What Is Gentrification in Real Estate?

What Is Gentrification in Real Estate?

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You may have heard the word ‘gentrification’ in both the media and casual conversation. While city residents and news reporters may complain that gentrification is a blight on urban communities, it’s a complex issue that can’t be summed up in a single paragraph. Read on to learn more about gentrification – the good and the bad – and how it affects real estate.

What is gentrification, and how does it affect an area?

The term ‘gentrification’ derives from ‘gentry,’ a word used to describe the class just below nobility in British society. British sociologist Ruth Glass originally coined the term in 1964 to describe the changes she saw taking place in London:

“One by one, many of the working-class quarters of London have been invaded by the middle-class… until all or most of the working-class occupiers are displaced, and the whole social character of the district is changed.”

In other words, gentrification is when a poor urban neighborhood becomes occupied by wealthier residents, rapidly transforming an area with a historically low market value into high-value real estate.

How does gentrification start, and how does the process play out?

Before a neighborhood becomes gentrified, it is undesirable to potential home buyers, who view the area as unsafe, inconvenient, or plain boring. Most of the people living there do not make a lot of money, so they lack the necessary funds to renovate homes that are falling apart, host community events, or establish successful businesses. As a result, banks don’t invest in the area’s businesses or real estate. This state of unfulfillment is known as disinvestment.

A disinvested neighborhood begins to undergo gentrification when outsiders from a higher socioeconomic class settle in and startup businesses and events, like festivals and concerts, that revitalize the community. The newcomers’ presence makes the area look more welcoming to middle-class homebuyers, who start moving in and change the neighborhood’s demographic.

What are some historical examples of gentrification?

New York City is one of the most famously gentrified regions of the United States. One neighborhood that has experienced notable gentrification over the past few decades is Alphabet City, an area widely associated with crime and drug use as recently as the 1990s. But by the turn of the century, the neighborhood had attracted many middle-class artists and entrepreneurs, marking a distinct change in the population. Now, Alphabet City is home to several upscale stores and restaurants, and both rent and quality of living have increased.

For examples of areas currently undergoing gentrification, see Realtor.com’s list of the top 10 fastest-gentrifying neighborhoods in the country as of 2019. Number one on the list is Rivertown, Michigan, a district near Detroit. While the area was previously more hospitable to warehouses and factories than homeowners and renters, more young businesspeople recently began to take advantage of the low cost of living, leading to a massive gentrification boom.

How does gentrification affect the local economy?

Gentrification leads to an increase in property value, but by how much do home prices increase? In the aforementioned Rivertown area, the median sale price rose by a whopping 526.4% in only five years. While this is an excessively high increase, even areas experiencing a more moderate degree of gentrification have their property values go way up. The San Antonio, Texas Eastside Promise Neighborhoods – the tenth fastest-gentrifying neighborhood in the U.S.–saw a 78.5% increase in median sale price between 2014 and 2019.

With higher property values come higher property taxes, but this tax money can contribute to government efforts that benefit both old and new community members.

Does gentrification cause homelessness?

The negative connotations of gentrification primarily arise from one unfortunate side effect: the displacement of a neighborhood’s original residents, who are mostly poor and uneducated. As rent becomes more expensive in a gentrified area, many of these residents cannot afford their homes. Some of them can relocate to a new, more affordable area, but others, unfortunately, are left homeless.

However, gentrification does not need to be synonymous with displacement and homelessness. There are ways to encourage gentrification without driving lower-class residents out of a neighborhood.

A study conducted between 2000 and 2013 found that while the gentrification of large cities led to a significant degree of displacement, the problem of displacement was not nearly as persistent in smaller gentrified neighborhoods. It’s worth noting that even without gentrification, people move frequently. In fact, the probability of a renter leaving a gentrified neighborhood is only 55.7%, compared to an overall probability of 54.0% regardless of gentrification status.

Can gentrification be stopped?

While experts can predict the likelihood of a neighborhood undergoing gentrification through extensive research, the question shouldn’t be how to prevent gentrification, but rather how to avoid its adverse effects. Government policies to ensure affordable housing for those who need it and prevent eviction can allow both old and new residents of a gentrified area to live side by side.

Is gentrification a good thing or a bad thing?

To characterize gentrification as ‘good’ or ‘bad’ would be an oversimplification of a complex issue. Let’s examine both the pros and cons.

Gentrification pros:

  • Increased property values: While more expensive homes may be out of reach for many buyers and renters; real estate agents can make a huge profit by investing in gentrified areas.
  • Accessibility: Gentrification provides a level of convenience previously unknown to a neighborhood’s population in two ways: It increases the amount of public transportation available to residents and decreases the travel distance required to shop, dine, and work.
  • Economic development: The opening of new businesses in gentrified areas means lots of new job opportunities become available, and thanks to increased accessibility, residents can find work that is reachable by bus or within walking or biking distance.
  • Lower crime rates: Gentrification leads to a decrease in crime both because middle-class residents are less likely to be involved with crime and because more funding for public works means a stronger police presence.
  • Increased diversity: Urban areas previously occupied mainly by low-income minority households become more socioeconomically and racially integrated under gentrification. This allows for better communication between people of different walks of life. Studies indicate that neighborhoods with this sort of mixed population encourage poorer children to develop their education and careers better as they grow up.

Gentrification cons:

  • Displacement of residents: As discussed above, the increased property values that come with gentrification may prevent poorer residents from keeping up with rent, and poorer owners from keeping up with property taxes, causing them to relocate or become homeless.
  • Increases in mortgage foreclosures: As property taxes rise, some residents who own their homes – many times with them having been passed down through the generations – will struggle to keep up with the ever increasing property taxes. For those with mortgages where the taxes are escrowed, this can cause them to fall behind and end up being foreclosed on by the bank. Note – if you’re facing this issue, please contact us and we’ll see if we can help.
  • Increases in tax foreclosures: For those who own the homes outright, they can end up facing a property tax foreclosure if they fall behind in paying the taxes for the property and/or don’t apply for the proper exemptions to lower their property tax obligations. Note – if you’re facing this issue, please contact us and we’ll see if we can help.
  • Challenges for small businesses: As larger businesses open up shop in gentrified areas, small business owners face new challenges. While local businesses can benefit from gaining new customers who spend more money, increased rent prices can make it more difficult to stay afloat.
  • Tension in the community: As wealthier people move into gentrified neighborhoods, it’s only natural for the people who have lived in the area for years to feel a sense of resentment and resistance to the change. While neighborhoods technically become more integrated, there is still a distinct divide between old and new residents, with many urban populations actively protesting gentrification in their communities.

How has gentrification affected Houston, Texas, specifically?

The Greater Houston Area is currently experiencing some of the fastest gentrification in Texas. Between 2000 and 2015, the median income in neighborhoods within 3 miles of Downtown Houston has increased by 67%. This has resulted in more demand for urban housing among buyers who would have previously stuck to the suburbs. And researchers predict that trend will continue, listing the Third Ward, Denver Harbor, the Fifth Ward, and Gulfton as the neighborhoods most likely to gentrify in the future.

Whether you view gentrification as good or bad, it’s essential to recognize that it will undoubtedly keep affecting Houston. And be aware of the positive and negative changes it can bring to communities.

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