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Are Cities the New Stock Markets? – Gentrification between Upgrading and Financialization

Rather stock market than housing market. Photo: AdobeStock/peterschreiber.media

Rather stock market than housing market. Photo: AdobeStock/peterschreiber.media

A few short years ago, everything seemed to be fine in the urban world. Apartments served their purpose as homes at prices more or less matched to the income of the residents. Structural and social upgrading processes in individual neighborhoods – known as gentrification – took place on a limited scale, and at moderate pace. All this seems to be long gone. Since the global financial crisis hit in 2007/2008, apartments in this country are no longer just for living – they are used to generate high profit as quickly as possible. These upgrading processes are not limited to individual neighborhoods with economic “exploitation gaps” but affect large urban areas.

 Financialization strikes housing markets

So how does the current situation differ from former periods in housing market development? The answer is surprisingly simple: After 2007/2008, financial market actors discovered residential property as a relatively profitable and low-risk investment – compared to low-interest or high-risk financial products. Large investors withdrew part of their assets from stock markets and new financial products and invested in property. On a global scale, this led to a massive buying up of housing property, especially in countries with a low price level, including Germany. Moreover, institutional investors increased their activities in housing construction. Initially, the main motivation for the run on property was to generate high profits and drive prices up through buying and reselling. But soon it turned out that in the rental housing market with its by then rather moderate price increases, high profit margins could be generated as well. Not only high-quality housing portfolios changed hands – large, low-price portfolios in lower class neighborhoods did too. It quickly became clear that functioning welfare systems with reliable income transfers to vulnerable households guaranteed the new owners stable incomes as well. At the same time, large-scale state subsidized modernizations and renovations were carried out in higher priced segments of the market for more energy efficiency. Consequently, rents shot up there as well, and political interventions such as the state-imposed rent control in Germany did little to stop this development.

The processes in the housing and rental markets described above would not have been possible without massive investments in real estate, refurbishment, modernization, and renovation. In recent years, urban researchers have increasingly categorized them as manifestations of more general financialization processes. The term financialization stands for the transfer of the logics and practices of the financial market to other sectors of the economy to amass capital as quickly as possible. In plain terms: property investments are to yield high returns as fast as possible. And in this connection it hardly matters whether the property is used by tenants or small property-owners. Following this logic, social interests and objectives related to housing as a service of general interest are secondary. This shift has brought about fundamental changes for the housing markets.
Property markets develop into markets with extreme scarcities and massive price upsurges. Whereas in the past, supply and demand were balanced – with cyclical fluctuations – in a way that was calculable for buyers and sellers, this has now changed. Since the middle of the decade at the latest, high capital investments by global speculators and the large-scale buyout of urban property have increased the risk of housing bubbles arising and market mechanisms failing to some extent.
Capital transfers and the large-scale buyout by major financial institutions and newly established property trusts have turned the rental housing market into a cash machine. Steeply rising rents in combination with an extreme shortage of supply and a lack of alternatives for tenants have brought landlords into a positon of relative power from which the “cash machine” can be operated comfortably.

New market types

The developments described above indicate that new market types developed within a short period of time. Starting in 2007/2008, the bond markets of former decades turned into yield markets. In this context, “bond” stands for the profit property and real estate owners generate from rent, lease, and sale. Usually, such bonds guarantee continuous, though just moderately growing income. They are based on social agreements establishing acceptable conditions for both the supply and the demand side. Furthermore, they are publicly sanctioned as excessive prices and practices are named and shamed as profiteering. In the new yield markets, however, such agreements quickly lose their validity. The rather joking description of the new behavior maxim as “cash as cash can” (from “catch as catch can”, meaning “all ways and means are permitted”) gets to the heart of the matter: categorical maximization of profits from unproductive activities, including skimming of profits from sales and overpriced rents. So yield markets are based on the reduction of the utility value of an apartment in favor of its exchange value. First and foremost, it becomes a commodity.
However, politicians and researchers have only realized and thematized these fundamental changes in the property market, and their high dynamism, in part. The usual talk of property bubbles misses the point in so far as it suggests that a sign of overheating, i.e. an anomaly, was threatening an otherwise intact housing market. It ignores the fact that the new players are driven by an exploitation logic that differs significantly from all previous logics. As a result, well-known social and structural upgrading processes that have been hitherto pithily described as gentrification have substantially changed and need to be totally reassessed.

