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Comment by scotty79 | Hacker News Reader

The cause of the problem is that real estate is a good investment asset.

The way to solve the problem is making it a bad investment asset.

The best way to do it is to tax real estate progressively. The more you own, the higher percentage of its value you must pay every year.

That taxation scheme would make investors drop millions of houses on the market like a hot potato.

Prices would tank. This might cause issues with real estate as mortgage collateral. So that needs to be reformed first. Bank would need to be forced by law to accept swapping collateral for another of the same value. Regardless of the current price of the collateral and its replacement. They should also be forced to consider mortgage fully paid once they decide to end the loan and take posession of the collateral.

Also no bailouts. Banks are companies. Superpower of companies is that they can die. Let them.

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that's the effect, the cause is that supply did not keep up, and that's caused by all kinds of restrictions and disincentives against high-density and corresponding cities (this stretched out populations, increased overall costs)

just as white flight completely turned cities inside out (negating a lot of their economic benefits) the resistance to even gradual "citification" of SFH suburbs further pushed costs up

It's impossible for the supply to keep up for the demand for investment vessel. China has already built 3 times the number of the apartments that are needed to house the entire population and the demand still outpaces the supply.

nah, Chinese real estate bubble bursted, because demand collapsed (despite the prices kept low due to municipalities financing a large part of their budget through land sales, and banks were incentivized to issue a lot of mortgages, and that's how Credit Suisse run into a wall)

I'm not sure how the latest data looks but crash is a strong word.

https://www.business2community.com/wp-content/uploads/2023/1...

It seem like it barely stopped (paused?) growing. Which is reasonable given more widespread awareness that what's being built is of lower and lower quality. Which is also natural given that supply is provided to satisfy investors not honest residential demand.

The tax change would have to be made gradually to avoid a shock to the system, and it could exclude primary residences so that middle-class homeowners aren't punished. Just incentivizing the wealthy to offload their pied-à-terres would free up plenty of housing stock.

The progression can start at zero. Even if you own up to 3 residential properties it still could be zero.

What it must do is incentivise largest owners who hold the most properties to sell them.

A land value tax would be a more efficient way to fairly distribute the benefits of land.

Sure, but progressive land tax to discourage large ownership.

But rents are also high. High rents aren't caused by investors. Rents are caused by too many people wanting to live somewhere versus a small number of dwellings. It's the pigeon hole principle, which you can't solve by reducing investors.

Also, let's think about unintended consequences. A lot of housing starts happen only because of investor capital. Given the existence of a rental crisis, if you inadvertently reduce housing starts, it might backfire and put upwards pressure on rents.

But yes, you are right that prices would go down with your proposal, all else equal. But it is not a full solution until you also have a way to increase the number of dwellings to solve the rental crisis.

Of course high rents are caused by the investors. After all, rents are huge part of the return on their investment and also huge factor in determining the asset price.

Solution to rental crisis is the reduction of what percentage of people rent vs buy. With a flood of cheap properties on the market more people would consider buying. Also they'd need smaller mortgages so they could be easier to acquire.

> After all, rents are huge part of the return on their investment and also huge factor in determining the asset price.

Yes, rents are part of their ROI. That does not mean asset prices cause rents. Rents cause asset prices by impacting investment demand. Rents provide a soft bound on asset prices because investors demand a certain ROI, else they will allocate capital in other markets. We're getting the direction of causality mixed up.

> Solution to rental crisis is the reduction of what percentage of people rent vs buy.

No. If we have N renters competing for 0.8*N rental properties near their workplace, and we convert half of them into buyers, you're left with 0.5*N renters competing for 0.3*N properties. If anything you have made the problem worse for renters (although you have improved the situation for buyers).

Higher rents inflate asset prices, but higher asset prices also inflate rents because buying becomes too expensive and rents can safely grow because people who can't buy must rent.

