I’m sure you all have had this discussion with your friends at
some point…
Why are flat rents getting so expensive?
It doesn’t matter if you live in Los Angeles,
San Francisco or London: we are talking about a global problem.
Then again, we should first question… is this an actual
problem or is it just normal economics?
Whatever it is, we’re talking about a phenomenon that’s
happening in all the big metropolises.
For example, in the city of Los Angeles, the average rent has
risen 15% in the last 3 years.
And let’s be honest here… if you have a
decent salary, this is more of an inconvenience than a real
problem.
But let’s imagine that you’re a shop assistant in L.A. Even
better, let’s imagine that ERIK is a shop assistant in L.A.
What would happen to you?
Even better, let’s imagine that XANDER is a shop assistant
in L.A. What would happen to you?
If I were a shop assistant in L.A. I would probably be
making around 2000 USD a month.
A 540 square foot single room apartment in South Los Angeles,
which is a very cheap neighbourhood, can cost 1200 USD
a month.
That’s 60% of my salary.
The rest would go to basic needs like food and clothing.
And yes, I would have a hard time saving any money in that situation.
In an ideal situation, you would only spend a third of your
salary on your rent or your mortgage, so you’d have enough
to live comfortably and to save.
Spending 60% of your income on the rent means that just a small
increase in prices could knock you below the poverty line.
And yes, that risk is more real than we might want to believe.
Los Angeles homeless population hits 36,000 in dramatic
rise But this is not the end of the story!
Think about this: here at VisualPolitik, we always say that the world
is getting better.
We are wealthier, healthier and have better lifestyles.
This is, partly, because… stuff is getting cheaper!
Here’s an example: during the 70s, only 20% of Americans
had ever flown on a plane.
Why?
Because a Los Angeles-New York trip cost 1500 of today’s dollars.
Now, this very same flight is just 200 USD.
Thanks to this, I’m sure all of you have already travelled more than your grandparents
did in their entire Lifetimes.
The same goes for other goods.
Everything is becoming more and more affordable… except
houses!
No matter if you rent or buy: you have to make the same, if
not more, sacrifices than your grandparents’ generation.
Today, in 2019, there are people in Stockholm living in 150
square meter flats.
In fact, it’s not uncommon to meet couples in Sweden who want to divorce but
are waiting for their spouse to find another flat.
Do you call that welfare?
But the real question here is…
Why are flat rentals going so sky high?
Can we solve this problem with better policies?
Today we are going to answer these questions but, before
we do, let’s take a look back at history.
SUPPLY, DEMAND AND…
THE REST It is a universal and logical fact: the population
grows in every country.
Just a decade ago, America had 300 million people.
Now they have 27 million more.
But not all cities grow equally.
If you’re watching this video from Detroit or
Cleveland, you’ve probably noticed that there are less and
less people.
Most of your friends are leaving the city.
And where are they going?
Exactly!
To more prosperous cities like L.A. or New York.
So what does this mean?
It means that the demand for living in those cities
keeps growing higher.
This is totally OK and it’s natural.
But here is the real problem!
If we’re talking about a normal market, supply can rise to satisfy the demand.
For example, let’s look at oil markets.
We told you a million times here at VisualPolitik, how Saudi Arabia decreases
or increases its oil barrel production depending on the market’s
needs.
It’s easy.
They can increase production from one month to the
other.
But when it comes to real estate, increasing supply
means building more houses… and this takes time.
Besides, the investment for a new block of flats is huge and
the profit margins are around 3%.
And the truth is that we need many, many houses to cover demand.
California would need to build 3.5 million housing units by
2025 to close its housing gap –Extract from a report from
McKinsey Global Institute, October 2016 But why do developers have so many problems
building homes?
We are talking economics.
With so much demand, you could make a great business with housing
in California, right?
Well… of course you can.
There’s just one problem!
Zoning laws.
You see, the real estate market is actually tightly regulated by city halls.
If you want to build in L.A., you need a permit that can take more than
3 years to get.
And all of this happens because city corporations are the
ones who choose where and how to build.
So how does the City hall know how many dwellings they need?
Mainly, they look at population growth.
If you check the data, you’ll see that the housing census in L.A. has mirrored
its demographic growth.
And although it makes sense on the surface, this is a huge mistake.
Because population is one thing and demand is another.
