The Fundamental Problem with Urbanism
Incentives
Few people love their cities’ urbanism. There’s always a problem: Streets are ugly, dirty, expensive, inaccessible, lifeless, overcrowded… But it seems to me that they all boil down to one single problem: Who owns what?
I realized this while at Singapore’s Lau Pa Sat hawker center, a traditional dining venue with dozens of food stalls serving dishes from around Southeast Asia.
As we stood outside, a friend of mine remarked: “Look at the value of this real estate. If they tore this down and replaced it with another skyscraper, imagine the amount of value that could be created.”
Except I disagree.
I count about 25 skyscrapers surrounding this hawker center. A big part of their value is because they are close to the hawker center. This hawker center isn’t just one of the oldest Victorian structures in South-East Asia, it’s also a center of neighborhood life, where hundreds of thousands of Singaporeans get coffee and take their daily breakfasts, lunches, and dinners. This makes the skyscrapers around so much more valuable!
Replacing the hawker center with a skyscraper might make a lot of money. Let’s say adding a 26th skyscraper could add 1/26th in value to the area, or a bit less than 4%. But the surrounding buildings would all lose a lot of value—probably more than 4%. Let’s say 10% of each building’s value, or the equivalent of 2.5 skyscrapers. On balance, the area would lose the value equivalent to ~1.5 skyscrapers by adding one.
Another way to look at this is that the owners of the hawker center would be taking some value away from neighboring buildings, reducing the overall value in the process. They would basically be reducing taking one piece of the pie and reduce the overall size of the pie in the process.
This would be the result of each parcel of land having a different owner: They each optimize for the value of their own piece of land, without considering the overall value.
What’s the standard solution to this? Regulate the sh*t out of it: What any developer can build is very limited, and within those boundaries, every new building or remodel needs a million approvals. Then, another part of the municipality takes care of the trash, another the roads, another the parks… All of them are experts, but they only focus on their own narrow area of expertise.
The ones overseeing the entire thing are usually elected individuals, people who are not as accountable as the owners of specific buildings. Why? A good development can make a fortune, making or breaking the developer’s entire life, so they obsess about getting their development right. Meanwhile, a reelection depends on dozens of factors. A single development going right doesn’t matter much to politicians’ future, but if they gets bad publicity, it can definitely derail their reelection. So politicians by default will not obsess about optimizing a specific development.
This is how you end up in the US with amazing buildings but terrible commons: The developers really only care about their own buildings and nothing outside of them. The experts (trash, fire, traffic, etc.) only focus on their area of expertise. The politicians are the truly accountable people, but their accountability is lower than that of owners, diluted across many other topics, and sometimes with perverse incentives.
This problem gets worse once the developer sells all its units: Now every owner of every apartment / house fights alone for the value of their unit. They’re optimizing for their little corner, at the expense of other neighbors if that’s what it takes, and worrying little about the commons like hallways or lobbies, even if they impact the value of their homes.
They have a coordination mechanism—the HOA, Home Owners’ Association—but anybody who’s been in one knows this ain’t a holy grail. Few have the time to invest properly in the management of the HOA, and decisions are made through broken democratic mechanisms that enshrine the tyranny of the majority…
So what can we do about this?
A Different Ownership Structure
In the article The fewer the merrier from Works in Progress, Samuel Hughes shares an alternative.
According to him, in London, some groups of buildings like the neighborhood depicted above are owned by single companies for historical reason. The result is that the companies think of the entire neighborhood experience, not only those of a single apartment or building.
They’re not going to cram huge towers there, because then nobody would want to live there. They ponder the tradeoff between more units and more value per unit, which means livability. They will build lovely streets lined up with streets, rent retail space to valuable shops at a loss to make the neighborhood more appealing,
The project above would be impossible to execute if the company didn’t own the entire thing. Municipal governments are unlikely to take this initiative, either, because the work involved is pharaonic (involving hundreds of citizens who might not agree with the new plan) while the upside would be low: Gaining just a few votes in this neighborhood is not worth the hassle.
What this means is that the coordination of the commons is so hard that it doesn’t work, so commons don’t get taken care of unless somebody owns the commons. This suggests that the size of ideal ownership is much bigger than the unit, or even the block.
We see this in malls today: When every stall belongs to a different owner, they become flashy shops trying to attract every shopper’s attention, while the alleys go dirty and lights go unrepaired.
This is why virtually every successful mall has a single owner, which makes sure the hallways are clean and welcoming, adds music, seeks anchor tenants, charges less (and even loses money) to rent space to really valuable shops that will attract more shoppers… Only a single owner can make the hard tradeoffs needed to optimize the whole rather than the parts.
So what’s the ideal size of ownership? The neighborhood level? The city level?
Neighborhood Is the Optimal Ownership Level
I don’t think the city level is optimal because the owner could become the rentier of a network effect.
