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I'm interested in hearing a discussion on this. It seems reasonable, but it also seems like it could be missing what's going on (is the new housing market-rate

I'm interested in hearing a discussion on this. It seems reasonable, but it also seems like it could be missing what's going on (is the new housing market-rate or above market-rate?) or missing other driving mechanisms ("investment" properties that then go empty?) But it does name a mechanism that seems reasonable for driving rents down as new high-end housing gets built; although the mechanism sounds suspiciously like "trickle down". Edit: I am in no way associated with the authors or site or any of; it came across my feed and I found it interesting.

aetherson 10y ago
This is the most banal possible observation: increased supply drives prices down. It is literally econ 101, probably literally first week of econ 101. There may be wrinkles or complexities. Obviously, in an infill situation, if you tear down existing housing and then build new housing, it's less clear that overall affordability will increase. There may be a backlog of demand that means that as new stock comes onto the market, the affordability increases less than you would imagine. But is it basically true? Sure. Even if you build new units only for millionaires, that takes the millionaires out of competition for other high end markets, which then makes people who were previously marginal for those units get them, and takes them out of competition for the next tier down, etc.
- crdoconnor 10y ago
  It's easier to fix the demand side (make billionaires not want 3 enormous apartments in every city) rather than the supply side: simply tax them. If land value (as opposed to property value) were taxed at a higher level (preferably at 100%), the following behaviors would stop making sense and the market would take care of them: * Buying and holding a property as a gold-like investment. Like electronics, most buildings would likely depreciate in value and if they are poor quality, holding on to them and renting them out would make losses, not profits. * Building apartments for people to treat like gold bars and leave empty. Instead, investors would build apartments for people like me and you who would live on them and there would be more real estate for them to do this with. * If the above doesn't end up fixing the problem all by itself, the tax revenue provides ample money to build affordable housing and owners falling into arrears on their land taxes would provide the space to build it. California's Prop 13 is essentially the main villain of this story since it did the exact opposite of the above.
  - yummyfajitas 10y ago
    There are too few billionaires for this to have any significant effect. http://marketurbanism.com/2016/06/27/do-the-rich-cause-high-rents/ http://marketurbanism.com/2016/06/27/do-the-rich-cause-high-... NYC has 5,600 ultra high net worth individuals. If each of these people has 10 flats in NYC (rather than the 3 you hypothesized), that's only 56,000 flats taken off the market. NYC has 3.4 million housing units. http://www.nycrgb.org/downloads/research/pdf_reports/16HSR.pdf http://www.nycrgb.org/downloads/research/pdf_reports/16HSR.p... The rich are just a tiny drop in a very large bucket. The more inequality we have, the fewer rich people there are and the smaller this problem becomes.
    - crdoconnor 10y ago
      A) It's not just billionaires treating inner city property like bars of gold. B) Billionaire properties regularly take up 10x as much room as regular apartments. Let's be generous and say that they each have only two 10x sized properties, that means 112,000 new properties on the market which actually would make a serious dent in prices and rents. C) I can't quite figure out from your link if they counted people who do not list NYC as their primary residence but still have a property there (say, via a Cayman Islands investment vehicle). I suspect not.
      - yummyfajitas 10y ago
        The ultra high net worth individuals I was referring to were $30M and up, not $1B and up. According to Le Wik, there are only 536 billionaires in the US. So if all of them have 10 10x sized properties, that's equivalent to taking 53,600 flats off the entire US housing market. You can roughly triple that number if you assume every billionaire in Europe and Asia buys 10 10x sized flats in the US. https://en.wikipedia.org/wiki/List_of_countries_by_the_number_of_US_dollar_billionaires https://en.wikipedia.org/wiki/List_of_countries_by_the_numbe... Why don't you crunch your own numbers and see if you can make them come out different?
        AstralStorm 10y ago
- mikeyouse 10y ago
