Something in this is contradictory and just hoping for a clarification - over investment in real estate should drop costs. I assume you mean under investment leading to prices requiring an overly burdensome amount of personal investment in housing?
In my town there is a constant raising of rent. People moving away, tons of new overpriced apartments largely vacant. Huge number of short term rentals. Affordable houses are torn down to make condos which are owned by people who don't live there (vacant most of the year, held as investment).
So many vacant commercial units with prices that don't match what businesses can afford to pay...but it drives up the rest of the rental prices to people going "site unseen". If you were not from here you would assume there is a huge demand for those buildings at that rate...this is not true.
These investors are not planning on using these units to help the housing crisis...and they have the ability to "stay irrational longer than renters can stay solvent". Overall this will come back to bite them...but in the short term they can reap the rewards.
Some commercial loans allow "interest only payments" if the unit is vacant. This allows investors to buy several locations...keep half vacant at higher prices and drive up the rents in the area. Through collusion and catering to out of area investors (who don't know better) they can hold the properties for a few years and double their money without every renting the building or paying on the principal of their loan.
This is what I mean by "overinvestment". Locally...why would you invest in a company (US or not) when you can just call dibs on essential services and rake in cash.
My county last I checked was over 35% retired. Most of those who I speak with moved here from out of state and bought multiple houses with the goal of renting them out to pay for their retirement...but when COGS go up that means rent needs to also to support the lifestyle they are accustomed to. Renters are expected to "quit buying coffees" so they can pay the rent...but nobody seems to ask the real estate investor to take personal responsibility for their part in the problem.
I know people say more investment in real estate drives prices down...but that is not the case. Nobody here is building housing to make it cheaper...they are building it because they heard they can get more money than last year. "If they build a new building it should be worth more than an old one right?" So prices keep climbing. Average renter here makes $30-40k (last I checked) but to live in a way that allows you to save you need to make $70k/year.
There is no housing shortage (in my area). There is an "affordable housing" shortage...and that will not be solved by building more unless there are major changes made to the way commercial loans (or personal ethics) are handled.
The only hope is people learn to practice ethical capitalism.
A) pensions don’t exist so people need cashflow to retire. You either save enough capital that you can build an annuity for yourself or you have cash flow investments and the lowest effort one is rental properties.
B) taxes for capital gains on a home that’s appreciated enough incentive rolling your home into a rental then rolling it into more rentals as it appreciates further afield into lower cost areas. The basis isn’t taxable as long as you roll it to another investment, and as prices go up, you are incentivized to move it into more properties to diversify at lower rents but more units. As that effect continues as people retire the cost of rentals further from the city core keeps rising. An easy fix would be to raise the capital gains deduction for a primary residence to incentive retirees to outright sell and take the annuity option, which is actually easier overall but the capital gains tax makes it unattractive today.
C) Obviously the financing your described, but compounded by private equity and hedge fund dominance in the unit and development rental market skewing towards higher margin lower occupancy developments. The marginal cost of a mass produced “luxury” rental allows for a lot of vacancy, compounded by the IO and other benefits to reduce vacancy load costs. There are also tax benefits to vacancy that improve as your portfolio gets larger. I think this is more than the retiree effect honestly, I think funds dominate large developments now and increasingly unit level portfolios.
D) The rezoning effect is IMO making it worse because it’s making the optionality of low density developments greater allowing for land value appreciation that wouldn’t happen otherwise because of (C). It’s taking a property with lower utility and making it more valuable for a larger development, but there’s no incentive to make the development more affordable per unit. Instead it increases the price per square foot of property value, increasing costs for everyone, while marginally increasing units but they’re constructed and priced to keep price per square foot of livable areas equal or increasing.
I think (A) can’t improve without a real social security system that replaces pensions. (B) can’t improve without tax reform realizing the nominal cutoffs don’t account for inflation and aren’t “rich” taxes any more but retiree taxes. (C) is probably intractable without socialist regulations which are perceived as unfair, and are hard to craft in a way that is not in fact unfair or have unintended consequences (D) is hard because it’s actually a demonstration of the unintended consequences of regulation and ethical capitalism - but the effect is paradoxical.