For example, imagine a couple who lives in one house.
If they get divorced, all of a
sudden, they need an extra home.
So, there you go!
With the same population, we just created twice
as much demand.
And the reality is that we have a higher and higher
single and divorced population.
This is not happening just in L.A. but also in Madrid, Berlin and almost
any other city.
Many experts say that the solution is to build more houses.
Others advocate for abolishing zoning laws.
But, in Europe, many cities bet on price controls.
Do you think these policies are working?
Is this a good or a bad idea?
Let’s have a look, shall we?
THE OTHER STOCKHOLM SYNDROME Usually, when we talk about Sweden, it’s
because we’re using them as a model.
Swedish people enjoy a large welfare state alongside a dynamic economy
with innovative companies.
Among those, there’s Europe’s most famous startup… even though it might not stay in
Sweden for much longer.
Check this out!
Spotify threats to leave Sweden spur startup protest in
Stockholm So why do startups want to leave Sweden?
Is it because of the high taxes?
Not really!
The main reason is that they can’t hire foreign talent.
And you might be saying…
Come on, Simon!
Everybody knows that Sweden is very open to immigrants!
And yes, they are!
But good luck moving to Stockholm and finding a flat!
While we were making this video, we spoke to a man who worked for a
Swedish startup for a year and a half.
He made a salary of 2900 euros a month, but more than half of that
went toward paying the rent on a 500 square foot flat.
And believe me, this was not the worst case.
Finding a flat in Stockholm is so hard that some people spend months in an
AirBNB.
And you might wonder… why?
It all started in the 50s.
Sweden needed houses.
So the social democratic government created the Million Houses Policy.
The idea was to build public houses for rent at very cheap prices.
During those years, every Swedish person could apply for
a public house and pay rent at prices equivalent to 400 or
300 euros today.
But things changed in the 90s.
During those years, Sweden suffered one of the worst debt crises in their
history.
No money meant no more houses.
But the rent regulations remained.
So you either went for a public house or you had
to find a place in an extremely scarce rental market.
Basically, in Sweden they have the so-called first hand
market.
Those are the public houses.
If you’re Swedish, the first thing you do when you turn 18 is
apply there.
If you’re lucky, in 13 or so years, you’ll get a 2
bedroom apartment for just 600 euros a month.
In other words, what you don’t pay with money, you
pay with time.
This explains why 25% of Swedes live with their parents
until they turn 30.
And also, it explains why this society is turning from renting
to owning.
With low rates for mortgages, most Swedes buy
as soon as they can.
But the real question is… what happens with the people
who aren’t born in Sweden?
What happens if you just moved there and have no family to stay with?
Well… in that case… welcome to the wonderful world of
the second hand market!
Basically, Sweden believes that you shouldn’t make
money from renting.
The law has lots of ways to ban people from renting.
And long term rentals are forbidden.
But even if you are allowed to have a tenant for a
one year contract, the community of the building can deny you
permission.
Yes, you heard that right.
Your neighbours can say that you can’t rent out your place or that you have
to kick out your tenant.
This explains why, with so many restrictions, there
are almost no available flats.
So, despite the great welfare system, many people live in 200 square meter
flats.
But, again, the worst problem is not the inconvenience.
It’s this.
Sweden probes riot in mainly immigrant Stockholm suburb
Exactly!
The poor immigrants who have no startup to find a
flat for them have to go to the worst neighbourhoods.
And this is how they form ghettos.
And… yes, OK, I know that all of you have seen those conspiracy videos where
they exaggerate the gang violence in Sweden.
But let’s be honest, even though the problem is not as
big as some media portrayals, Sweden has a clear problem
with criminality.
But we’ll talk about this in a future video.
In the meantime, by the way, if you’re new to this
channel and you’re enjoying this video so far, remember
that we publish brand new videos every week.
So subscribe to VisualPolitik and hit that bell button so you receive a
notification on your phone anytime we post.
But let’s get back to our story.
Of course, this Stockholm crisis could be solved by building more houses.
But, even if you built 80,000 new dwellings a year as many
have suggested, you’d also badly need to change
those renting laws.
But now you might wonder…
OK, Simon… give us a solution!
Is there any example of a city that solved this
renting problem?
And the answer is yes.
Let’s check it out, shall we?
VIENNA AND RENTS-FOR-ALL SYSTEM Austria is one of Europe’s wealthiest countries.
