Yes, cities can be great, but these can also be dangerous bombs in the making.

Sir, Edward Luce writes about how trying to attract big companies like Amazon to the cities might make it harder on the poor in the city. “Beauty contest reveals ugly truths” June 6.

Yes, of course, the weaker, the poorer, they will always be relatively more squeezed by any development that occurs in cramp conditions where there will be a fight for space.

But it is when Luce quotes Richard Florida with, “America’s most dynamic cities have played right into the company’s hands, rushing to subsidise one of the world’s largest corporations rather than building up their own economic capacities.” where the real discussion should start.

Why would a city want to bet so much of its future on so few actors as would here be the case with Amazon? Have they not seen what happened to Motor City Detroit? If you want to use incentives to attract jobs, which is of course to start “a race to the bottom”, why bet all on a number, would you not be better off diversifying your bets? 

If I was responsible for a city, one of the first things I would be doing is to analyze how its riskiness would be rated compared to other cities? For instance, what are the chances that suddenly another city offers your city’s wealthy, the possibility of moving to a place that has not accumulated impossibly high debts that will need to be served, supposedly primarily by them?

And, if your city faces a financial crash, what would be ones’ first priorities, to help the poor, or to make sure the rich do not leave without being substituted for by other rich?

PS. Luce writes: “Big fund managers… are putting cash into global urban real estate portfolios. As a result, property prices are becoming a function of global capital movements rather than local economic conditions”

Again, for the umpteenth time, what initially feeds high property prices is the inordinate ease of access to financing it, provided among others by regulators allowing banks to leverage much more with “safe” residential mortgages than with “risky” loans to entrepreneurs. 

The fund managers are just following the results of it… when that regulation-easing plan begins to be reversed, which will happen sooner or later, they run the risk of being left holding the bag. 

@PerKurowski

Preferential access to bank credit for those buying houses have also turned houses in attractive investments, and so a house is no longer just a house

Sir, I refer to Sarah O’Connor’s “Cities only work if they accommodate rich and poor” March 21.

She is correct although it would be more precise saying that cities only work if they accommodate all those workers required to make a city work.

Here is my take on this issue.

By politicians and regulators giving so much preference to the purchase of houses, the prices of houses have been inflated beyond reflecting the need of houses, and so have also turned houses into attractive investments. That has created a financial disequilibrium because most workers who would anyhow struggle to pay for just houses, will find it impossible to service mortgages that also reflect the value of investment assets.

Most politicians would naturally want to be seen as helping people buy affordable houses, but they do wrong in that. What they should do is to help people to be able to afford housing, something which is absolutely not the same thing.

Before we clear out this distortion, our cities will suffer from what O’Connor’s describes. Alternatively, current house asset owners, might be required to start building houses where they allow the indispensable workers to live at a reduced rate… something that could affect the value of their houses.

In many places that are too distant for the firefighters to arrive in time, we have already heard of building houses in order to provide homes close by to these.

PS. For the purpose of the capital requirements for banks regulators have risk weighted  residential mortgages with 35% and loans to entrepreneurs with 100%, which means bank can leverage much more with residential mortgages than with loans to entrepreneurs, which means banks earn much higher expected risk adjusted return on equity with residential mortgages than with loans to entrepreneurs, which mean we will end up sitting in houses without the jobs that could provide the income to service mortgages or utilities.

PS. How much of current house prices is the direct result of easy financing? I ask because it would be interesting to know how much we are financing with easy financing of houses the easy financing of houses.

PS. One of the biggest pension crisis will be when we see all those who trusted houses to be safe investments, trying to cash out in order to convert these back into main-street purchase capacity to use in older days L

PS. Too much preferential finance for the purchase of houses, which increases demand for houses, which increases houses prices, and turns safe homes into risky investment assets, also promotes inequality as those without a house are further left behind… until L

@PerKurowski