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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, bec

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.

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.