Direction of causality goes both ways. It's positive feedback loop that's barely contrained by any reality. That's why it seems to run away towards infinity despite only small changes in supply and demand.

There's no good solution to your example because there's simply too few properties. Some people will become homeless. The same number in each scenario. It hard to tell how much total rent will be transferred in each scenario because competition for rentals is harder in second one but 0.5N properties have zero rent.

This economic reasoning doesn't make sense to me. If a buyer can't buy because an investor priced them out, they'll become a renter (+1 demand), and that property will become a rental property (+1 supply). These things cancel out. You still haven't explained the imbalance (lack of rental properties versus number of renters) that causes rents to go up.

However, the other poster brought up vacancies, which is a good point. That does give a plausible way that investors can cause rents to go up. But rents are going up even in places where vacancy rates are decreasing, so it's not the full picture.

If you proposed a large vacancy tax as a way to remove this contribution to increasing rents, I'd support that. But the other stuff should not contribute to reducing rents, and it won't be close to a complete solution. Rents should remain high until you build. FWIW, I actually do support all your other proposals too, because reducing prices is good, I just don't think it will solve the rental crisis.

There's inefficiency when property becomes a rental. As you noticed vacancy is one factor. There's also the rent itself that's aimed at extracting value from the person that needs a limited resource more than the investor.

Vacancy tax would be great but it's way harder to track vacancy than ownership. And it wouldn't help with the rent. Money would still flow through this channel from people who get their income mainly from work to those who get their income mainly from capital. And there are so many channels through which this process happens that if we could limit this one a bit it would be something.

Hoarding limited resorce that everybody needs is one of the societally worst things somebody can do with money. We'd be better off if that money was redirected to literally almost anything else.

High rents are being caused by investors, which is why plenty of stock is sitting vacant. When the developer or PE purchaser financed the building they did so based on an estimate of what the building can generate in revenue. If average rent drops to 70% of what the estimate had, then the loan goes completely underwater. However, if the landlord simply refuses to rent those units at the market rate, they can pretend that the forecast value is still legit since they don't have a market signal indicating otherwise. When the loan comes due, they can maintain this fiction and roll over to another loan. Thus rent stays high despite market forces - the landlord can't afford to rent it at the actual market price or they won't be able to roll the loan over when it pops and they are forced to bankruptcy.

We have to unwind the low-interest financial ponzi schemes the Fed has propped up since 2007, otherwise there is a huge incentive not to fix the problem. Maintaining high interest for another 4 years will probably be enough to force the issue, since most commercial RE loans are pretty short.

> High rents are being caused by investors, which is why plenty of stock is sitting vacant.

Vacancies are a contributing factor, but why think it's the primary one, compared to a lack of housing? Rents are going up everywhere in the West, even in places where vacancy rates are decreasing such as Ireland. How can vacancy rates decrease while rents skyrocket?

How should I know, provide some data to support that claim. Could be more people are cohabitating to meet the higher rents. Roommates are still better than homelessness, after all. There is a ton of evidence for financial shenanigans and only modest evidence of actual shortage. As with most things these days, its a problem is distribution and ownership model, not supply.

Net migration in Ireland is 2x the number of new dwellings. Similar thing going on in Canada, Australia and UK. Even if I believed you that there wasn't a shortage 3 years ago, there has to be a shortage now by the most elementary logic (pigeon hole principle).

This combines with the trend towards increased urbanization, creating a relative shortage near major cities where the jobs are located, which, no coincidence, is also where there's the rental crisis.

But you then point to vacancies as the explanation. Yet vacancy rate changes are inversely correlated to rent changes in some places. This proves that vacancies do not explain the increase in rents we've observed. What other reason can you offer to justify the connection between investors and rent, other than the vague "financial shenanigans"?

> Even if I believed you that there wasn't a shortage 3 years ago, there has to be a shortage now by the most elementary logic

Or you could provide data. I don't live in Ireland, did they have a surplus before?

> So you have not offered any explanation.