  I'm a huge proponent of new building and I fully support the Bay Area groups in favor of more housing (BARF, SFYimby, etc.) but the wrinkles and complexities of building new housing shouldn't just be hand-waved away. In a region as attractive as the SF Bay Area (or Boston / NYC / LA), there is a significant competent of induced demand that affects housing prices. If they built a 50,000 unit skyscraper in Mountain View and priced the apartments at $1,000/month, how many people would move from other parts of the country to be in Mountain View? How many people have relocated out of the Bay Area due to housing costs that would move back if things became more affordable? We should absolutely build more housing, especially around transit, but overselling the price impact isn't going to win many friends.
  - kilroy123 10y ago
    Actually building a massive building doesn't sound like a bad idea. They want to try it Tokyo. http://edition.cnn.com/2016/02/10/architecture/tokyo-mile-high-skyscraper http://edition.cnn.com/2016/02/10/architecture/tokyo-mile-hi...
  - Kalium 10y ago
    You're absolutely right! Induced demand is a real concern that merits careful consideration and study. Fortunately for us, the relevant professionals are keenly aware of this real and important concern! It's been studied quite explicitly in San Francisco. One of the results was that in a fairly representative new residential tower, in excess of 80% of households moving in were doing so from San Francisco. Induced demand is a real and important phenomenon we should all consider carefully in our urban planning. Yet, we should also consider that demand for housing in attractive regions like San Francisco is perhaps somewhere short of infinite.
  - aetherson 10y ago
    I am a big believer that, in fact, it would be very hard to build enough housing in SF to really substantially change the affordability of the city in the relatively short term. So I think that we're much in agreement, but just to quibble over a few things: Sure, if there comes a bunch of new stock into the market in SF, a lot of what happens may be that people who are currently content to live in Daly City may instead get housing in SF proper, and it will be Daly City that has substantial stock available at rates sub, say $2000/month or $1500/month. So what? I mean, if Joe lives in San Jose now because that's the closest he can get to his job in SF and now he gets to move to Daly City, but isn't quite in SF itself, isn't this a net benefit? If SF doesn't really become affordable to people in the lowest two quintiles of income, but does become affordable to people in the middle quintile of income rather than staying in the upper two (or upper one, or upper fraction of one), maybe that's not ideal, but it's an improvement in the status quo, isn't it?
- mrec 10y ago
  > Even if you build new units only for millionaires, that takes the millionaires out of competition for other high end markets, which then makes people who were previously marginal for those units get them, and takes them out of competition for the next tier down, etc I wonder how unit size affects this. E.g. if you knock down a block housing 20 poor people to build a mansion for one rich person to occupy.
  - aetherson 10y ago
    Of course that does not increase affordability. We're speaking here of net increases to supply. Indeed, if you knock down 20 units of housing to build 25 units of much more expensive housing, you probably don't increase affordability, at least in the short run. But those are fairly divorced from the reality of housing development.
- jonbarker 10y ago
  Increases in supply do not always cause the same effect. An example is multi-lane highway expansion projects. This often leads to more traffic problems, not less.
  - thwarted 10y ago
    This isn't that great of a comparison because a highway lanes are not the good that is in demand, the travel destinations are. More lanes doesn't translate into more demand for the destinations, but it does potentially reveal the actual demand for the destinations, which may have been artificially limited (or difficult to measure) when there were fewer lanes because of a lack of usable routes/bandwidth.
    - jonbarker 10y ago
      More lanes creates the perception that it is easier to drive than take other modes of transportation, so more people set up their lives around car ownership, taking cars everywhere, etc.
      - thwarted 10y ago
        Creates that perception right up until the point where they're sitting in traffic. Are you talking about building a new multilane highway where one didn't exist, or expanding the number of lanes on a highway that already exists? I thought you were referring to the latter, since that's the case that is closest to a increased housing in an established city==building lanes analogy, in as much as it is close at all as I previously described.
    - jonbarker 10y ago
      I agree with you that there may be some revelation of pent up demand for destinations, but also believe that that effect is overshadowed by the overall effect of creating a "car town" vs a "public transit town". There is an overall culture shift when one demonstrates that the highway is "open for business". The lagging effect is ridiculous traffic jams.