These are all structurally hard problems and they aren’t made better by the rate of global population growth. There are way more people today than there were before, and economic activity is much denser than before. The urban areas are crushed, and the rural areas empty except for a hoary crust of MAGA with disproportionate state and federal power. It is frustrating all over - and I don’t see an end state that is very positive.
> A) pensions don’t exist so people need cashflow to retire. You either save enough capital that you can build an annuity for yourself or you have cash flow investments and the lowest effort one is rental properties.
"pensions don’t exist": This is certainly untrue, especially for retired people today. Private pensions only started to disappear enmass in the late 1990s. Public pension certainly exists. It is called Social Security, and it pays about 25K USD (on average) per year, per retired person.
"so people need cashflow to retire": Sure, they can do that with a 401k that holds bonds. For those unaware, 401k plans really took off in the 1980s. Retired people today most likely have one, plus their 401k was growing during an incredible time. From 1985 to 2015, the S&P 500 grew 12+% per year. That is crazy compounded results!
"you have cash flow investments and the lowest effort one is rental properties": I don't know where this myth started of "rental properties are low effort", but it needs to die. It is much more work that managing a 401k. Also, the ROI for rental properties is rarely more than 5%. Frequently, lower. So, the 401k looks much better and more consistent. Sometimes rental properties are vacant for months at a time. Then you have negative yield/carry because you still have expenses.
Most people having had a rental at some point understand the concepts a lot better than bond trading and investing writ large. They also can’t convert their basis in their home appreciation into their 401k, and my point was on basis rolling of property capital gains and how to convert your family home appreciation into a tax deferred vehicle with cashflow.
Personally, I agree with you; I would do a self managed annuity structure and hire an advisor for my later life when I may not be able to manage it. However, I’m just explaining the typical thinking. And the capital appreciation basis roll is a real problem for retirees whose home appreciated over their lives.
I think you misunderstand what happened in the 80’s - pensions were raided and they were stolen. In the 90’s the defense was to not offer them any more. There do exist some pensions, mostly governmental, and some rare corporate pensions that escaped raiding, but the survival of private pensions wasn’t great even for those that had them. Social security is below poverty rates, and is not a retirement plan but supplemental. It was designed with the private pension system existing in mind. I’m fine with expanding social security by lifting income caps and other fixes, including a sovereign wealth fund. The status quo isn’t tenable.
> Bond yields aren’t comparable to property cash flow; especially leveraged property.
> I think you misunderstand what happened in the 80’s - pensions were raided and they were stolen.
The 401k with company matching has largely replaced (or: overtaken) the private pension in the United States. The primary problem with putting so much pressure on the 401k system: There are lots of people who don't have/use professional advice how to manage their savings. My mother was well-educated (master's degree) and was a public school teacher for 35+ years. She was not well-equipped to manage her 401k. She only understood the basics. Think about that: She has two university degrees. Think of all the people who have much less and are required to manage their primary source of retirement income. It is a flawed system.
Personally, I much prefer the Dutch or Japanese "Three Pillar" system: (1) National minimum pension (like US Social Security), (2) private pension provided by workplace (professionally managed), (3) personal pension(s) (similar to 401k). In combination, the trio provides the greatest chance for people to avoid poverty during retirement.
That still leaves a lot of people with a terrible retirement plan though. SS is something, but that is about all you can say about it.
I’d also note you have to be at a company that even offers a 401k. Only 45% of Americans have access to a 401k, or have their own IRA. This isn’t a safety net - I’d like to see you do a high wire with only 45% of the area of your walk covered with a net, and of that the median segment doesn’t have the strength to hold your weight. It’s a political gambit to fool people into voting against their best interests.
Where I live used to be the rural area that people made fun of you for being from (Idaho). Also, my county is 70%+ MAGA voters. So I understand your point about disproportionate amount of power...that is another topic entirely (as is the Redoubt movement and other things attempting to profit off the imbalance).
This is happening everywhere around me. Montana is just as bad. Locals have nowhere to go and cannot afford to stay.
I don't have a solution...just pointing out my observations of the issues I have encountered personally.
This central planner grand vision bullshit we embarked on over the second half of the 20th century was a mistake.