by the district government, and it usually involves a strategy to relocate current dwellers of the buildings to be torn down. The projects that comply with the technical proposal go forward to the assessment of the financial proposal. The firm that wins the bid is that one which is willing to pay the highest amount of money to the district government for the land-use rights.
What follows is a process of negotiation to buy out the current owners of the housing units in the buildings to be redeveloped. This negotiation can take months or even years until the government agrees on a compensation for which the current owners would agree to relocate. Tenants usually negotiate to exchange the agreed amount in kind for other apartments. What usually happens is that relocated households tend to end up with up to two apartments in the relocation sites. They live in one of them, and they tend to rent the other one.
Up to this point, everyone seems to be winning through the business model of this housing industry. The district government can argue that they have increased the GDP, they get revenue from three different sources -one time when selling the redevelopment rights, a second time with the taxes collected by the sale of the newly developed apartment, and yet a third time when relocated people purchase their new apartments-, and that they are improving the housing conditions of their population. The developers get a profit twice, once when selling the redeveloped apartments and another when selling housing units to the relocated population. The relocated population wins by increasing their assets: they get a new housing unit to dwell and an income source when renting the rest of their assets.
But there is a gap in this business model that is subtler and less discussed. What happens with the migrant population that used to rent a room or an apartment in the buildings being torn down? If policies have distributive effects and there are always winners and losers, this population is the big loser in this state-led mill of assets, revenue, and profit. When redevelopment and relocation come to this population –and we are talking about roughly 39% of the population of Shanghai–, they are forced to leave their dwellings without any compensation. Only the population with local hukou from Shanghai are eligible for the compensation schemes. The migrants are outcast from all of this wealth creation. Thus, this business model is arguably widening the inequality gap between the population with a local hukou and the migrants.
Why is this possible in the case of Shanghai?
Now, the above is only an account of what is going on in Shanghai’s redevelopment. However, what really drives my inquiry is to better understand the specific characteristics of the case of Shanghai able to explain why this account is developing in such a way. In pursuing this inquiry, I have come up with a list of four key institutional arrangements whose interaction might be playing a role in the course of Shanghai’s urban development: 1) the regime of land ownership, 2) the rules for redevelopment, 3) the control of sale prices, and 4) the hukou system.
The regime of land ownership. There is no such thing as private land ownership in China. All the land is the property of the state, who sells the rights to use the land for a determinate period of time to private investors. Private actors own the buildings, but they do not own the land in which the buildings are located. Therefore, the government has the prerogative to decide what to do with the land at any time. If the government decides to change the land use of an area, they are legally enabled to do it. All that is requested from the government is to buy out the owners of the existing buildings on the land marked for redevelopment.
The rules for redevelopment. The government -usually at the district level- has the prerogative to decide what gets to be built within their territory. Districts elaborate a master plan for their urban space –a legal instrument in which they get to decide the land use, what can stay, and what needs to be redeveloped–. When redeveloping an area –whether building an industrial, commercial, habitational, or recreational zone–, the district organizes an auction in which private developers will bid to win the land-use rights. These bids go through two phases, a technical and a financial. In the technical phase participant firms have to comply with the terms of reference provided by the district government. Those participants that fulfill the technical requirements will go forward to the financial phase, in which the winner will be the firm that offers to pay the government the higher amount of money for the redevelopment rights.
The control of the sale prices. Within the auctions described in the above paragraph, the districts have the prerogative to include in the terms of reference the square meter price in which the developers will sell the new real estate to the population. That is, there are cases in which the sale price to the public is not established by market mechanisms. In these cases, the government determines the prices of new properties; thus, providing a mechanism which allows them to ensure that their buyout price is sufficient for compensated parties to purchase an apartment in other areas of the district.
The hukou system. Shanghai has been cataloged by the party leadership as an ‘oversized city’, and there are intentional policy efforts to control the growth of their population. One of such efforts is disincentivizing migration into the city through the household registration system, the hukou. Only the population with a local hukou from Shanghai will have access to the full coverage of the welfare system and the benefits of other important urban policies. One of such policies is the relocation scheme described above. Only those with local hukou are entitled to be bought out by the district government throughout the relocation policy. Those that are not residents of the city have no other option but to leave the site without any compensation from the district government. Therefore, citizenship status is playing a role in which populations are recipients of policy benefits and who are the outcasts.
How do these institutions work in the case of Mexico City?
In Mexico City, the land is by and large privately owned. There are some exceptions, like the land that is actually owned by the state –which is a very small proportion–, the rural land collectively-owned known as ejidos, and the land occupied by informal settlements in which land property is disputed between private stakeholders and squatters. However, it can be stated that every private landowner is free to decide what to build on their piece of land. Whereas in the case of Shanghai the state owns the land permanently, in Mexico City the state would have to engage in burdensome legal procedures of expropriation should they need to regain ownership of land. This procedure could take years and citizens can resort to courts to appeal these procedures. There are many examples of public works and projects in Mexico City that have been stopped because the state was unable to regain ownership of the land.
