This explainer is based on the wikipedia gentrification page.
Gentrification is a process in which increased investment in a neighborhood drives up property values and rents, displacing lower-income residents by increasing prices so that such residents can no longer afford to live there.
Increased Investment
Increased investment can take many forms:
- Mansionization – where small houses get remodeled into big houses.
- Trendy renovation – where an old looking house is remodeled into something trendy looking.
- New development – new buildings usually cause property values to rise. Shopping improvements, new apartments and condos, office buildings.
- Infrastructure improvements – something like a new train station increases property values.
- “The Creative Class” – an idea by Richard Florida, to be explored. It seems to be a code word for “racism” or “high income people”.
- Finding Investors – reaching out to wealthy people to convince them to invest.
Property Values
There are also other ways to increase property values:
- Rezoning or upzoning to a more dense or intensive use, like going from residential to commercial or mixed-use. This increases land value.
- Reducing supply by keeping units off the market, or destroying units.
At the same time, things like commercial uses and infrastructure improvements can reduce the “quality of life” and thus reduce property values of nearby residences, or at least reduce the maximum possible value of them.
Rents
Rents can rise if property values rise.
Property values can rise if rent rise.
This isn’t a “cause and effect” relationship – the two things are tied together, and they move together, so they can be considered the same thing.
(If you have low rent in an expensive neighborhood, it just means you lucked out.)
Real estate people use a formula called the “gross rent multiplier” or GRM, which is the price of the property divided by the annual rent.
GRM = PROPERTY_VALUE / (12 * RENT)
Land Value
When people say “property value”, they usually mean the land value + house value.
The land underneath is valued by the “highest and best use” of the land.
They don’t mean “best”, but “most valuable” or “highest rent” use of the land.
So, if a property is zoned for “residential”, and the rents could be 10k per month, it’ll have a land value based on that. If the same property is rezoned as “commercial”, and rents could be 30k per month, the land value will be much higher.
Displacement
definition of displacement
Affordability
explanation of affordability