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Smart cities?

Under the Smart Cities paradigm we understand implementation of digital technology and so called big data into municipal management. Currently it solves relatively easy problems such as traffic congestion (traffic cams and statistics), assignation of limited resources in public services (queue management) or real time control of some municipal assets (IoT attached to lighting systems, for example). Essentially these problems occur in “real time” and can be predicted and managed efficiently by IT systems. Statistics may help to identify trends that allow managers to project certain data into future so quantitative analysis is simple. If there’s some known fundamental events that may affect the projected figures, forecasts may be modified in order to depict changing reality. 

But real time problems are only a small part of the city’s agenda. Cities are probably the longest living institutions that now exist. People started to live together and manage common resources far before countries or private companies appeared. There are cities that exist tens of thousands years. This  means that there are also mid and long term problems that equally need to be addressed.

One of such problems is housing. Availability and affordability of this resource is crucial for city’s sustainable development. Let’s look into global top municipalities like London, New York or Hong Kong. All of them enjoyed fast population and economic growth, together with rampant escalation of housing prices. Living anywhere near original boundaries of the city became prohibitive. Inadequate housing with living space of 20 m2 became widespread. And even for such a small space you should pay very big money.

If we take into account Madrid, the situation is similar. Renting prices are growing very fast in the past few years. But still we have 10% of empty homes, where nobody lives. It seems there’s no market economy rationale in these numbers.

But what modern digital economy can offer to solve such problems? How can we make cities affordable again? Current solutions are not helping the situation but worsening it.

Services like Airbnb avoid urban planning limitations and create pockets of tourist housing in places not designed for such services. Profits from tourist renting are much higher than from long term rent, the risk is lower and if you do it “Airbnb way” you don’t need to hold any license that regular hotels or hostels do. Now, also started to offer tourist apartments. It’s important to point that these services are just great, but urban planning exist to ensure that city is comfortable to live for everybody. If there are some services that escape from it, unplanned reality change city’s equilibrium and create mid to long term problems.

Online real estate portals are another factor that challenges statu quo. In these portals people and companies negotiate in real time long term contracts. Essentially they create a real time market for assets with very low liquidity: rents (3 years) and purchases (mortgages for 30 years and more). This drastic difference in speed (transaction speed vs asset liquidity) makes it easy to speculate and artificially rise the price by creating false scarcity. If you own a house and prices are rising (something that happens in vast majority of time) you have incentives to hold your property so the final value increases. This is what created that 10% of empty houses in Madrid. But if something go wrong, the prices fall so fast that you have no time to react.

Modern cities should be able to effectively manage empty properties to avoid situations that are contrary to the laws of healthy competition. Real estate portals act as a facilitators for Cartel-like behavior and Anti-competitive activities, since properties are usually limited and demand is always present.

Therefore, Municipalities should allow API like access to their urban management systems to allow automatic response to changing reality:

  • Allow Airbnb like services to operate in cities only through municipal API service, where city is able to adapt the offer to current urban regulations and limitations and collect relevant taxes
  • Identify, through API and single cadastral number, all the urban real estate in order to avoid stocks of empty houses that are held for speculation purposes. Housing is city asset, although in private property (I’m not speaking like accountant now, rather as hobby economist), and as such should be managed publicly. By smart taxation plans that penalize such practices the real estate market will become more competitive and will reflect real demand/offer situation.
  • Based on the data received from tourist and real estate transactions, city will be able better plan future developments, transportation system improvements and urban planning in general.

Like many regulations, urban planning is possible to transform into algorithms. By giving the access to these algorithms through API, modern cities may ensure that digital transformation will run under legal terms and sustainable manner.

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