rhino369 10y ago
There may be some factors that work against his conclusion. Higher end new properties might be built with less space efficiency than new middle or lower end properties. So if you bulldoze a block of low rise apartments and build a couple massive single family homes, you are making housing prices worse overall. But I don't see much indication of that actually happening in high cost of living cities like SF, NYC, DC. If anything, new "high end" apartment buildings have very small units compared to older stock. It's also not always true over a small area of an entire housing market. If you bulldozed the poor areas of DC and rebuilt with dense luxury properties, the average rent in the city would go up, but the prices in the suburbs would fall. My experiences match this article very well. I live in the cheapest building in my neighborhood, probably 300-400 dollars below "market." But my unit was build in the 1960's as a luxury unit. It's huge, has large walk in closets, and has a "butler door." People who lived there originally were expected to have help. And now it is the shittiest building in the area. And my coworker is talking the other route. He lives in what was literally a crackhouse 10 years ago. Gentrification is much increased when you refused to build new high income property. Those higher income people just bid up low income property. I'd be shocked if the author was wrong.
twblalock 10y ago
Consider what would happen if you were a high-income tech worker looking to move to San Francisco. If there was a nice new apartment available, you might rent it. But if there wasn't, you would have to settle for an older apartment, which puts you into direct competition with poorer people over housing stock. This is what is happening in San Francisco now -- high-income people are bidding up the prices of older apartments, many of which are pretty crappy, because the supply of new apartments is pretty small. This is how the city ended up with 70-year-old crappy apartments renting for more than $3000 per month. If San Francisco built lots of new luxury apartments, the rich newcomers would live in them, and leave the older apartments available for the people who can't afford to pay more.
- maxerickson 10y ago
  That's the story. It doesn't answer the question though, which requires information about whether the high end supply actually matches up with the demand. For instance, this article has someone stating they believe the Bay Area isn't permitting nearly enough housing: http://www.sfchronicle.com/business/networth/article/Bay-Area-building-boom-may-not-end-housing-7223711.php http://www.sfchronicle.com/business/networth/article/Bay-Are... So the wealthy move into the new housing and are replaced in the old housing by the slightly less wealthy rather than anyone reasonably described as poorer.
  - jimmywanger 10y ago
    > rather than anyone reasonably described as poorer. This doesn't make sense. They are poorer than the wealthy. There is still no justification why increasing supply leads to increased costs.
    - maxerickson 10y ago
      Say the annual income of the person renting a place goes from $300,000 to $280,000. The one with lower income isn't in any way poor.
      - 10y ago
zebrafish 10y ago
Yeah I think that "trickle-down" with regard to individual income taxes is different than the "trickle-down" of asset-prices due to depreciation and increased supply. I don't think the author's car comparison is apt here. Cars are not stationary assets. I can have a Denali in suburbia and and Denali in midtown and it's still a Denali. However, a flat above retail in suburbia is probably not at all the same as a flat above retail in midtown. I agree that the over arching law of supply and demand is still at play. But if I go look anywhere in my city center at prime locations with nice housing built 30 years ago, I don't see that being anywhere near affordable for lower or even middle income families.
maxerickson 10y ago
New supply almost certainly helps affordability. In places that have high demand and constrained supply, the impact will not be particularly meaningful. There's also the problem where housing policy in the US tends to create upward pressure on prices rather than doing something sensible (like trying to be hands off or lower prices).
burntrelish1273 10y ago
Trickle-down economics suggested capitalists were somehow benevolent money spreaders instead of selfish, cheap bastards, but as applied to housing there is a sizable segment of affluent Bay Area residents whom will move when new/better options come along. The gotcha is that affluent residents represent such a minuscule fraction of inventory, giant flats can't possibly be false equivocated to building tons of tiny, cheap studios or much more section 8 housing. OTOH, there is plenty of idle housing inventory (~8%) which could house all of the homeless and the very poor right now.

