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On Dualist v. Unitary Rental Markets

It is not a stretch to say that our rental housing system is broken. In Los Angeles, more than half of renter households are considered “rent burdened”, and almost a third of them are severely rent burdened, paying over half of their gross monthly earnings in rent. What’s more, instead of building more affordable housing, Los Angeles has lost much more affordable housing than it has gained in the last decade. And these trends are not isolated to L.A.; they are evident in major cities across the country. So, why is it that we struggle to maintain affordable housing? And why is it that building affordable housing is so difficult in the US? The specifics are myriad and convoluted (of course), but–as with anything–they can be better understood by understanding the broader context in which they operate.

In his 1995 book, From Public Housing to the Social Market: Rental Policy Strategies in Comparative Perspective, Jim Kemeny generally classifies all rental markets in developed, capitalist societies as being either dualist—whereby the profit-driven rental sector and the non-profit rental sector are kept separate—or unitary—whereby both profit and non-profit landlords are allowed to compete openly in one market. These rental systems also have corresponding policy strategies, termed command and market, respectively, by Kemeny. This tome represents a significant contribution to academic discourse on rental markets and has been widely accepted and cited in various research papers and publications as a rubric by which to gauge the evolution of rental markets in various countries.

The evolution of one rental system over the other is largely a result of the type of welfare regime in a given country. Countries that are categorized as liberal he identifies as having a high likelihood of developing a dualist rental sector, while countries identified as having either corporatist or social democratic regimes, have a much higher proclivity toward a unitary rental model. More broadly, Kemeny establishes that the dichotomy can be boiled down to English-speaking (Anglo-Saxon) countries having a dualist system whereas a unitary system can be largely found in the Germanic block of countries. Insofar as the international influence of liberal economies such as the United States and England—both economically, in terms of policy and theory, as well as culturally—has far outpaced that of the Germanic block countries, it should be no surprise that the dualist rental model is much more prevalent than the unitary model globally.

Dualist Rental Market

Kemeny defines a dualist rental sector as one in which the private, profit-driven market is insulated from the non-profit, cost-renting market. Such a market tends to evolve as a reaction to liberal economic policy in a country. The logic is as follows: in order to promote a ‘free’ market, rental regulations are relaxed in a liberal regime under the logic that a market functions best when not hampered by excessive regulation. With relaxed regulations, private landlords can raise rents as high as the market will tolerate, and this inevitably leaves a segment of the population disenfranchised, unable to afford increased rents. As political pressure mounts from these constituencies, governments provide the framework for the establishment of cost-renting platforms—either by providing such housing directly or establishing the framework by which non-profit organizations can provide such housing. As market rents rise, cost-renting becomes an increasingly attractive option for a wider swath of the population. In order to cut demand for such housing, then, ever more stringent regulations must be put forth as to who may qualify for such housing. The result of this is the emergence of two separate and insulated rental markets in a society, a largely unregulated profit-driven market and a highly regulated cost-rent sector.

Ironically, attempts to minimize direct government involvement in the rental market in such regimes result in the government taking over responsibility for an entire sub-sector of the market. In Kemeny’s words, “alongside the profit market there develops a state non-profit sector that acts as a safety net for the profit sector. Instead of allowing non-profit forms to compete directly with profit forms, non-profit forms are hived off from the market and organized as a residualised state sector.” Protecting the private for-profit rental market from competition from the non-profit cost-rent market in such a manner ends up raising rents overall for the majority of the population which does not qualify for cost-rent housing. Rents can then be increasingly aggravated by the provision of demand-side rental subsidies—a popular mechanism aimed at improving housing imbalances in liberal economies—as these tend to increase demand without doing much to increase supply.

Additionally, such an approach has broader repercussions to society as a whole, marginalizing large portions of the public. Attempts to remove the government from the rental housing sector under such policy are often to the detriment of existing public housing. As funds get transferred from the direct provision of housing to demand-side subsidy programs—such as Section 8 housing vouchers in the US—there is less investment in maintenance for the existing housing stock, which is ultimately what can lead to its failure. “Behind the systematic and long-term deprivation of investment for renovation and modernization,” asserts Kemeny, “lies an essentially ‘poorhouse’ attitude to public renting: that it is for the most marginalized households only, that they should be grateful for whatever housing they are offered, and that it should not be too attractive.” These attitudes tend to permeate into policy, affecting the housing sector as a whole.

