Slums are “economically rational”

May 11, 2005 | Economics, Markets, Primer posts, Slums

… and bad.  Because they are economically rational, they come into being any time the conditions are right. 



Philadelphia, mid-twentieth century


Because they are bad, we need government-incentivized affordable housing.


The ‘law of economic gravity’


            Simply put, uneconomic endeavors cannot survive.  In the long run, the economics must work – that is, recurring income must exceed recurring expense.  Otherwise the venture fails, and keeps failing until sustainable income-expense (link in .pdf) equilibrium is created.


            The private sector has a straightforward and economically rational solution to the problem of unsustainable renters, consisting of the following steps:


  1. Compress rentable space each unsustainable renter occupies.  This has the effect of increasing the revenue per unit.



Tenement, 1880


  1. Reduce operating expenses to a bare minimum.  This results in an accelerating cycle:


·         Inadequate operating expenses — > deferred maintenance and a decline in property physical condition.

·         Declining property condition –> lower curb appeal, difficulty attracting good tenants –> acceptance of marginal tenants.


Thailand, present day


·         Accepting marginal tenants –> higher collection/ bad debt losses, higher maintenance, secondary problems (e.g. vandalism) –> higher-income tenants move out.

·         Loss of market tenants –> lack of rentability –> stigmatization of the property.


  1. Adverse-select the worst location because these have the lowest acquisitions/ operating costs and the tenancy residing in them has the fewest alternatives and the least economic imperative for (as an example) transportation and public services.



Camden, New Jersey, 1938


The long-term end result, of course, is a slum, and it is economically significant that exactly the same slum-creation economics recur in cities going back two thousand years. 


Slums are ‘economically rational’


            From the standpoint of a diversified housing financial ecosystem, slums are ‘economically rational’ – that is, they will inevitably emerge when certain conditions are present, namely:


·         Demand: a large supply of very poor households.

·         Supply: existing stock of housing that can be acquired cheaply and not maintained.

·         Market economics: An economy in which owners can sell to buyers.


Slums will inevitably come into being unless government intervenes in otherwise ‘normal’ market practices.



Manila, present day


They are bad because they breed disease, malnutrition, unemployment, and crime.



South Bronx, New York, 1985


Slums are normally temporally dynamic — they come and they go, and their location thus shifts in cycles of decades or quarter-centuries.  The nation’s urban cores are replete with formerly affluent neighborhoods become slums, and former slums …



Boston‘s North End, 1901


… become gentrifying upscale neighborhoods.