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Comment by windlep | Hacker News Reader

I'm sure the fact that there's an increasing trend of empty Chinese investment properties isn't helping. I grew up in Cupertino, and when I visit my parents there, I'm rather shocked at how downhill the neighborhood has gone in parts. It's crazy that these old 70's tract homes go for 1.5 million. Even more insane is that they're bought and then left empty to go downhill. Literally broken windows and paint falling off. I never used to see that.

Part of the problem with building more housing (outside of SF where transit is decent) is that it means even more people. Lack of effective mass transit means those additional people need to drive everywhere, and there's no space for more roads/freeways. So the roads will just get even more clogged.

Cupertino recently had a developer proposal for 4 large high-density housing developments (condos & some apartments), and of course they were to go into areas that already had ridiculous traffic, and there was no way to facilitate even more drivers.

Until the South Bay gets serious about mass transit, merely adding more housing is only going to make the traffic pain worse.

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> "I'm sure the fact that there's an increasing trend of empty Chinese investment properties isn't helping."

This. This. This.

A couple of years ago, I found myself utterly shocked by the price of homes in San Francisco. In a fit of frustration, I fired off a few emails a few random real estate firms in SF, asking one simple question:

"Who the BLEEP can afford these homes?"

You see, I was frustrated. I have a great job, great pay, and yet I can't even come close to buying a home in the city I live in.

The responses I got were jaw dropping, if not infuriating. The #1 purchaser at 2 of the 3 firms I emailed, were foreign investments. Unused, speculative, investments.

I am shocked that land isn't more protected in this state. It seems strange to me, that someone living thousands of miles away, can buy a piece of land with a home on it, thereby shrinking the available market, and driving up the price of housing. This means people who live in, work in, and contribute to, their local community, can't even afford to buy a home there.

The fact that this isn't seen as a full on crisis, confuses and saddens me.

What would make it a less interesting investment is if there were a credible threat to add enough supply to devalue it.

That's generally how markets keep prices regulated: if they go up enough, more people jump in to producing the good.

That mechanism is severely broken in the Bay Area, among other popular places in the US.

Alternatively, repealing Prop 13, so that property taxes rise with the value. Or increasing property taxes as you get more homes. Both of these would decrease housing prices significantly.

Given that the supply of land cannot be increased (the huge omission in GP's argument), repealing Prop 13 is indeed a large part of the solution.

Thanks to technology, the supply of land is not really the constraint on housing supply in most of San Francisco, and especially not in most of the Bay Area.

What technology are you referring to?

At the extreme, these things can hold a lot of people without too much land:

https://en.wikipedia.org/wiki/Skyscraper

But you don't really need those in most places. Simply building 'in' more and up 2/3/4 stories would add a ton of housing in much of the bay area.

Those are very expensive to build, approaching $1000/sqft. Also require utilities, transit, and other city services (schools, police, fire, etc).

Prices are high enough in San Francisco to pay for them.

2/3/4/5/6 stories are significantly cheaper to build.

There isn't a cheap way out of SF's situation.

> Also require utilities, transit, and other city services (schools, police, fire, etc).

High rises don't require those things. People require those things.

For some of them, the requirements (for the same number of people and the same overall outcomes) increase with density, so, in a sense, high-rises (or other arrangements which increase density) do require them.

I didn't state my point well enough; people are the driving factor here. The density is caused by people wanting to move to SF. High rises are a way to deal with the reality, not providing housing isn't going to solve the problem in any way people are going to be happy with.

> The density is caused by people wanting to move to SF. High rises are a way to deal with the reality, not providing housing isn't going to solve the problem in any way people are going to be happy with.

Quite likely, just as many (if not more, in both absolute and proportional terms) people in SF will be unhappy with adoption of high-rises as the solution; the lack of availability under the current regime constrains some of the problems because it limits the ability of people to move in regardless of their desire to do so; relieving that constraint -- especially if the problems besides finding places to store the bodies aren't addressed -- just makes all the other problems of density worse.

