“Luxury” construction causes high rents like umbrellas cause rain
noahpinion.substack.com
noahpinion.substack.com
The comparison to umbrellas and rain - two variables with obviously no causal dependency - feels like a big stretch no matter what side of this argument you fall on.
There are far less total tenants now. Rooms are twice as big, in some cases apartments are twice as big, halving the number of units. These people probably would have stayed outside of the downtown if large units weren't created.
Except that it doesn't because of the nature of the financing agreements on these kinds of apartment complexes.
"Missing rent" can be tacked onto the end of the financial agreement. "Lower rent" requires you to recapitalize your financing--which is absolutely NEVER going to happen with the interest rates having gone up.
Therefore, apartments will sit empty for years rather than allow rent to go down. That benefits nobody.
Lots of various places would need to implement a "lack of occupancy tax" in order to force the rents to come down.
Per the article:
> The alternative to induced demand is called “filtering” — or as I like to call it, the “yuppie fishtank theory”.[1] Basically, this says that when you build a big glass tower full of nice new apartments, it draws high-earning people away from working-class neigborhoods. Yuppies would probably rather go live in a nice new tower with other yuppies than go around bidding up the price of 40-year-old apartments in working-class neighborhoods. So if you build those “luxury” apartments, they’ll draw the yuppies away and stop them from pricing out the working class.
The article [1] in question:
> In 2018, I wrote a post[2] about why building market-rate housing in gentrifying cities helps relieve rent pressure on long-time working-class residents. I dubbed this kind of housing “yuppie fishtanks”, and I tried to explain why they help without resorting to the theory of supply and demand. Later, someone made a TikTok video about the concept. Anyway, with people moving back to the big cities after Covid, and housing construction still lagging, I thought it would be a good time to re-up my original post.
* https://noahpinion.substack.com/p/yuppie-fishtanks-yimbyism-...
* [2] http://noahpinionblog.blogspot.com/2018/07/yimbyism-explaine...
Going back to this article, increasing housing stock in general is generally good:
> What you should notice here is that Gopal and Clark only briefly mention the “growing body of research” that supports the filtering effect, choosing only to specifically name the 2019 paper by Asquith et al. They do not mention Li (2019), who finds that “for every 10% increase in the housing stock, rents decrease 1% and sales prices also decrease within 500 feet.”
Especially around housing, there seems to be a thousand models that don't work to solve the housing crisis, while there's only one that's been proven again and again to work: build more.
If you meet their demand with new housing, the demand and price pressure on existing housing inventory will decrease, even if you don’t build any new “affordable” housing.
How are those the two options?
Aren't you forgetting about new construction in established neighbourhoods? I.e. buying up two or three low-density lots, or a older/decrepit low-land-value condo building, to replace these lot(s) with a modern, high-density mixed-use condo building, composed mostly of high-sqft condos that cost more than most SFHs?
There are more units on the new lot than there were on the old lot(s), so the people buying these units are definitely "moving into new construction"; but at the same time, the creation of these units displaced previous low-cost rentals.
This is 99% of what people in my city (Vancouver) are complaining about when they talk about gentrification through "luxury construction": being priced out of a neighbourhood they previously rented in, as buildings containing low-price rental units are torn down and replaced by buildings containing only high-price rental units.
You could evict a bunch of people from existing houses and then re-sell those within the constraints of affordable housing parameters, but I doubt that is a feasible method of significantly scaled up expansion the pool of available affordable housing.
Gradually? That's roughly what's happening in Denver right now - nobody's been building anything but luxury castles for years, but we saw our average rent drop last quarter for the first time since the recession.
Reason? There were 11,000 more units available than there were this time last year and there are 40k more on the way, so apartment managers are having to think about vacancy rates instead of myopically focusing on profit per unit for the first time since... probably the recession again.
https://www.denverpost.com/2023/01/25/apartments-metro-denve...
You are correct, that it would be possible to build new luxury housing and then lower the cost of old luxury housing until it becomes affordable. However, that seems unlikely to actually happen since the owners of the old luxury housing are likely to resist losing money. In some cases, luxury housing may have features (size, density, amenities, etc.) that make is economically unviable to price it as affordable housing.
Reality is that it's too expensive to stay a "luxury" housing, all the labor costs and major renovations just don't make sense from a financial perspective.
The fundamental issue that people miss is that the cost of building a "luxury" housing and "affordable" is not that different. Throwing quartz countertops and a tiny gym with outdated cheap equipment for a few extra k is nothing when the place costs 500k+. Sizes are also not relevant, since newer apartments are smaller than older ones. We can't just build an old affordable house, that's it. We need to start building as much as we can and impact the demand by evaluating the impact of new businesses coming to the area.
See Oakland.
Let's refine this statement, there's plenty of land and housing, but not enough near the jobs or attractions that middle and upper class desire or that the lower class can afford, who provide support for the middle and upper class.
The good news is there is basically no place in North America where there is a finite construction infrastructure or land causing housing shortages, except for maybe very low population remote areas and maybe Manhattan. The vast majority of shortage is driven by bad government zoning and approvals policy (looking especially hard at you San Francisco). If you fix the policy in a way that developers will be reasonably sure it won't revert back and be used to punish them for what they did under new policy, your shortage problem would sort itself out in a decade or two as the massive building boom led to a glut and lower prices.
When there is an expectation that zoning laws will be changed to allow higher density, or when there's an expectation that there will be a growing market for high-end real estate, the ask price from land owners usually rises.
The markets are not 100% efficient in the real world, outside of the simplest economic models.
Somehow we have to complicate it or abstract it to make it an issue it isn’t.
Comparables and greedy corporations inflate the inventory of expensive housing while affordable housing shrinks to nothing.
> Now, if you cornered Gopal and Clark — or the “small group of academics” they cite — you could probably get them to admit that if we built 10 market-rate (“luxury”) apartments for every resident of Austin, most of them wouldn’t get filled, and landlords would be forced to slash prices, and regular folks would have cheap apartments to live in. An apartment’s price is not built into its walls and floors; “luxury” is just a marketing buzzword, and most of the apartments that are affordable today went for market rate when they were built.
More housing in general is generally good:
> What you should notice here is that Gopal and Clark only briefly mention the “growing body of research” that supports the filtering effect, choosing only to specifically name the 2019 paper by Asquith et al. They do not mention Li (2019), who finds that “for every 10% increase in the housing stock, rents decrease 1% and sales prices also decrease within 500 feet.”
Want rents to decrease? Have vacancy rate of 10%. Renters can jump ship at any point and have an option available, which will incentivize landlords to not be assholes.
If vacancy rates are ~0%, then landlords can do whatever they want, and renters have to to take it.