aetherson 10y ago

This is the most banal possible observation: increased supply drives prices down. It is literally econ 101, probably literally first week of econ 101. There may be wrinkles or complexities. Obviously, in an infill situation, if you tear down existing housing and then build new housing, it's less clear that overall affordability will increase. There may be a backlog of demand that means that as new stock comes onto the market, the affordability increases less than you would imagine. But is it basically true? Sure. Even if you build new units only for millionaires, that takes the millionaires out of competition for other high end markets, which then makes people who were previously marginal for those units get them, and takes them out of competition for the next tier down, etc.

crdoconnor 10y ago
It's easier to fix the demand side (make billionaires not want 3 enormous apartments in every city) rather than the supply side: simply tax them. If land value (as opposed to property value) were taxed at a higher level (preferably at 100%), the following behaviors would stop making sense and the market would take care of them: * Buying and holding a property as a gold-like investment. Like electronics, most buildings would likely depreciate in value and if they are poor quality, holding on to them and renting them out would make losses, not profits. * Building apartments for people to treat like gold bars and leave empty. Instead, investors would build apartments for people like me and you who would live on them and there would be more real estate for them to do this with. * If the above doesn't end up fixing the problem all by itself, the tax revenue provides ample money to build affordable housing and owners falling into arrears on their land taxes would provide the space to build it. California's Prop 13 is essentially the main villain of this story since it did the exact opposite of the above.
- yummyfajitas 10y ago
  There are too few billionaires for this to have any significant effect. http://marketurbanism.com/2016/06/27/do-the-rich-cause-high-rents/ http://marketurbanism.com/2016/06/27/do-the-rich-cause-high-... NYC has 5,600 ultra high net worth individuals. If each of these people has 10 flats in NYC (rather than the 3 you hypothesized), that's only 56,000 flats taken off the market. NYC has 3.4 million housing units. http://www.nycrgb.org/downloads/research/pdf_reports/16HSR.pdf http://www.nycrgb.org/downloads/research/pdf_reports/16HSR.p... The rich are just a tiny drop in a very large bucket. The more inequality we have, the fewer rich people there are and the smaller this problem becomes.
  - crdoconnor 10y ago
    A) It's not just billionaires treating inner city property like bars of gold. B) Billionaire properties regularly take up 10x as much room as regular apartments. Let's be generous and say that they each have only two 10x sized properties, that means 112,000 new properties on the market which actually would make a serious dent in prices and rents. C) I can't quite figure out from your link if they counted people who do not list NYC as their primary residence but still have a property there (say, via a Cayman Islands investment vehicle). I suspect not.
    - yummyfajitas 10y ago
      The ultra high net worth individuals I was referring to were $30M and up, not $1B and up. According to Le Wik, there are only 536 billionaires in the US. So if all of them have 10 10x sized properties, that's equivalent to taking 53,600 flats off the entire US housing market. You can roughly triple that number if you assume every billionaire in Europe and Asia buys 10 10x sized flats in the US. https://en.wikipedia.org/wiki/List_of_countries_by_the_number_of_US_dollar_billionaires https://en.wikipedia.org/wiki/List_of_countries_by_the_numbe... Why don't you crunch your own numbers and see if you can make them come out different?
      - AstralStorm 10y ago
mikeyouse 10y ago
I'm a huge proponent of new building and I fully support the Bay Area groups in favor of more housing (BARF, SFYimby, etc.) but the wrinkles and complexities of building new housing shouldn't just be hand-waved away. In a region as attractive as the SF Bay Area (or Boston / NYC / LA), there is a significant competent of induced demand that affects housing prices. If they built a 50,000 unit skyscraper in Mountain View and priced the apartments at $1,000/month, how many people would move from other parts of the country to be in Mountain View? How many people have relocated out of the Bay Area due to housing costs that would move back if things became more affordable? We should absolutely build more housing, especially around transit, but overselling the price impact isn't going to win many friends.