It's about as expensive to live here as it is in many skyscrapers in Manhattan. NYC seems to have those other problems pretty well figured out. I've never heard a very convincing reason that SF can't be more like Manhattan in terms of density, except that the existing residents who've "got theirs" don't like the idea.

> At the extreme, these things can hold a lot of people without too much land:

They can hold a lot of people without too much land, but they don't reduce the land requirements for transporting goods and supplies to and waste products away from those people.

Sure, you can hold a lot more people in San Francisco if you fill the city with high-rises, but that's not going to, e.g., suddenly give the city a greater supply of water to support that population, or a greater ability to handle the solid waste produced by that population.

Cities are greener than suburbs by and large, so actually putting more people in cities that otherwise would have lived in a burb is a win for the environment.

Is that true when you factor in utilities? IE - Where does all the water come from? At least in the burbs, you can set up your own well.

Yes, it is, especially when you consider utilities. Average house in the burbs has some lawn or shrubs or something that uses water, and it's not like well water is ultimately 'free' - it comes from somewhere. Also, it means less land developed, less extensive electrical and water distribution systems, and so on.

What makes cost of living so much more expensive in cities vs. suburban or rural areas if they're really so much more efficient?

Demand.

Yes. Cities, dense cities, are efficiency machines.

Look up Geoffrey West, of the Santa Fe Institute, who does all kinds of research on scale and scale effects. Including of cities.

They also do best in areas where there is a large amount of bedrock close to the surface. NYC is geologically blessed in this regard. The Bay Area has far less geologically stable ground to build on, and a lot of what there is makes up our gorgeous parks and nature preserves.

Chicago seems to do ok. I don't know what the ground is like in SF, but Chicago is basically a swamp.

There is ample room to build in San Francisco - not much construction even needs to be skyscrapers. More 4/5/6 story construction would help a lot. The problem is entirely political.

Presumably building high-rise apartments.

> Given that the supply of land cannot be increased

Supply of land can be increased, but its expensive (and, for geological and hydrological reasons, particularly so in the SFBA.)

Taxing vacant real estate is another tool used in some countries and cities. One way of doing it is via an imputed rental income: if a property is not owner-occupied, then the owners are deemed to be earning a rental income (either market rate, or if rent-controlled, then whatever the set rate is), regardless of whether they actually bother to rent it out or not. That increases the cost of sitting on empty housing.

(Though the real motivation for an imputed-rental-income law is usually to combat tax fraud: people who're renting out apartments under the table and not reporting the income. It just has the secondary effect of making it more expensive to sit on vacant real estate.)

Yeah, something like that might work too, although it can be kind of invasive in the sense that now you need to check if people are living in a place. In Italy, that meant that the police send someone around for a look inside the house where you say you recently moved to. In theory, at least - they don't always.

I guess it's easier in countries with some kind of address register. Denmark doesn't police it with physical police, just through the address register: you have an official principle residence, and can only list one. So by definition any other property you own is not owner-occupied. (At least in the cities, I think second homes outside the cities are handled differently.)

You can get away with some cheating there, e.g. a couple who live together can claim to be living separately and rent the second one out under the table, or someone who lives with their parents can be dabbling in under-the-table real estate with an investment property they don't really live in. But it at least keeps it to that kind of small-scale thing; the couple can pretend to owner-occupy two properties when they really live in one, but they can't do it with five.

Higher taxes is not enough. Taxing property means you confiscate it piece by piece, the owner will have to pay or lose it, but given enough time the owner will pay more than the value of the property. Why go that slow and not go for it, confiscate all properties and be happy with it? You can always follow examples from the likes of North Korea. Just in case you don't get it: you can ask for taxes when you provide services, not when you vote to raise taxes. Not sure what are more expensive services the empty Chinese-owned houses require to tax for it. And blaming Chinese investment is just a straw man: if all the houses would be occupied by pure-breed white Caucasian Americans (that's a joke) who would you blame, Martians?

Just wanted to compliment you on one of the most impressive substance-free arm-flailing retorts I have seen in recent memory. It takes skill to weave residents of both North Korea and the planet Mars into a discussion of Bay Area quality of life.

