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That new luxury housing makes a city more attractive and induces demand from outside. Adding new roads can make driving more attractive and worsen congestion.

That new luxury housing makes a city more attractive and induces demand from outside. Adding new roads can make driving more attractive and worsen congestion. Not saying that’s what happens, but a simple supply/demand analysis (ceteris paribus) may not suffice.

OrwellianChild 9y ago
No one has seen fit to build much luxury housing in Cleveland, OH lately, but what exists already (at rock-bottom prices) doesn't seem to be attracting much population from outside... Induced demand is definitely a thing for roads, but that demand is from fixed supply of people. In the roads case, it is counter-intuitive specifically because it causes the same number of people to drive more, on average. That dynamic simply doesn't hold for luxury goods in general or luxury housing in particular. There are effectively no replicable instances of more luxury good = more buyers unless price falls or supply was previously constrained.
- throwawaymsft 9y ago
  I'd posit it's hard to know what the dynamic would be. Consider certain luxury goods (https://en.wikipedia.org/wiki/Veblen_good https://en.wikipedia.org/wiki/Veblen_good) where increasing the price increases the demand. (Conveniently, economists have a model and also a name for things that don't follow the model. The universe can be divided into bananas and non-bananas.) Cleveland isn't a prestigious world-class city attractive to the wealthy, but if new luxury condos in a tier-1 city come online, it may induce demand from wealthy/speculators who would not otherwise have considered that city, or were picking between alternatives. (Investment, signaling/status-seeking, etc.) Treated as an investment vehicle, increasing supply (e.g., having an IPO where no shares existed before) can unlock latent demand (people divert income into that investment and drive up the price). Perhaps housing needs to be modeled as a mix of investment, local demand for shelter, status symbol, tax haven, political baton (keeping existing homeowners above water), etc. Again, not sure how housing actually behaves but it seems complex enough to defy my econ 101 understanding.
  - OrwellianChild 9y ago
    I'm assuming you're suggestion that housing is a Veblen good is in jest - I can build a shining, gilded tower in the middle of Wyoming and I'm not going to attract America's wealthiest citizens to Cheyenne... It seems like you're conflating cause and effect here - If Cleveland isn't good enough, then it must be the tier-1 city that is the cause of the demand. Not the housing itself. Further, unless the new luxury units are sitting empty (a problem Vancouver, BC dealt with for awhile), then the market for rents functions regardless of whether speculation is occurring. I invite you to find an example of vacancies increasing in the same place that housing/rents climb - it won't exist in any of the real estate hot-beds in America. The main thrust of this article and the research surrounding it by folks like City Observatory, Sightline Institute, etc. is that we now do know the dynamic of housing prices in booming economies. I don't feel like you've provided any evidence that contradicts the conclusions presented in the research, so I'm having trouble pinpointing your skepticism. Let me know if I've missed your point!

OrwellianChild 9y ago

No one has seen fit to build much luxury housing in Cleveland, OH lately, but what exists already (at rock-bottom prices) doesn't seem to be attracting much population from outside... Induced demand is definitely a thing for roads, but that demand is from fixed supply of people. In the roads case, it is counter-intuitive specifically because it causes the same number of people to drive more, on average. That dynamic simply doesn't hold for luxury goods in general or luxury housing in particular. There are effectively no replicable instances of more luxury good = more buyers unless price falls or supply was previously constrained.

throwawaymsft 9y ago
I'd posit it's hard to know what the dynamic would be. Consider certain luxury goods (https://en.wikipedia.org/wiki/Veblen_good https://en.wikipedia.org/wiki/Veblen_good) where increasing the price increases the demand. (Conveniently, economists have a model and also a name for things that don't follow the model. The universe can be divided into bananas and non-bananas.) Cleveland isn't a prestigious world-class city attractive to the wealthy, but if new luxury condos in a tier-1 city come online, it may induce demand from wealthy/speculators who would not otherwise have considered that city, or were picking between alternatives. (Investment, signaling/status-seeking, etc.) Treated as an investment vehicle, increasing supply (e.g., having an IPO where no shares existed before) can unlock latent demand (people divert income into that investment and drive up the price). Perhaps housing needs to be modeled as a mix of investment, local demand for shelter, status symbol, tax haven, political baton (keeping existing homeowners above water), etc. Again, not sure how housing actually behaves but it seems complex enough to defy my econ 101 understanding.
- OrwellianChild 9y ago
  I'm assuming you're suggestion that housing is a Veblen good is in jest - I can build a shining, gilded tower in the middle of Wyoming and I'm not going to attract America's wealthiest citizens to Cheyenne... It seems like you're conflating cause and effect here - If Cleveland isn't good enough, then it must be the tier-1 city that is the cause of the demand. Not the housing itself. Further, unless the new luxury units are sitting empty (a problem Vancouver, BC dealt with for awhile), then the market for rents functions regardless of whether speculation is occurring. I invite you to find an example of vacancies increasing in the same place that housing/rents climb - it won't exist in any of the real estate hot-beds in America. The main thrust of this article and the research surrounding it by folks like City Observatory, Sightline Institute, etc. is that we now do know the dynamic of housing prices in booming economies. I don't feel like you've provided any evidence that contradicts the conclusions presented in the research, so I'm having trouble pinpointing your skepticism. Let me know if I've missed your point!