The average salary here is over 2,700 euros a
month.
And, if you live in Vienna, it’s not hard to find
jobs paying more than 3500 euros a month.
Nevertheless, rent costs are the same as a way poorer city like Madrid, Spain.
For 1500 euros, you can find an amazing 860 square
foot flat in the center of the city.
And I know what you’re thinking…
Now the guys at VisualPolitik are going to tell me another
story about how a city embraced the free market with no remorse
and lived happily ever after, right?
Well… nope.
The opposite is true.
Basically, the Vienna council is something like a developer
and a rental agency at the same time.
They are the city’s biggest landlord.
You see, after World War II, half of Vienna ended up completely devastated by the bombings.
So the city hall paid for all of the reconstruction.
That’s when they said ‘Wait a minute!
Since we paid for all of this… aren’t we
entitled to rent it out under our own conditions?’
This is how the World’s most ambitious public program
started.
Here’s how it works: 80% of Viennese people live in rental
flats.
60% of those are public housing.
Some of the buildings are from cooperatives and others
belong to the city hall.
But wait a minute because we are not talking about normal
rental agreements!
In fact, we could call them something just short of limited property.
Basically, rent contracts in Vienna last forever… even after you’re
dead!
Yes, rental contracts can be inherited as well.
So, as long as you don’t move, you can say the flat is yours.
And oh boy!
You gotta see those houses.
In America and the UK, we have this notion that public housing is for the poor
and it’s in bad neighbourhoods.
But here, you can find public houses even in the best neighbourhoods and they are amazing:
swimming pools, gyms, even saunas.
In some cases, you can even find pretty absurd situations.
While we were doing the research for this video, we spoke
to Vienna’s city hall and they gave us lots of cases.
For example, there’s a young woman who lives
in an 860 square foot apartment in the center of the
city.
How much do you think she pays?
400 euros!
That’s less than 500 dollars!
But her neighbour, living in a similar flat, pays 2000
euros.
Why?
He lives in one of the apartments that aren’t public!
So just like in Stockholm, Vienna also has two types
of renting: controlled prices and free prices.
And you might be wondering…
How come they don’t have waiting lists here?
Well, here’s your answer!
Annually, Vienna spends about 600 million euros ($682
million) on social housing.
In comparison, Germany — with a population over 45 times Vienna's — spends
about 400 million euros nationwide.
And now you might wonder… how does this system work?
Let’s say that you move to Vienna.
In the first few years, you can’t apply for public housing.
But no problem!
There are more than 290,000 flats on the free market.
So it’s not hard to find a place and the prices aren’t
crazy because there’s a large supply.
Then, after only 2 or 3 years, you can apply for a public house.
Depending on your family status, your income and your pickiness, it
might be easier or harder for you to find a home.
But, usually, we’re talking about waiting times of no more
than 2 years.
Of course, as we always say on VisualPolitik, not everything is sunshine and rainbows.
The first issue with this system is that you don’t wanna
move out of your flat once you find it.
This model pretty much reduces your freedom to choose.
Basically, it’s not you who gets to choose but the city hall.
And remember that your house determines many things about your lifestyle.
But there is another issue here: the sustainability.
This system relies heavily on just one actor: the
municipal corporation.
This means that, as long as the local government has the money, there’s no problem.
But they just need one crisis and there will be no
more houses.
And, since there aren’t many private developers
because there are no incentives, they could easily end up
with a housing shortage situation.
And this would lead to a lot of problems.
But we have to admit that, so far, this model seems to be
working.
So the question now is…
Would it be possible to combine this Viennese model with a more free market
solution?
Do you think this system could be applied in
other cities?
Would you mind renting the same flat for your entire life if
the conditions were good enough?
Please, leave your answer in the comment section below.
Before finishing, let me give a special thanks to MARC
SOLO and JAIME CHAPINAL for helping us with the facts
on Stockholm.
Also, let me thank Vienna’s City hall for answering all of our questions.
They were extremely nice.
Don’t forget to visit our friends from RECONSIDER MEDIA.COM, the podcast that provided the vocals
in this episode that were not mine.
And, of course, remember that we publish brand new
videos every week so subscribe to VisualPolitik and hit that
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If you liked this video, give us a thumbs up and, as always,
I’ll see you next time.