> Alternatively, repealing Prop 13, so that property taxes rise with the value. Or increasing property taxes as you get more homes. Both of these would decrease housing prices significantly.

More significantly, they would mean that the increased demand for property driving prices would also result in increased public resources to deal with the issues produced.

Or we could tax foreign investment properties at a higher rate. "Remove barriers and let the market work" isn't the only solution to any given problem.

I'm definitely not a "markets fix all the world's problems" kind of guy. Far from it. But in this case I think it's a big part of the answer, and I'm not alone in that thinking either. This book was particularly good, although a bit high level: http://amzn.to/1rOgoq3 - and it's also noteworthy because the author, like myself, is somewhat left of center in terms of US politics.

That depends on a lot of factors. Manhattan is an example of a building boom not necessarily increasing supply or lowering prices: a lot of the building boom involved demolition of older, cheaper apartment buildings that were subdivided into small units, to be replaced with newer, higher-end apartment units subdivided into larger units. Net square footage increased, but square footage isn't identical to number of housing units. Which is why over the past 100 years Manhattan has gone from having cheap housing and 2.3 million people, to having expensive housing and 1.6 million people.

Article about Manhattan rental prices dropping: http://ny.curbed.com/2016/4/7/11381852/manhattan-market-repo...

We made a pact with the devil when as a society we decided to believe that our primary homes would also double as investment vehicles that will appreciate in value and help us fund our retirement.

Except no one decided that - it falls naturally out of the facts that homes are expensive (and therefore represent a large chunk of the wealth of most people) and that homes do not depreciate very much as a result of people living in them.

> homes do not depreciate very much as a result of people living in them.

I get what you are saying, but this part above isn't a "natural order of things". For example, homes in Japan are expensive (perhaps representing an even larger fraction of lifetime earnings than in the Statse) yet they depreciate like they are cars.

They depreciate like they are cars because Japan focuses on the new. You don't buy a house, you buy the land, knock down the existing house, and build a new one. You don't buy a used car, you buy a new one unless you're broke. There's precious little used market for anything, which can be a boon to those of us who want to buy nice used film cameras from Japanese ebay sellers.

except used video games and used books :)

By the way Yahoo Auctions is much more popular than eBay in Japan so you might check that out.

Honest question: Why?

My home is about 30 years old and honestly the only way you'd know that is by recognizing certain features and techniques that pin it to that general time period of construction and code requirements. It's not like everything shows "30 years of wear" on it. (Of course all the surfaces have been replaced at least once over time, but by mass of the house that's not that much; maintenance is maintenance.) So it seems sensible to me that it hasn't depreciated all that much, in the way that, say, a computer from the same time period is basically worth whichever is greater of "nostalgia" and "scrap metal" value.

I do think the psychology is similar to why a car suddenly drops 30% in value the moment you drive in out of the dealer's parking lot.

For what it's worth, the 30 year old house will show wear in places you can't see, like the plumbing or the electrical wiring or the roofing. My parents' place is about 30 years old now and there's a fairly constant stream of small repairs that have been necessary over the last few years.

I don't really know, but I read an article that said earthquakes contribute significantly to depreciation in Japan. If the structures just don't hold up as long due to the harsh conditions, it would make sense that old structures would be worth less.

It's true that there's no law of nature that dictates housing depreciation. However, I will say that all of America works this way, and has for at least as long as I have been alive - houses hold onto their value. That fact may be culturally bound, but the point still remains that no one decided that this should the case, nor is there some law or policy that keeps homes from depreciating.

Except that voters in California effectively did decide that, with Prop 13. In other states, property tax is effectively a liability for the owner. Texans pay roughly 3% of the current value. That is a lot-- keep in mind that mortgage interest is only slightly higher than 3% (and loan is based on the initial purchase price, ie it doesn't go up like property tax). In California, Prop 13 is essentially an entitlement for the owner, who only pays roughly 1% of the value, and that value is not increased along with the market (only tiny increases are allowed).