Of note is that countries with dualist rental markets also tend to have a high ownership rates. This, however, is not necessarily representative of a preference for this sort of tenure. Instead, argues Kemeny, this can be attributed, at least in part, to the fragmented nature of the rental sector. By being priced out of the for-profit rental market and not qualifying for cost-rent housing, many households are pushed into homeownership, whether or not it may be the best decision for them. The smaller the public rental sector, the larger the low-income population effectively forced to buy. This push then drives pressure for homeownership subsidies. “As a direct result of the policy of the suppression of cost renting, therefore, political pressure is created for escalating subsidies to owner occupiers to bring ever more marginal households into owner occupation,” observes Kemeny. This push toward ownership feeds a vicious cycle by which it is then perceived that there is a societal preference toward owning, leading to more ownership-friendly policies and further marginalizing the rental sector.

Unitary Rental Market

The unitary rental model draws from policy based on the social market theory originally developed in Germany after World War II. This market approach was developed in large part in response to the devastation the country faced in the aftermath of the war, as the country needed to essentially rebuild policy from scratch. The aim of this approach was to attempt to “construct markets in such a way as to strike a balance between economic and social priorities and thereby ameliorate the undesirable effects of the market.” As such, Kemeny asserts that the task of government in such a system is “not to encourage profit-driven markets and then construct emergency ‘safety-net’ arrangements to take care of its casualties. It is rather to actively take part in the construction and continual maintenance of markets.”

In contrast to the dualist rental market, a unitary rental market allows cost-renting to compete openly with for-profit renting. The open competition between cost-renting and profit renting works to dampen rents and provide a source of high standard housing with security of tenure. Such markets take a long time to develop, however, as cost-rent housing becomes increasingly competitive as the building stock matures. As asset debt gets paid down on mature properties, for example, costs are significantly reduced as debt service payments drop. As a result of this, the rents necessary to cover costs are reduced, making the housing more affordable. However, such a drop in rents in only a few rental buildings would have little effect on market rents overall. As such, the maturation process of a cost-rental sector depends on both the average age of assets as well as the size of the sector. As the sector grows, the rents charged by cost-rent housing begin to act as price makers, determining the maximum level of private rents by their market preponderance.

As is the case with a dualist regime, a unitary rental market also has implications on society and the housing sector as a whole. For starters, countries that approach having a unitary rental market tend to have more renters than dualist societies, and those renters tend to span all ranges of income scales. Additionally, Kemeny argues that such a rental market promotes tenure-neutral housing policy, as opposed to the owner-biased housing policy typically observed in dualist rental markets. This is especially the case as the cost-rental stock in a country matures. Kemeny explains that “maturity results in rent levels highly competitive with owner occupation and creates a heavy demand for rental housing. This in turn creates a large and expanding rental sector that offers a genuine alternative to owner occupation. Such a rental market serves households from all socio-economic groups that have actively chosen to rent.”

Insofar as a unitary market provides for just one open market in which all sorts of rental operations compete, such a model, it can be argued, represents more of a ‘free market’ approach to the rental sector than the dualist rental market that emerges in neo-liberal economies. To get to the point where cost-renting can compete openly with profit-renting, however, takes time, and during this time it is important that the State maintain regulation so as to not let the profit-renting sector get too far out of pace with the cost-renting sector. As the cost-renting sector matures and grows, these regulations should become more relaxed, eventually allowing for free competition between cost-renting and profit-renting. This point cannot be understated, because if rental regulation is too stringent for too long it can have the effect of dissuading private investors from developing rental housing altogether. To get to a truly unitary rental market, then, takes finesse and patience. Unsurprisingly, it has not been achieved in many countries. Even in Germany and Switzerland, arguably the two countries with the most successful version of a unitary rental market, some State intervention is still necessary to protect the cost-renting sector to some degree.

In conclusion, the broken rental sector in the US is a result of various policies and factors. Kemeny’s theory of dualist and unitary rental markets provides a framework to understand how different welfare regimes affect the rental sector. The dualist system prevalent in Anglo-Saxon countries, including the US, promotes a profit-driven market insulated from non-profit cost-renting platforms. The lack of regulation in the private market results in rising rents that exclude many people, creating demand for cost-renting housing, which is heavily regulated by the government. The government's attempts to minimize its involvement in the rental market through demand-side subsidies lead to increased rents, marginalization of the public, and inadequate investment in existing public housing. Ultimately, building affordable housing is challenging in the US because of the policies and attitudes that have developed in the dualist rental market. A rethinking of rental housing policy is necessary to address this crisis and provide affordable and safe housing for all.