Imagine some company owned all of New York City. It could probably get away with high rents, high taxes, and shitty city services, because the value of living in NYC is higher than these costs. People would endure bad management for the sake of the network effects of living with so many other amazing people. In other words, there’s not enough competition.
We saw this in Why Cities Are Fractal:
Network effects of cities are so high that they suck up the business from all around them, preventing other big cities from growing nearby. The bigger the city, the more economic activity it sucks in from a bigger area. This is why Zipf’s Law exists: There’s very few huge cities, and their number grows exponentially as the size goes down.
So network effects eliminate competition between nearby cities, making movement from one city to another really hard. But there’s competition between neighborhoods. If the company managing the Upper East Side of NYC does a poor job, dwellers might move to Greenwich Village. Therefore, each company would have a strong incentive to compete with the companies owning other neighborhoods.
You want enough neighborhoods for there to be competition, and for collusion to be really hard. My guess is this means dividing a city into at least 10 owners of neighborhoods. I’m not sure what the optimal number is: Too few, and there might be collusion. Too many, and they might have problems coordinating and the commons between them might not be optimized.
This leaves a couple of problems:
Who optimizes for the commons between the neighborhoods?
Does this make everybody into a renter instead of an owner? Isn’t that bad?
The first one is easy to answer: We can solve that the way we solve it today. Police, transportation, sewage, or main road services might remain at the city level. Others don’t, like for example, trash collection. But even for the commons that remain at the city level, they would probably get much better management, because now instead of answering to millions of people in cities like NYC, they would only have to answer to a dozen companies, who would be much better at raising concerns.
The other issue is transforming everybody into a renter. Is that bad?
I’m not actually sure this is necessary. Maybe instead of owning your house, you would own a share of the company that owns your house?
Imagine you want to live in a neighborhood with 100 identical houses, owned by RealCorp. Instead of buying your house, which costs 1/100th1 of the overall housing value of the neighborhood, you can buy one of the 100 shares of RealCorp. This share gives you the right to live in one of the houses, but now crucially you don’t own just the value of your house, but the equivalent value of the entire neighborhood. Now, suddenly, you don’t just care about your house. You care about the entire neighborhood, and you want all of it to improve in value.
Imagine, for example, that there’s an empty field nearby. Today, you’d try to block any new building there, because you’d only suffer from the cost (noise, dust), but wouldn’t get any benefit (the value created by the new building). But if you own a share in the neighborhood, you’re getting rich with this new building! You’re going to approve it in a heartbeat.
Another big difference is that now you don’t have to participate in useless HOA meetings. Now these are run by professionals, who spend their days thinking about how to increase the value of the entire neighborhood, because if they do, they make money too.
These professionals would explore the expansion of RealCorp, buying neighboring land like companies buy competitors, adding new amenities like normal companies add products and services, making sure the neighborhood experience is top notch like companies optimize their user experience…
In sum, the fundamental issue with urbanism is that incentives are misaligned: There’s a tragedy of the commons where direct home ownership creates lots of common spaces that nobody cares about. To solve this problem, we should relinquish direct home ownership and get companies to own entire neighborhoods, unleashing the power of the markets to improve our urbanism, because companies would have a vested interest (i.e., money) in making the urban experience wonderful.
In an upcoming premium article, I’m going to talk about why this is a massive deal, and probably the most underdiscussed topic in economics.
Obviously in reality not all homes would have the same value. My guess is there’s probably a bidding mechanism like a stock market that can determine how much ownership of RealCorp you get from owning any given home. I also guess that there’s a component of ownership and a component of rent, or maybe the rent is equivalent to taxes, I’m not sure. This would be worth exploring further.
Your identification of fragmented ownership as the root of urbanism's problems is compelling; it clearly leads to a tragedy of the commons.
While your solution of neighborhood-level corporate ownership effectively aligns incentives for holistic improvement, we must consider its potential downsides. These include likely gentrification and displacement, homogenization of urban areas, a focus on superficial improvements, and reduced public input.
Perhaps exploring alternatives like stronger public-private partnerships with community oversight, enhanced municipal governance, or cooperative and community-owned development models could offer more equitable and inclusive paths forward.
The premise that unit owners don't care about the commons does not match my observations. It's trivially easy to find neat, well-maintained neighborhoods governed by effective HOA's, including the two suburban HOA's I've been an owner in. There are, of course, differences in opinion on how much should be spent to maintain commons and to what level, but that's different than a 'tragedy of the commons' style lack of incentive. Rather than throwing the concept out, it'd be useful to understand why some governance structures work, and others don't, and how often they achieve satisfaction for the owners/occupants.
In my limited experience, the structure of the CC&R's has a lot to do with success in making necessary investments while limiting the ability of a small majority to 'tax' the other owners. Over the last 50 years or so, the preferred CC&R structure has evolved, and I've been told that newer models are more successful in achieving balance. Professional HOA management is also a factor.