Unused, speculative, investments.

As I understand it, it's not really speculative, but rather is a way around China's currency controls. It's allegedly quite difficult, if you're Chinese, to convert holdings into USD or other currencies and get that money out of the country, and investing in foreign real estate is apparently a popular way to work around that

The final slap in the face is that the investment is guarded from rising property taxes by Prop 13.

Same thing happening in South Florida only buyers are South American oligarchs/crooks. A good fix would be to charge much higher property tax rates for non-owner occupied single family residences.

Absolutely. The same thing is happening here in Vancouver and it is eventually going to suck the life out of the city. Beautiful homes in formerly vibrant neighbourhoods are left empty...indefinitely...held as an investment by offshore owners. The governments (provincial, civil, and federal) have no intention of limiting foreign ownership so it will continue apace until nobody wants (or can afford) to live here. I rent a house that was bought in 2014 (when I moved in) for $800k and it's now worth $1.5M. Foreign investment is driving this.

Ah! I was hoping someone from Vancouver might comment, as I have heard through the grapevine that there is HUGE foreign money (mainly from China) buying up land there, and driving prices sky high. Hadn't heard much else than rumor about it though. Hopefully Vancouver will figure something out, I hear it's a very nice place to live.

>empty Chinese investment properties

It's like this all over North America. Not just the west coast.

I lived in a chinese-built condominium in Toronto a few years ago, and the rumor was that 50% or more of the building's units were owned by absentee landlords.

Which made sense, because almost the entire building was seemingly vacant.

Hardly any lights on at night. No furniture on most of the balconies. Never had to wait for an elevator (at 30+ floors, that is strange). Always ample visitor parking spots when there was only 15 of them shared between ~300 units. And I knew most of the neighbors on my floor, would see them come and go regularly, but there were always a few apartments that just never made any noise.

Why aren't more people squatting in these? My understanding is that if you can maintain "tenancy" for 30-60 days(?) you gain all sorts of rights.

Startup idea: Squattr

I suppose because there are security guards and cameras in these buildings and that nobody is able to knock on every door for months on end to determine which apartment is vacant and which one is not. Especially difficult for someone who fits the profile of needing a permanent residence.

> SF where transit is decent

Transit is abysmal in San Francisco. Muni is an utter disaster.

The fact that it exists doesn't make it "decent." Cities with decent public transportation include Berlin, Munich, Zurich, Moscow, Tokyo, Hong Kong, Taipei, Portland. Even New York is much better. SF is a far cry from any of those.

I live in Cupertino, near DeAnza college and the Garden Gate elementary school, and I see no sign of broken windows or peeling paint. The prices are crazy.

I'm not sure what developments you are referring to, but the Main Street and Hills developments are running shuttle buses to caltrain. The one by the Oaks shopping center certainly seemed ill-advised, but it got shut down by the city council.

The neighborhood around Kennedy Jr High School and Monta Vista High School. Many houses over the past decade became mini-mansions for awhile, but the recent trend seems to be ignoring basic house maintenance.

I didn't mean to imply there were lots of houses like this, but even two houses kept up poorly on a single street in this area is a relatively new thing.

Two doors from my house is a deluxe 3 unit condo building that has been uninhabited for years. Not once have I seen any evidence of anyone living there. The units went for little under $2 million apiece. It makes me wonder what will happen if/when China has a financial crisis and people start trying to liquidate their offshore piggy banks.

Exactly! If this is indeed a major factor, could we see the SF housing market nose-dive if/when the Chinese market does at the same time? Or if/when better investment vehicles become available to them domestically?

Why aren't the investment property homes being rented out? Seems like an entrepreneur could pitch a service to the overseas owners to rent out the house, do all maintenance and insurance, pay the property tax from the rental income, and get a slice of the remaining profit.

What's needed is a property management firm that caters to these people.

There's no reason for houses to sit empty. They're much more economically productive (a nice way to say "profitable") with tenants in them.

