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If you’re a developer, build a bunch of high end housing, and try to sell it off, and no one wants to buy it, you have approximately three choices: 1. Leave th

If you’re a developer, build a bunch of high end housing, and try to sell it off, and no one wants to buy it, you have approximately three choices: 1. Leave them empty to deteriorate. 2. Cut your losses and sell them for cheap 3. Let them out for less than you feel they ought to be worth in the hope that people will be willing to pay your high price soon. Option 1. Is unlikely to happen as it is very unprofitable. This leaves options 2,3, each of which leads to people living in the newly built properties, so the total supply of housing has increased. Even if people are just renting, this means there is less demand for rentals so less of an incentive to buy houses to let them out, decreasing the demand for houses.

losteric 8y ago
Developers rarely build blindly. If they build high-end housing, there is some demand which will definitely buy-in... and that opens a new option: 4. Wait, because operational expenses are cheap compared to the capital expenditure. They will set an asking lease that is guaranteed to attract enough high-rent leasers to pay for maintenance + loan interest (if any), then hold the price right there regardless of vacancy rates. Rates will be lower only if the market demographics irreversibly change, but otherwise they can afford to wait as the building slowly fills over a decade or more - each additional renter is pure profit, and raises the value of the building as an asset for resale. The alternative is lowering prices, which attracts a different demographic that makes it challenging to raise rates afterwards. They may generate more short-term income but overall value is lower.
- AnthonyMouse 8y ago
  > 4. Wait, because operational expenses are cheap compared to the capital expenditure. The problem with waiting is that you're sitting on a huge risk, because holding prices artificially high attracts new construction. If that price makes construction profitable then construction will continue to be profitable until prices come down. To keep prices from coming down, the existing speculators would have to buy all of the new construction. The vacancy rate would keep increasing until it could no longer cover the maintenance costs. And the higher the vacancy rate gets, the greater the downside risk to holding vacant units, because there are more competing vacant units that the other owners could at any point decide to put on the market, causing lower prices that induce other owners to abandon the conspiracy and put their units on the market too. And the more vacant units there are, the more the price declines when the cartel dissolves.

losteric 8y ago

Developers rarely build blindly. If they build high-end housing, there is some demand which will definitely buy-in... and that opens a new option: 4. Wait, because operational expenses are cheap compared to the capital expenditure. They will set an asking lease that is guaranteed to attract enough high-rent leasers to pay for maintenance + loan interest (if any), then hold the price right there regardless of vacancy rates. Rates will be lower only if the market demographics irreversibly change, but otherwise they can afford to wait as the building slowly fills over a decade or more - each additional renter is pure profit, and raises the value of the building as an asset for resale. The alternative is lowering prices, which attracts a different demographic that makes it challenging to raise rates afterwards. They may generate more short-term income but overall value is lower.

AnthonyMouse 8y ago
> 4. Wait, because operational expenses are cheap compared to the capital expenditure. The problem with waiting is that you're sitting on a huge risk, because holding prices artificially high attracts new construction. If that price makes construction profitable then construction will continue to be profitable until prices come down. To keep prices from coming down, the existing speculators would have to buy all of the new construction. The vacancy rate would keep increasing until it could no longer cover the maintenance costs. And the higher the vacancy rate gets, the greater the downside risk to holding vacant units, because there are more competing vacant units that the other owners could at any point decide to put on the market, causing lower prices that induce other owners to abandon the conspiracy and put their units on the market too. And the more vacant units there are, the more the price declines when the cartel dissolves.