I explained exactly how the scheme works, as well as providing the possible explanation of higher cohabitation rates. That's certainly what is happening in Southern California where I am actually familiar with the market. Based on a cursory Google search, it looks like Ireland is having some of the same...

https://dublininquirer.com/2022/11/02/increase-in-landlords-...

> But it had “further potential to secure full market rent levels” subject to tapping into an exemption from the rules around rent increases, with one of the options being “through vacancies”, the advert said. If a property has been vacant for two years – or a year for a protected structure – then a landlord within a rent pressure zone can legally raise the rent by more than the rent-increase cap.

I'm not going to spend any more time on this. The evidence is pretty clear that landlords are playing games to drive up the rental market. There is no question that shifting demand patterns and decades of failure to deliver new housing are part of the equation as well, but those issues are solvable. The intractible problem of a landlord class are much more threatening and difficult to solve.

> Or you could provide data. I don't live in Ireland, did they have a surplus before?

Net migration has tracked higher than new dwellings for a number of years in all of these countries. See Canada for example where this has been a trend since 2016.

Net migration (excludes 2023 which was almost 500k): https://data.worldbank.org/indicator/SM.POP.NETM?locations=C...

New housing: https://tradingeconomics.com/canada/housing-starts

> The evidence is pretty clear that landlords are playing games to drive up the rental market.

This explanation makes no sense, it doesn't generalize outside of Ireland. You're talking about vacancies that are caused by a price ceiling on rent (which is a terrible regulation that always backfires) which doesn't exist in most other locations that are experiencing a rent crisis.

I chose an example of landlords playing games in Ireland. The only generalizable fact across the western world is low interest rates from 2007-2022 and the landlord class continuing to jack up rents every time they got more access to cheap money. That's the problem.

I think you misunderstand elementary economics here. The rental market is not a monopoly or oligopoly. Landlords can not exercise market power. It is a competitive market given the number of independent landlords and given their inability to coordinate in order to effect collusion.

> the landlord class continuing to jack up rents every time they got more access to cheap money

That's not true. As a case study, in Australia during the negative net migration during Covid, rents actually decreased. Rents only increased when net migration levels surged post-2022 to 2.5x the level of annual housing starts. Credit in Australia is actually more expensive now than back when rents were low in the 2010s. https://tradingeconomics.com/australia/rent-inflation

Also, cheap credit does have one deflationary impact on rents, which is that it leads to more housing starts which addresses the shortage issue. If credit was expensive you'd have less housing, exacerbating the main cause of rent increases.

Thank you econ 101 student, but I understand it fine.

> It is a competitive market given the number of independent landlords and given their inability to coordinate in order to effect collusion.

Oops, they did collude. https://www.ftc.gov/business-guidance/blog/2024/03/price-fix...

> rents actually decreased.

This link says rent inflation decreased, which just means inflation was lower. This is also just a graph and some numbers, so I'm not really sure why you linked it. It doesn't explain anything by itself.

> which is that it leads to more housing starts which addresses the shortage issue

We had 15 years of the cheapest money in the history of modern economics, why do we still have a shortage?

Negative rent inflation in 2020 means rents decreased in 2020.

I explained already why it's relevant. Rents went down when credit was the cheapest (refuting your hypothesis) and when net migration was the lowest (confirming my hypothesis that it's shortage related).

Then rents skyrocketed post-2022 when credit was expensive (refuting your hypothesis, again) and when net migration was at an all time high relative to housing starts (confirming my hypothesis, again).

You have no data that backs your hypothesis and you remain obstinate in the face of data that refutes it.

  "We had 15 years of the cheapest money in the history of modern economics, why do we still have a shortage?"

Zoning regulations that prevent housing near cities. We also didn't have as bad of a shortage 4 years ago, the rental crisis got a lot worse post-2022 everywhere in the West as the net migration backlog from covid was processed and housing starts failed to keep up.

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