There are plenty of property management & other real estate firms in Vancouver which cater to foreign owners. But the math on renting isn't actually so straight forward.

A 10-20 year old building in Vancouver will have many units with kitchens that have literally never been used. There's wear and tear and a lot of extra work and risk that comes from renting a place. And as odd as it may sound, the resale value can take a hit when a property is "used".

Unlike San Francisco, rents in Vancouver have not gone through the roof. Recently AirBNB seems to have put some upward pressure on rents, but rents still remain fairly detached from capital costs.

Frankly, the rental income is almost a rounding error. Vancouver real estate is about capital, not cash flow. It's a place to store capital (which in and of itself is quite valuable for many foreign owners), and current supply/demand trends also lead to price appreciation.

Traditional views of real estate market fundamentals are nearly irrelevant to the observed behaviour of the Vancouver real estate market.

So, if I may summarize, you're saying that there's a lot of demand for safe-haven assets by investors whose priority is capital preservation?

I don't see the math on this working out. Have you been in a house that hasn't been occupied? Things depreciate: roofs leak, water pipes break, floors rot, bugs get in, etc.

Given a sane property rights regime (something notably absent from San Francisco), I would vastly prefer real estate I own for investment purposes to be occupied. Tenants make sure the place is at least habitable, pay rent, and you can feel good as an owner about giving someone a place to live. I get that the market may not view it that way, but I think the market is wrong, and maybe that's an opportunity in and of itself.

Honest question: do Chinese people understand capitalism? Even poor people in the US have some inkling of understanding about the stock market -- it's on TV, in the newspaper, the presidential primaries, etc. I get that the main motivation might be just getting capital out of China and into the US, but I really don't understand the investment thesis of holding empty real estate, at all.

For condo towers, things are mostly going to be OK even if no one is living in the unit. You pay your strata fees & the strata takes care of most of the things which become a problem simply due to the passage of time.

For single family detached, the value of the building is not a big deal. It's the dirt the building sits on that people are buying. Prices went up ~30% over the last year in Vancouver.

There are also buyers who think nothing of tearing down a relatively new building because it's not quite what they want.

As long as the city remains a place people wish to live, the dirt will retain value. Perhaps it goes down 50-80% - you can live on your land or you can use its cash flows to help cover your living expenses. As a safe-haven, it's not a bad option.

The price in CAD/USD/EUR/CNY/XBT is almost irrelevant to these owners.

The problematic purchasers in my view are the locals. Many are buying because the market is going up - "I'd better buy now or I'll never be able to afford it". In a falling market, that demand many not exist.

Though I also remain unconvinced that the foreign demand will remain strong in a falling market.

What's going on in Vancouver isn't sustainable in any traditional sense. But the market can also remain irrational longer than many can remain solvent.

I agree that the phenomenon of properties remaining vacant represents a failure. I'm curious what opportunities you think there are. I suspect that many of the opportunities would require regulatory changes to be viable, but I'm open to a different perspective.

Regarding Chinese people understanding capitalism, I suspect there's a very different view culturally. I'm told that the advertising for financial products is quite different - in North America we tend to expect a convervative branding. In China you'll see investments with more of a WeChat approach (including being actually promoted on WeChat). Property rights were recently codified in China - i.e. 2007 or 2008. Real estate is mostly only available as leasehold in China. There's a lot of people who recently became quite wealthy quite quickly. I think it's very likely that they have very different understandings of capitalism than North Americans, who also have a different understanding than Europeans.

This is really great discussion, thanks for that.

I'm not at all a Marxist (pretty pro-capitalism in general) but this does strike me as a case of over-financialization. Wasn't there some Marxist/socialist line of thinking that in late capitalism, so much gets accumulated that the economy shifts from one oriented around socially useful production of goods ("socially useful" is the broad sense, anything people want), to a purely financialized system driven more strongly by investment returns vs. profits from production?

I recognize there's always an element of balance between starting a company to satisfy the demand for goods vs. the demand for return, but cases like this make me think the investors are more in the driver's seat than marketers/product people thinking about what we should make.

