4 ms·

I agree that laws passed to deal with high housing costs are often counterproductive in the long run. The classic example is rent control. Can you explain your

by spikels 10y ago

I agree that laws passed to deal with high housing costs are often counterproductive in the long run. The classic example is rent control. Can you explain your theory that low rates drive high rent inflation? Seems like it would be the opposite for several reasons: low rates are associated with low inflation, low rates make it much cheaper to build and operate apartment buildings, etc.

soVeryTired 10y ago
There's no doubt in my mind that low rates are driving up house prices, but the link to rental prices is a bit more tenuous to me. My gut feeling is that the post-crisis recovery started in the big cities, so people flocked to them, which drove up rental prices. But if anyone's seen some decent analysis that says otherwise, I'd love to see it.
- repsilat 10y ago
  There's no doubt in my mind that low rates are driving up house prices, but the link to rental prices is a bit more tenuous to me. Yeah, the link to house prices is clear: low rates means you can afford a larger mortgage, so prices get bid up. The link to rents is less direct: low rates are effected by loose monetary policy -- by central banks pumping money into the market. This means more inflation (not quite the same thing as "rents getting more expensive" of course.) In theory, anyway. Inflation has actually been very low even with historically loose monetary policy, so folks have been flummoxed (but generally positive about it, because they think it has let them encourage job growth and economic expansion more than they otherwise would have been able to.)
conanbatt 10y ago
Low rates drive up mortgage lending and increases housing value, that is far from being "my theory", it's an accepted phenomena. There are other things related to the housing market, like construction lagging demand(the U.S. is not building as many dwelling units as purely demographic demand needs) or demand being pro-cyclical. As far as i can tell, developers are picking up the pace and the whole situation might fix itself with a simple market correction. If housing prices dropped 5% one year, demand would lower and might match supply. Ofc, i cant tell the future, but there are reasons to believe the situation we have is only temporary, and raising rates and increasing supply might calm the whole situation down.
- spikels 10y ago
  I thought we were talking about rent levels not home prices! Again how does low rates drive up rents? Keep in mind that very few people borrow to pay rent while most apartments and their construction is financed by debt. At first approximation low rates would be neutral for demand but positive for supply.
  - yowlingcat 10y ago
    You might be conflating overall rental demand activity with overall real estate financing activity. Keep in mind that low interest rates create continuous opportunities for financing, bandlimited to the minimal interval between credit knocks for doing so. If Joe Q. Landlord can refinance or purchase property at an assumed valuation of $X, that incorporates an expected inflation subject to interest rate Z%, which yields a median monthly rental fee of $Y.
    - spikels 10y ago
      Not sure I am following you but the classic valuation relationship would be something of the form $X is proportional to $Y/Z% (i.e. revenue or income capitalization valuation). So if $X is fixed (your assumption) and Z% decreases (interest rates decline) then $Y (rents) must also decrease. QED
      - yowlingcat 10y ago
        Wouldn't say that $X is not proportional to $Y/Z%. It's the other way around, that $Y is proportional to $X/Z%. If Z% decreases, that value increases. The utility of a property can serve multiple use cases -- it could be rented, lived in, or used for parking wealth. Financing allows people to purchase property at rates higher than they would be able to with all cash. That specific rate is material to the deal they get on their mortgage at the time that they finance it. Therefore, low interest rates inflate the prices of real estate because they encourage people to take on debt because it's at more favorable terms. They also encourage people who have mortgages on worse terms to refinance. With higher interest rates, the ratio of mortgage to all cash buyers would decrease, and so the appraised market value of the property would decrease as well.
didibus 10y ago
Counter productive in what ways? Rent control works great for Montreal and has for years. That city is very affordable to live in, because of it.
- superuser2 10y ago
  Rent control still leaves people who want apartments without them, it simply changes the allocation strategy from "willing to pay market price" to "was here first" or, in the case of designated affordable housing, lottery. Increasing density limits, or improving transportation to allow wider sprawl, actually add housing supply in a way that might keep up with demand.
- foota 10y ago
  The issue being that renting in the city effectively becomes a lottery, because not everyone can live there that wants to.
- cwp 10y ago
  Montreal is affordable, but I don't think you can attribute that entirely to rent control. Forty years ago it was the premier city in Canada, but it's had a serious decline since then. Perhaps not an absolute decline in population, but certainly slower growth than the rest of the country, and way less money than it used to have.
- krakensden 10y ago
  Rent control is good for people who already live somewhere, and bad for new arrivals. Places like the Bay Area, with huge numbers of new arrivals and not much new development, see this more than "normal" cities.
- spikels 10y ago
  I'm no expert on the Montreal rental market and rent control rules but if you are not experiencing shortages then the rent controls are likely not "binding". That is, the controlled rental rate is very close or above what the rental rate would be without rent control. Since it appears that Montreal has relatively low rental rates it is likely that supply is high but demand is low relative to other cities. This is consistent with the relatively low population growth of the area (the Island of Montreal had a larger population 60 years ago than today!). In this situation rent control would have very little impact and be unnecessary anyway.

