Holy shit, supply and demand is still a thing!
Last year I was in Seattle and all I heard was complaints about all of the highrises going up as if that was what was causing the high rents. headdesk
Last year I was in Seattle and all I heard was complaints about all of the highrises going up as if that was what was causing the high rents. headdesk
Rich people moving in to a working class neighborhood makes the neighborhood more attractive to other rich people, both directly and by bringing in rich people amenities. So building high end housing can ultimately cause more demand and higher bids for the existing housing in the neighborhood.
This is a good start, but I hope they don't stop building and complete all the existing projects. The prices are still high. ST3 will help make it easier to live where you want, with a lower income, and still be able to commute reasonably, by train, to work.
I do agree that it's complicated, though!
As someone who lives in New York, I can attest that affluent people will just rent the apartments that already exist in the neighborhood and drive the prices up for everyone. The difference is that the shitty tenement one bedroom gets bumped to 3k/month because the affluent will displace the current occupants.
If you build luxury buildings, the affluent will move into those. Sure, that will have a second order effect on the desirability of the neighborhood (which is what I believe you are arguing), but I am of the belief that that is a separate issue. Gentrification is its own bag of worms.
A while back someone said "Luxury Housing is future middle class housing" and that rings pretty true. The economic incentives are to build nice properties and over time those properties get old. A good percentage of them get divided up into smaller places or simply rented for less as new inventory comes on line.
The history of US housing is (with a few exceptions, notably the post WWII housing boom) a story of people building premium housing that, as it ages, becomes affordable housing. Thing how many big old houses end up converted into duplexes or townhouses.
But lately we've 1) used zoning to stop the conversion of premium housing into cheaper housing and 2) used zoning and planning permission to stop the construction of premium housing and then wondered why we don't have enough affordable housing. What a mystery!
> It is complicated, though.
It's a complex system with many different forces in play, yeah, but it's not that complicated. If you build more housing, the price of housing drops. Building expensive apartments in a neighbourhood doesn't magically create affordable apartments in the same neighbourhood, but it certainly doesn't hurt.
The exception would be if, somehow, building 100 units of housing somehow attracts more than 100 families into the city from outside the area, which...I dunno, it could happen, but is it? Has it ever? It sounds unlikely at first glance.
The problem in some cities (London) is that this does happen at some level: 100 units of housing attract enough investors to start a speculative price rise, as they buy multiple units each. Maybe 50 of those units will stay empty forever, but average prices in the area will have been pushed up for good, compounding the problem.
In no place in the US is this true. Even in San Francisco 100 units of new housing get occupied in excess of 80% by households already in SF.
Induced housing demand is common in the majority of cities across the US. The act of creating urban housing makes an area in higher demand than the housing just built could actually supply. The action of creating 100 units of supply simultaneously generates ~120+ units of demand.
Most people refer to this as "gentrification", even if that label isn't totally accurate. It obviously doesn't last forever, you can't generate more demand indefinitely. But it absolutely does happen -- we see the results all the time.
And to be clear that's not an argument against new housing -- we obviously need to build more housing. But it's a common observation that new 'market-rate' urban housing does not lower prices, but raises them in short and medium length timeframes (yes even in non-coastal cities, yes even in small towns, etc).
We see this in Seattle too. Seattle rents are 4.5% higher than last year, or 50% higher than they were 5 years ago, according to the articles own data. They'll be even higher next year, and Seattle Times will write an article about the winter slowdown in leasing, and rents will rise even higher again a year later. Until the bubble pops, the cycle will continue.
The last study I saw on the subject in San Francisco showed that for 100 units of newly constructed supply, about 85 would be consumed by extant demand, roughly 15 would be consumed by new migrants, and less than 10 new units of demand that would not have existed otherwise gets generated. This is admittedly not obvious, and generally looks like purely generated demand when viewed at a very coarse level.
Incidentally, induced demand is an idea I often see advanced as an argument against constructing housing.
> The number of recorded empty homes in London is far below its long-term average, at 1.7% of total stock.
From the same report:
> In the last two decades the number of jobs in London has grown by 40% and the number of people by 25%, but the number of homes by only 15%
So if the number of people is increasing faster than the number of houses, and the percentage of empty houses is falling, then offhand I'd say your numbers are a bit exagerrated. Yes, certainly some people buy property as an investment and leave it empty, but even in London, it's not that many. And as for this:
> average prices in the area will have been pushed up for good, compounding the problem.
Asset price bubbles are a thing, but so far, everyone who's ever believed that prices were going to stay high forever has been burned, badly. What will keep London house prices high is that they're not building very many. If that changes, prices will fall. (And fall all the quicker when the people buying Mayfair properties as an investment decide to liquidate them before the price falls any further. As, again, is the way of asset bubbles.)
[1]: https://files.datapress.com/london/dataset/housing-london/20...
Anybody who doesn't think this is a problem just needs to take a look at one Hyde park. Nearly empty. Prime location. You could demolish that and build high rise flats for a thousand people there, maybe more. The problem isn't just how many prime location empty apartments there are but how big they are too.
That sounds like a big argument in favour of "building more units will fix the problem" then. :)
> Anybody who doesn't think this is a problem just needs to take a look at one Hyde park.
I'm going to stick with data over anecdotes. If the data we have is flawed, then we need better data in order to make decisions; it doesn't mean we should just ignore data.
It's an argument in favour of building units people will live in (e.g. council housing) and against big units that consume large amounts of land that people won't live in (e.g. yet another block of luxury flats treated as gold-bar-like stores of wealth).
The amount of property tax paid on those apartments is pitiful and amounts to a market distortion. It needs to be raised about 100x before the owners will be incentivized to yield hoarded land to more productive use.
>I'm going to stick with data over anecdotes.