Sort of like there's this giant mass of passive capital chasing yield and there isn't enough to go around. And I think this view is consistent with the idea that asset ownership isn't backed by a legally sound property rights regime in China. It seems a lot of this would be fixed if they could channel more accumulated domestic capital (profits) into housing, business equity formation, or even consumption.

It's funny to think that "make something people want" (YC truism) might be good investments, rather than products. But maybe true here?

I have to question the moral scruples of many of the real estate brokers who are selling these inflated properties to Chinese investors as if they are can't miss, can't fall, foolproof investments.

A real estate friend has actually refused to represent clients on the buy side for a couple of years now since he cannot in good conscience facilitate a transaction that he seems as questionable in judgment.

> I grew up in Cupertino, and when I visit my parents there, I'm rather shocked at how downhill the neighborhood has gone in parts. It's crazy that these old 70's tract homes go for 1.5 million. Even more insane is that they're bought and then left empty to go downhill. Literally broken windows and paint falling off. I never used to see that.

Do you have any idea what's behind this?

Chinese capital chasing the California real estate dream?

I'm inclined to believe many are empty investment properties. A documentary about the housing costs showed a Chinese investment tour of Cupertino for such purpose:

https://youtu.be/SBjXUBMkkE8?t=2m35s

The other issue is that the high school I went to there, Monta Vista High School, is extremely well-ranked. As such some investors buy houses, then rent them to a single custodian who boards as many students as possible so they can attend the schools. These custodians don't seem to have a high priority on keeping the house in great shape.

> As such some investors buy houses, then rent them to a single custodian who boards as many students as possible so they can attend the schools. These custodians don't seem to have a high priority on keeping the house in great shape.

This sounds like student housing in any major city.

This is also why cities have occupancy rules, codes for maintenance, etc.

Actually, I stumbled upon a Deleon (a major realtor in the South Bay) brochure yesterday, and due to the prices, they're willing to pay for a lot of complementary services to get your house sold (not surprising, since a $2 million sale will give the selling agent $60k, by the customary 3% fee, and they can make even more money if the buying agent is also employed by them). One of the services they advertise is ads on Chinese radio and newspapers.

It seems to me the real answer is to leave. This town ain't big enough for everybody. Mass transit isn't going to solve this problem.

Yup, it can just become 50% empty investment properties, and folks can scrounge for what's left. Some solution is going to be needed to prevent that situation, though maybe with all those empty houses, there'll be less people to make traffic so bad.

Just tax unused properties at a higher rate. Speculative investment wouldn't be as bad if they were rented.

A Texas-sized property tax rate would do the trick

Or, a proper Land Value Tax[1]

[1]http://www.economist.com/blogs/economist-explains/2014/11/ec...

If lots of people leave, investing in property won't be as attractive, and folks will have more to scrounge among.

But then, this is SF's usual cycle.

> Literally broken windows

This would be a code violation. Neighbors would in theory be reporting it.

They can report it all they like. The city (or HOA) will send a letter to the homeowner demanding that they fix it. If the don't fix it in a few years then they'll send a second letter or may go as far as to take a lien out on the property. What doesn't happen is that the window gets fixed.

No, it's not "a few years". Cities act very quickly on this since broken windows make the dwelling open to all sorts of problems like animals coming in, people coming in (trespass, drug den, etc).

It was 3 years in my case, and they were only fixed because the house was finally foreclosed and sold to someone else. Critters had definitely moved in, and there was lots of water damage too. It was a real problem for me because it was a townhouse attached to mine. That was the last time I ever owned an attached dwelling.

Painful to read. Sorry that happened to you.

> Until the South Bay gets serious about mass transit, merely adding more housing is only going to make the traffic pain worse.

This seems very chicken-and-egg. SF has a million dollars in its annual budget tied up in maintaining the status quo for homelessness -- if those people had homes, that money could get redirected into mass transit.

> SF has a million dollars in its annual budget...

A million? If only. Try $241M

http://www.sfchronicle.com/bayarea/article/S-F-spends-record...

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