Over the past two decades, the US has seen its industrial base shift away from traditional manufacturing and towards the tech sector.
For some, this has brought higher wages, elevated further by the substitution of pension plans for stock and stock options, driving huge payouts to employees, giving them massive spending power. However, for many other skilled workers – such as teachers, police officers, retail and restaurant employees – it has had the effect of making it increasingly difficult to afford a home in America’s major cities.
As millennials begin to enter the market having delayed purchasing a home in the immediate aftermath of the 2008 recession, and baby boomers look to downsize as they reach retirement, the supply of affordable housing is under severe pressure. Even when we require developers to dedicate a percentage of their projects to affordable housing, which is never enough to meet demand, this intervention pushes them to increase the price of their other homes, driving the market ever higher.
This is a crisis, not just because of the growing divide between society’s haves and have-nots, but because we risk losing the heart of our cities – with people whose services are vital for communities to thrive, priced out to the most distant suburbs. The National Low Income Housing Coalition has found that a renter working 40 hours a week on minimum wage cannot afford a two-bedroom apartment anywhere in the US. As house prices continue to rise at twice the rate of wage growth, the shortfall in affordable homes is only set to grow.
A new model is needed
While the situation appears desperate, the solution is not simply to build more and more homes as fast as possible. Previous experience has shown that cramming low-income families into huge districts of poor quality housing only leads to slumification and segregation. In the past, affordable districts have lacked the provision of basic services. You often find residents relying on the few small corner shops for their groceries and other basic needs. These small shops lack variety, buying power, and competition, meaning those with the least to spend are forced to pay a higher price for their daily essentials. Even when supermarkets are present, the quality of products is often lower, exacerbating issues of poor health and obesity. This is not only a major barrier to social mobility, but a missed opportunity for the US economy – a swath of the population willing to pay for services yet chronically underserved by businesses.
If we are to avoid slumification while overcoming the affordable housing crisis, we need a new model – one able to marry low-cost housing with a high quality of life and wealth of services. It may seem an impossible task – to raise quality and lower price – but it is achievable by retooling the way private businesses approach affordable housing to align profit with local prosperity.
A model already exists for this kind of rethink. In the healthcare sector, Kaiser Permanente combines an insurance plan with its own hospitals and clinics. Because each member pays a fixed amount for their plan, the business is incentivised to keep people out of hospital and healthy for the long-term, linking social outcomes to corporate profit. Kaiser generated US $2.5 billion of net income in 2018 while at the same time investing in community programmes focused on everything from obesity to safe housing.
Prioritising social benefit
A version of the Kaiser model could be realised in the real estate sector if developers embraced the growing preference for services over spaces. If developers plan and market their districts with an emphasis on public places and services rather than the current model of prioritising the size of private living spaces, then businesses’ capacity to generate sales and profit will be tied to their ability to maintain a thriving community.
For example, a family living in a small but well-built home with access to a park, to green spaces, a gym and shared tool facility known as a library of things, as well as digital services such as ride-sharing, free Wi-Fi and smart parking will enjoy a higher quality of life than one with a larger living space but no amenities. In this situation, the value of the home is based on the strength of community life, meaning if the developer wants to maximise profits it needs to prioritise social benefit.
What’s more, since communities are at their strongest when residents feel they have a stake in the future of where they live, developers are incentivised to engage with residents and empower them to take responsibility for the evolution of their neighbourhood. This not only leads to districts that are better tailored to the specific needs of their residents but circumvents one of the key risks experienced with company towns. Once seen as the solution to affordable housing and accessible services, an area’s main employer would ensure its employees were provided with everything from housing to public spaces, schools and healthcare.
However, as we’ve seen in the Rust Belt, companies don’t exist forever and when the employers departed, employees lacked resources to plug the gap. In a model for real estate where developers are actively incentivised to empower residents, local people are provided with the means to organise, to make collective decisions and to work together on community solutions even if the company responsible for managing services in their neighbourhood disappears.
Involvement of the community in decision making will also allow developers to overcome the privacy and personal data stumbling blocks faced by many of today’s large digital platforms. While the likes of Google’s Sidewalk Labs have faced questions over their use of personal data, companies incentivised to engage residents will reap benefits from a collaborative approach to data usage.
For example, the developer may have data showing that a group of residents all leave home at a similar time and head in similar directions to work. The developer will openly present this data to the relevant residents, propose a solution in the form of shared transport services and build consensus from the individuals concerned. This model of engagement gives residents the assurance of data sovereignty, while generating benefits for the developer through a community that is invested in the success of new projects.
The shape of American society has changed beyond recognition over the last two decades, yet the real estate sector’s approach to affordable housing appears stuck in the 20th century. We need disruption of traditional models and practices to match the disruption experienced by people across the country. This transformation is not a case of charity – of compensating for government inaction – but rather an opportunity for developers to seize. It is a chance to align financial and social outcomes to both secure the long-term sustainability of the sector and support communities that are inclusive, collaborative and led by the people who live there.
Chief Digital Strategy Officer