So you think if the data is simply based upon asking people if they live in their properties that it is to be believed?
Raising property taxes would definitely solve the problems but the political forces arrayed against that are very powerful.
So, yeah, "easy" to solve if the market is structured right. It often isn't.
Granted, increasing property taxes would put pressure to rent out empty property. However, the occupancy rate is also very high so it's not currently a meaningful issue.
Property taxes are part of the problem in many cases. When property taxes are low that doesn't really happen, but when they're high nobody wants to build new housing. Because the net present value of the future property tax comes out of what someone will pay for a new building, making it less profitable to construct one.
You should probably provide a source on that one. Rents are sticky. Its equally likely they are already wealthy and want to move to a "hip" neighborhood which tend to be recently poor/urban. Rents don't fall as quick in the place they left but rise quickly in the place they're headed, which just raises the average rent in both places.
It also creates demand for people who wanted to live in the former neighborhood and can now move there because there is a vacancy (or after any slight reduction in rent brings otherwise marginal renters).
This is all just conjecture without data, and there is very little data studying this because, as the previous poster says, its complicated and there's no way to do a controlled experiment.
If these people truly valued the "character" of their city then they wouldn't try to make it more attractive to other people. They want those new people and they want them to buy their overpriced property.
Is it a slower, more secondary effect where over a period of time more rich people move in and somehow raise demand which leads to overbidding by a second wave of newcomers?
Maybe I'm presuming too much, but I don't understand why rich people would be willing to overpay for "low quality" housing in the working class area? Are they actually paying market rent, but what's happened is that all of the current residents are somehow paying below-market rent?
https://www.wsj.com/articles/u-s-cities-see-apartment-rents-...
http://www.businessinsider.com/rents-are-plunging-in-the-mos...
https://www.cnbc.com/2016/12/03/rent-prices-show-signs-of-ca...
But yeah, I haven't done the digging to attempt to quantify that effect.
My second point remains, however. Building more housing does not inflate prices. (and yes, I know it's not quite as simple as econ 101 supply and demand, but)
That's the thing, though, I kinda don't believe it. I mean, sure, people from China buying US real estate; I can totally believe that one (and that would increase demand and thus put upwards pressure on sale prices)
The part I have a hard time swallowing is the idea that they'd let them sit empty. The real estate agent they bought from would be super happy to hook them up with a full service property mangement company that could deal with renting the things out; I'm sure said agent could (for a hefty cut, of course) set it up so the owner need not be bothered at all.
I mean... I guess there could be something I'm missing, but the idea of people buying up some of the most valuable realestate in the world and then letting it sit empty (and supposedly paying somene to come by and check on it, etc...) just seems really unlikely vs. buying and renting it out.
To rent out your Ferrari you'd have to run an agency and couldn't use it as you wanted to. Which kind of defeats the purpose of a luxury good.
(It's hard to find data on how prevalent this is... From one article, it looks like a Palo Alto realtor estimated in 2015 that about 20% of home sales were to Chinese investors, with about half of these leaving the house unoccupied: http://sanfrancisco.cbslocal.com/2015/04/28/realtors-printin... )
Apparently they'd keep enough of these units off that they could keep the 1 bedroom price around $2k, but not too many so the city wouldn't catch on.
I couldn't find anything else though, either in the news or other people in knew in real estate, to corroborate that; so maybe he was blowing smoke or taking tokes.
Well, no. People are complaining about the change in their neighborhoods, of which high rents and new construction are both observable qualities.
But not to worry...if rents are truly declining, the new construction will rather quickly stop. Real estate investors are smart enough not to build into falling markets for long. They will leave holes in the ground before they complete a project that won't pencil out on financing -- just as they did in Seattle and San Francisco during the last bust.
(Edit: you guys...really. The article itself says that construction has already slowed down:
"Developers and banks that lend money for new construction have taken notice of the market cooling. While tons of new buildings are already approved or under construction now, the pipeline for future projects that exist only on paper is shrinking."
If rents decline from new construction, it happens over years of economic shifts, not because developers rush headlong over the cliff like a bunch of lemmings.)
I don't think anyone who understands supply and demand thinks that new construction won't slow - it's pretty self evident that if demand slows that people will stop adding supply. If anything, I think folks are objecting to the tone of your post that makes it sound like declining rents will leave a wake of "holes in the ground" instead of a normal and healthy adjustment.
I didn't post "evidence" (scare quotes yours). The quote is right there, in the article. It's something that's actually happening, and I quoted it because of the irony.
Likewise, I lived in SF during the last crash. I saw the holes in the ground, with my own eyes -- developers pulled construction equipment out of foundations, and left them there, at mid-Market, in downtown San Francisco. I lived near two of them.
Nothing I'm saying here is even remotely theoretical. The real issue is that there's a certain popular narrative here, and any facts that disagree with that narrative are immediately ejected from the conversation. It isn't "haughty disdain" to observe that people are rejecting facts that don't fit their biases.
Also note, 2008 was unusually dramatic; one of the big projects in downtown sunnyvale went bankrupt and changed hands several times before completion. Yes, declining home prices do sometimes leave long term holes in the ground, but mostly only when prices decline a lot more quickly than expected, as they did in 2008.
I was here in 2001, too, though (or a little up the peninsula) and there was a bigger drop in rent (though not sale prices) then than in 2008. In 2001, sure, you saw 'for rent' signs, but as far as I remember, the 'holes in the ground' as you put it, of buildings who's builders had gone bankrupt partway through were rare.
I grant you that 2008 was exceptional, as recessions go...but it's not rare to see projects abandoned. I saw it in Seattle in 2001 as well. It just depends on the state of the projects when the recession hits -- you might not get "holes in the ground" unless the decline hits quite suddenly (as in 2008), but you definitely see projects abandoned. That's universal.