- kilroy123 10y ago
  Actually building a massive building doesn't sound like a bad idea. They want to try it Tokyo. http://edition.cnn.com/2016/02/10/architecture/tokyo-mile-high-skyscraper http://edition.cnn.com/2016/02/10/architecture/tokyo-mile-hi...
- Kalium 10y ago
  You're absolutely right! Induced demand is a real concern that merits careful consideration and study. Fortunately for us, the relevant professionals are keenly aware of this real and important concern! It's been studied quite explicitly in San Francisco. One of the results was that in a fairly representative new residential tower, in excess of 80% of households moving in were doing so from San Francisco. Induced demand is a real and important phenomenon we should all consider carefully in our urban planning. Yet, we should also consider that demand for housing in attractive regions like San Francisco is perhaps somewhere short of infinite.
- aetherson 10y ago
  I am a big believer that, in fact, it would be very hard to build enough housing in SF to really substantially change the affordability of the city in the relatively short term. So I think that we're much in agreement, but just to quibble over a few things: Sure, if there comes a bunch of new stock into the market in SF, a lot of what happens may be that people who are currently content to live in Daly City may instead get housing in SF proper, and it will be Daly City that has substantial stock available at rates sub, say $2000/month or $1500/month. So what? I mean, if Joe lives in San Jose now because that's the closest he can get to his job in SF and now he gets to move to Daly City, but isn't quite in SF itself, isn't this a net benefit? If SF doesn't really become affordable to people in the lowest two quintiles of income, but does become affordable to people in the middle quintile of income rather than staying in the upper two (or upper one, or upper fraction of one), maybe that's not ideal, but it's an improvement in the status quo, isn't it?
mrec 10y ago
> Even if you build new units only for millionaires, that takes the millionaires out of competition for other high end markets, which then makes people who were previously marginal for those units get them, and takes them out of competition for the next tier down, etc I wonder how unit size affects this. E.g. if you knock down a block housing 20 poor people to build a mansion for one rich person to occupy.
- aetherson 10y ago
  Of course that does not increase affordability. We're speaking here of net increases to supply. Indeed, if you knock down 20 units of housing to build 25 units of much more expensive housing, you probably don't increase affordability, at least in the short run. But those are fairly divorced from the reality of housing development.
jonbarker 10y ago
Increases in supply do not always cause the same effect. An example is multi-lane highway expansion projects. This often leads to more traffic problems, not less.
- thwarted 10y ago
  This isn't that great of a comparison because a highway lanes are not the good that is in demand, the travel destinations are. More lanes doesn't translate into more demand for the destinations, but it does potentially reveal the actual demand for the destinations, which may have been artificially limited (or difficult to measure) when there were fewer lanes because of a lack of usable routes/bandwidth.
  - jonbarker 10y ago
    More lanes creates the perception that it is easier to drive than take other modes of transportation, so more people set up their lives around car ownership, taking cars everywhere, etc.
    - thwarted 10y ago
      Creates that perception right up until the point where they're sitting in traffic. Are you talking about building a new multilane highway where one didn't exist, or expanding the number of lanes on a highway that already exists? I thought you were referring to the latter, since that's the case that is closest to a increased housing in an established city==building lanes analogy, in as much as it is close at all as I previously described.
  - jonbarker 10y ago
    I agree with you that there may be some revelation of pent up demand for destinations, but also believe that that effect is overshadowed by the overall effect of creating a "car town" vs a "public transit town". There is an overall culture shift when one demonstrates that the highway is "open for business". The lagging effect is ridiculous traffic jams.