In the case of Mexico City, there is no land-use right auction system as in Shanghai. Every person or firm is free to decide what to build on their private land, when to do it, and with whichever characteristics. There are zoning regulations that dictate the kind of land use and the characteristics of the buildings to be built in each zone of the city. When developing their piece of land, people and firms have to ask for a construction permit to the city, and the city will grant the permission provided the construction plan complies with the zoning regulation. However, issues of corruption in Mexico are a regular practice, allowing anyone to bypass the zoning regulations through a bribe. So here is one important difference; in the case of Shanghai, the materialization of the built environment as a whole is decided by the district government and implemented through the redevelopment auction system. In the case of Mexico City, the built environment is decided by the sum of millions of individual private decisions.
In Mexico City, the attempts of the government to control the prices of housing units are less explicit than in the case of Shanghai and definitely less effective. In general, the property prices are decided through market mechanisms. Policy efforts are usually focused on affordable housing. The government offers subsidies to private developers, but these subsidies are conditional to producing housing which is affordable for low-income populations. As a result, developers tend to buy and develop the cheaper land that they can find, which is usually in the outskirts of the city.
There is no household registration system in Mexico City. Citizenship rights are universal and detached from the populations’ place of birth. Having access to the welfare system is dependent on having access to a formal job, not on citizenship status. One of the benefits of the welfare system is to have access to low-cost credit to buy a housing unit in the market. Many workers have purchased their homes through the low-cost credit offered by the government. The downside of this policy is that the population without a formal job –which is usually the poor and uneducated and probably the population that most needs this kind of support from the state– does not qualify to be a beneficiary of this policy.
Nonetheless, the interaction of these four institutions in the case of Mexico City is also creating landscapes of increasing inequality of urban wellbeing. The housing market uses inner city urban space for the development of high-end housing stock that only the wealthy can afford. The location of the new middle to high-range housing units has the spillover effect of lowering the costs of transaction of the city for the wealthier segments of the population. Conversely, the production of affordable housing is taking place in the periphery of the city, where the land is cheaper and developers can actually make a profit by serving the low-income segment of the population. These new affordable housing units are typically located in places that lack public services and urban infrastructures to efficiently connect people to urban-based economic activities. As a byproduct, these new low-price housing units might be increasing the costs of transaction of the city for the urban poor.
What can we learn from the comparison?
Amongst the many things that could be highlighted as learnings from this comparison, I will make comments on three salient issues: 1) the role of the state in the housing sector; 2) that in both cities there are winners and losers as a consequence of the policies being implemented, and 3) the role of some key institutions in defining the paths that the hosing industries have taken in each city.
A first lesson to highlight is that, in both cases, there are segments of the population who suffer the distributional costs of the policy via the increase of their transactions costs of the city. In the case of Shanghai, it is the migrant population that is displaced from the places being torn down and redeveloped, who have to relocate empty-handed. In the case of Mexico City, it is the urban poor who have no option but to buy a low-cost housing unit in the periphery of the city. In both cases, these two populations suffer an increase in their transaction costs of the city, which in turn will contribute to enlarge the inequality of urban wellbeing. This suggests that the distributional costs of the interaction between institutional settings and policies in the housing industry have to be further studied.
A second lesson to highlight is how the role of the government in the housing industry is very different in each of the cities. In the case of Shanghai, the government is the invisible hand behind the workings of the housing industry. The government decides what to build, where, when, and in some cases even at what price to be sold. The workings of the housing industry in Shanghai is a textbook example of the economic model that has been named market economy with Chinese characteristics. In the case of Mexico City, there is no clear intention by the government to increase GDP through the housing industry –like in the case of Shanghai–. Rather, the government acts like a regulator of the housing industry who sets up the rules but is willing to make exceptions if the price is right. As both cases show, the role of the government is clearly having an effect over the paths that their housing industries develop over time.
Finally, a third lesson is that there are key institutions that can potentially explain how the two housing industries have come to develop in such different paths. The regime of land ownership, the rules for redevelopment, the control of the sale prices, and the citizenship status, are all institutions that play a role in influencing the path that the housing industry will take. Both cities create and navigate their own institutional settings to fulfill their role in the housing industry. There might be many more and even more important institutions, but the point that I am trying to bring home is that we have to start studying these kinds of institutions in a comparative way. The field of urban studies is filled with case studies. However, we lack comparative efforts that allow us to assess the workings and effects of specific institutions of the urban political economy.
Agiurre, A. (2007) “Urban Space.” Blackwell Encyclopedia of Sociology. Ritzer, George (ed). Blackwell Publishing.
Harvey, D. (1978) The urban process under capitalism: a framework for analysis. International Journal of Urban and Regional Research, 2(1-4), pp. 101-131.
North, D. (1992) Transaction costs, institutions, and economic performance. International Center for Economic Growth.
Yuan, Z. (2004) Land use rights in China. Cornell Real State Review, 3, 76-78.
 The land-use right model was introduced in China in 1988. By this model, land in China belongs to Chinese citizens as a whole and cannot be privately owned. However, private investors may obtain land use rights from the government and the holder can retransfer these land use rights to a third-party subject to certain conditions. To see a full description of the model, follow this link: https://tinyurl.com/yc4mqsnx
 In Mexico, an ejido is an is an area of communal land used for agriculture, on which community members individually farm designated parcels and collectively maintain communal holdings. Mexico City still has some ejidos. For a full description follow this link: https://en.wikipedia.org/wiki/Ejido