Old-school gentrification: small-scale upgrading circles

Social scientists began to research the phenomenon of gentrification in the 1960s. Since then, it has been considered an important part of urban development. It is characterized by a gradual infiltration of affluent households into lower-status neighborhoods. Generally, these neighborhoods were neglected and, for lack of investment in the conservation of building stock – often caused by speculation in real estate – visibly dilapidated. Still they were particularly attractive to the said households, known as gentrifiers. They appreciated the social atmosphere that had developed – between lower class culture and alternative milieus. Before, lifestyle pioneers, i.e. students, artists, and other low-income groups, had opened up and culturally shaped these quarters thanks to their low rents. Often, gentrifiers came from the same milieus, and some had even lived there as students. Over time, they climbed the social ladder and could afford to buy houses or apartments. Slowly but surely they pushed out the pioneers and became the most important drivers of social and structural upgrading in the neighborhood.
For a long time, this form of gentrification was linked to bond markets. It took place slowly, in small steps, and over longer periods of time. Only in this way could the typical succession of players evolve. Later, major investors from outside stepped in who wanted to make extra profit with luxury modernization. Usually, the activities of these institutional players merely brought minor structural and socio-structural changes. Each “takeover” of a neighborhood by new gentrifiers meant that lower-status populations were forced to move as land and rent prices increased.
The older bond market led to rather slow population movements from one quarter to the next. In Berlin, local gentrification researchers refer to it as an upgrading circle. In the 1990s, lower-status populations – above all creative minds and destitute academics – relocated from Kreuzberg to Prenzlauer Berg, in the early 2000s from there to Friedrichshain, and some years later to Neukölln and the eastern parts of Kreuzberg. Every ten years, it seems, they relocated from neighborhood to neighborhood, in clockwise direction. Berlin’s gentrification researchers were thrilled, they had a catchy tracing model easy to reproduce on maps.

Gentrification 2.0: expansive and comprehensive

With the radical transformation into a yield market, external players no longer content themselves with shaping the last phase of the gentrification process. They step in much earlier, sometimes even during the pioneer and the first phase formerly left to affluent households. In Berlin, this is very evident in districts like Prenzlauer Berg, Friedrichshain, and Kreuzberg (Gräfe-Kiez, Bergmannstraße). The rampant conversion of entire streets into residential property, the filling of vacant lots, and the construction of luxury apartments are all clear indicators of how radically large investors are changing the market. Within just a few years’ time, the displacement of financially weak populations here and there has turned into displacement on a massive scale.
The yield market breaks with the previous model idyll of the upgrading circle in an almost brutal way. Financialization in the form of a large-scale acquisition and conversion of housing affects not only high-price neighborhoods in Berlin’s city center (i.e. inside or bordering on the city railway’s circle line), but lower priced neighborhoods and the margins of the city as well. The unchecked price rise since 2010 has hit all urban subregions, and even housing stock on the fringes formerly ignored by and unpopular among pioneers and small gentrifiers, such as the districts of Lichtenberg, Marzahn, or Hellersdorf, has been modernized and fully leased due to high-demand pressure. Suddenly, entire quarters are upgraded where nobody would have expected it. The individual players typical of older gentrification processes are hardly involved in such developments. Overnight, financialization and gentrification are everywhere, dominated by large real estate companies and investment funds. They drive the pace and extent of structural transformation, and thus the population exchange. Displaced populations are migrating from the city center faster and in greater numbers than before. As financialization and gentrification have gained a lock on other parts of the city as well, leaving the entire urban housing market extremely tough, those searching accommodation find nothing they can afford, or no available apartments at all, even on the outskirts of the city. Some of them are forced to relocate to more distant municipalities in the area surrounding the city.

Fast upgrading as political and scientific challenge

To get to the heart of the current gentrification dynamism: Berlin, like many other cities, is faced with fast upgrading through financialization. The sequence of dominant players in its ideal-typical form as was characteristic of gentrification in the past has almost disappeared. Instead, institutional investors get in early and force large numbers of residents who are unable to pay higher rents to relocate. What used to be the final phase referred to as hypergentrification is now attained practically everywhere at a very early point. In the long run, the displacement effect of financialization is expected to be stronger and more sustained than that of older gentrification processes. And what is more, the lack of state and municipal interventions backs these processes – intentionally or not. Financialization and the political framework are interacting and continuing developments for the time being. Gentrification research has to react to these observations to uphold its prerogative of interpretation in urban development debates now and in the future.

The Researcher

Prof. Dr. Hans-Joachim Bürkner has been Professor of Economic and Social Geography at the University of Potsdam since 2011, in joint appointment with the Leibniz Institute for Research on Society and Space. His research focuses on sociological urban studies (socio-spatial disparities, creative industries) and border area research.
Mail: buerkneruni-potsdamde

Text: Hans-Joachim Bürkner
Translation: Monika Wilke
Published online by: Sabine Schwarz
Contact to the online editorial office: onlineredaktionuni-potsdamde