The economics of gentrification

A Turkish mom-and-pop grocery store in Berlin’s Kreuzberg district facing eviction has apparently become a symbol in the locals’ war on gentrification.

The word is defined as “the process of renewal and rebuilding accompanying the influx of middle-class or affluent people into deteriorating areas that often displaces poorer residents.” It is therefore no surprise that most academic studies have concentrated on gentrification’s impact on these residents – for example, whether they end up in worse housing or neighborhoods.

While these individual costs are definitely important, I have to agree with Stephen Sheppard, professor of economics at Williams College, that the real costs are for the neighborhoods and communities. Studies that focus on this aspect usually find a positive impact on the remaining residents and district as a whole.

Not only do the new residents attract new businesses, and naturally jobs, higher property-tax revenues improve local services. Moreover, many cities have zoning laws that require developers to build subsidized housing, and so the district could actually end up with more affordable housing. Finally, Stuart Butler from Brooking Institution argues that white collars “know how to get things done”: They put pressure on the municipality, schools and the police to improve.

Sheppard adopts a different approach: He argues that “the risk of displacement from gentrification changes the incentives that residents have to engage in any of the variety of activities that can improve a community.” He therefore feels that, in addition to studying the traditional channels, we should be looking at the fall in these “privately produced public goods.” His approach is related to another aspect of public goods related to gentrification often overlooked by academics, but definitely not the media: The displacement of local stores.

An amendment to Turkish commercial laws that took effect in July 2014 allows landlords to eject tenants of 10 years or more without cause. Two shops that were immediately hit were the historic İnci Patisserie on the pedestrian İstiklal Avenue, famous for its profiterole, and the equally iconic Pando Kaymak breakfast shop in Beşiktaş, home of my beloved Black Eagles. İnci moved to a nearby location, but Pando now lives only in memories.

To be honest, while I love İnci’s profiterole, I was not a big fan of Pando. However, I would have preferred it to stay open as well, in the name of preserving what is left of the city’s historic fabric. Unfortunately, although economics offers several solutions to increase the production or consumption of such goods with “positive externalities,” which are benefits an activity imposes on third parties, I am not aware of one in this particular case.

Subsidies or government provision can address the problem of people getting too few vaccinations, one of the classic cases of positive externalities. The government could also make vaccinations obligatory. Obviously, none of these would apply to a breakfast shop. You could argue for a return to the old laws, but, if you look at the other side of the coin, the landlord has a right to get the prevailing market rent for her property.

You can see that the gentrification of shops is actually a much more difficult problem than resident displacement. I believe the media has got it right this time.