by spikels 10y ago

soVeryTired 10y ago

There's no doubt in my mind that low rates are driving up house prices, but the link to rental prices is a bit more tenuous to me. My gut feeling is that the post-crisis recovery started in the big cities, so people flocked to them, which drove up rental prices. But if anyone's seen some decent analysis that says otherwise, I'd love to see it.

repsilat 10y ago
There's no doubt in my mind that low rates are driving up house prices, but the link to rental prices is a bit more tenuous to me. Yeah, the link to house prices is clear: low rates means you can afford a larger mortgage, so prices get bid up. The link to rents is less direct: low rates are effected by loose monetary policy -- by central banks pumping money into the market. This means more inflation (not quite the same thing as "rents getting more expensive" of course.) In theory, anyway. Inflation has actually been very low even with historically loose monetary policy, so folks have been flummoxed (but generally positive about it, because they think it has let them encourage job growth and economic expansion more than they otherwise would have been able to.)

conanbatt 10y ago

Low rates drive up mortgage lending and increases housing value, that is far from being "my theory", it's an accepted phenomena. There are other things related to the housing market, like construction lagging demand(the U.S. is not building as many dwelling units as purely demographic demand needs) or demand being pro-cyclical. As far as i can tell, developers are picking up the pace and the whole situation might fix itself with a simple market correction. If housing prices dropped 5% one year, demand would lower and might match supply. Ofc, i cant tell the future, but there are reasons to believe the situation we have is only temporary, and raising rates and increasing supply might calm the whole situation down.

spikels 10y ago
I thought we were talking about rent levels not home prices! Again how does low rates drive up rents? Keep in mind that very few people borrow to pay rent while most apartments and their construction is financed by debt. At first approximation low rates would be neutral for demand but positive for supply.
- yowlingcat 10y ago
  You might be conflating overall rental demand activity with overall real estate financing activity. Keep in mind that low interest rates create continuous opportunities for financing, bandlimited to the minimal interval between credit knocks for doing so. If Joe Q. Landlord can refinance or purchase property at an assumed valuation of $X, that incorporates an expected inflation subject to interest rate Z%, which yields a median monthly rental fee of $Y.
  - spikels 10y ago
    Not sure I am following you but the classic valuation relationship would be something of the form $X is proportional to $Y/Z% (i.e. revenue or income capitalization valuation). So if $X is fixed (your assumption) and Z% decreases (interest rates decline) then $Y (rents) must also decrease. QED
    - yowlingcat 10y ago
      Wouldn't say that $X is not proportional to $Y/Z%. It's the other way around, that $Y is proportional to $X/Z%. If Z% decreases, that value increases. The utility of a property can serve multiple use cases -- it could be rented, lived in, or used for parking wealth. Financing allows people to purchase property at rates higher than they would be able to with all cash. That specific rate is material to the deal they get on their mortgage at the time that they finance it. Therefore, low interest rates inflate the prices of real estate because they encourage people to take on debt because it's at more favorable terms. They also encourage people who have mortgages on worse terms to refinance. With higher interest rates, the ratio of mortgage to all cash buyers would decrease, and so the appraised market value of the property would decrease as well.

didibus 10y ago

Counter productive in what ways? Rent control works great for Montreal and has for years. That city is very affordable to live in, because of it.

superuser2 10y ago
Rent control still leaves people who want apartments without them, it simply changes the allocation strategy from "willing to pay market price" to "was here first" or, in the case of designated affordable housing, lottery. Increasing density limits, or improving transportation to allow wider sprawl, actually add housing supply in a way that might keep up with demand.
foota 10y ago
The issue being that renting in the city effectively becomes a lottery, because not everyone can live there that wants to.
cwp 10y ago
Montreal is affordable, but I don't think you can attribute that entirely to rent control. Forty years ago it was the premier city in Canada, but it's had a serious decline since then. Perhaps not an absolute decline in population, but certainly slower growth than the rest of the country, and way less money than it used to have.
krakensden 10y ago
Rent control is good for people who already live somewhere, and bad for new arrivals. Places like the Bay Area, with huge numbers of new arrivals and not much new development, see this more than "normal" cities.
spikels 10y ago
I'm no expert on the Montreal rental market and rent control rules but if you are not experiencing shortages then the rent controls are likely not "binding". That is, the controlled rental rate is very close or above what the rental rate would be without rent control. Since it appears that Montreal has relatively low rental rates it is likely that supply is high but demand is low relative to other cities. This is consistent with the relatively low population growth of the area (the Island of Montreal had a larger population 60 years ago than today!). In this situation rent control would have very little impact and be unnecessary anyway.