rhino369 10y ago

There may be some factors that work against his conclusion. Higher end new properties might be built with less space efficiency than new middle or lower end properties. So if you bulldoze a block of low rise apartments and build a couple massive single family homes, you are making housing prices worse overall. But I don't see much indication of that actually happening in high cost of living cities like SF, NYC, DC. If anything, new "high end" apartment buildings have very small units compared to older stock. It's also not always true over a small area of an entire housing market. If you bulldozed the poor areas of DC and rebuilt with dense luxury properties, the average rent in the city would go up, but the prices in the suburbs would fall. My experiences match this article very well. I live in the cheapest building in my neighborhood, probably 300-400 dollars below "market." But my unit was build in the 1960's as a luxury unit. It's huge, has large walk in closets, and has a "butler door." People who lived there originally were expected to have help. And now it is the shittiest building in the area. And my coworker is talking the other route. He lives in what was literally a crackhouse 10 years ago. Gentrification is much increased when you refused to build new high income property. Those higher income people just bid up low income property. I'd be shocked if the author was wrong.

twblalock 10y ago

Consider what would happen if you were a high-income tech worker looking to move to San Francisco. If there was a nice new apartment available, you might rent it. But if there wasn't, you would have to settle for an older apartment, which puts you into direct competition with poorer people over housing stock. This is what is happening in San Francisco now -- high-income people are bidding up the prices of older apartments, many of which are pretty crappy, because the supply of new apartments is pretty small. This is how the city ended up with 70-year-old crappy apartments renting for more than $3000 per month. If San Francisco built lots of new luxury apartments, the rich newcomers would live in them, and leave the older apartments available for the people who can't afford to pay more.

maxerickson 10y ago
That's the story. It doesn't answer the question though, which requires information about whether the high end supply actually matches up with the demand. For instance, this article has someone stating they believe the Bay Area isn't permitting nearly enough housing: http://www.sfchronicle.com/business/networth/article/Bay-Area-building-boom-may-not-end-housing-7223711.php http://www.sfchronicle.com/business/networth/article/Bay-Are... So the wealthy move into the new housing and are replaced in the old housing by the slightly less wealthy rather than anyone reasonably described as poorer.
- jimmywanger 10y ago
  > rather than anyone reasonably described as poorer. This doesn't make sense. They are poorer than the wealthy. There is still no justification why increasing supply leads to increased costs.
  - maxerickson 10y ago
    Say the annual income of the person renting a place goes from $300,000 to $280,000. The one with lower income isn't in any way poor.
    - 10y ago

zebrafish 10y ago

Yeah I think that "trickle-down" with regard to individual income taxes is different than the "trickle-down" of asset-prices due to depreciation and increased supply. I don't think the author's car comparison is apt here. Cars are not stationary assets. I can have a Denali in suburbia and and Denali in midtown and it's still a Denali. However, a flat above retail in suburbia is probably not at all the same as a flat above retail in midtown. I agree that the over arching law of supply and demand is still at play. But if I go look anywhere in my city center at prime locations with nice housing built 30 years ago, I don't see that being anywhere near affordable for lower or even middle income families.

maxerickson 10y ago

New supply almost certainly helps affordability. In places that have high demand and constrained supply, the impact will not be particularly meaningful. There's also the problem where housing policy in the US tends to create upward pressure on prices rather than doing something sensible (like trying to be hands off or lower prices).

burntrelish1273 10y ago

Trickle-down economics suggested capitalists were somehow benevolent money spreaders instead of selfish, cheap bastards, but as applied to housing there is a sizable segment of affluent Bay Area residents whom will move when new/better options come along. The gotcha is that affluent residents represent such a minuscule fraction of inventory, giant flats can't possibly be false equivocated to building tons of tiny, cheap studios or much more section 8 housing. OTOH, there is plenty of idle housing inventory (~8%) which could house all of the homeless and the very poor right now.