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There's a dead comment later in this thread which using directed abusive language towards another commenter while linking to a Louis Rossmann video. The video

by afuchs 5y ago

There's a dead comment later in this thread which using directed abusive language towards another commenter while linking to a Louis Rossmann video. The video [1] was interesting, although the dead comment seemed to completely ignore the video's [1] main point, where Louis talks about a hypothesis [2] where in New York City there may be an incentive structure between real estate investors and banks which is creating a market failure. The hypothesis [2] is that a building's assessed value is based on the rental prices that the landlord asks for even if nobody will reasonably pay those rents. The hypothesis speculates that, if a building's assessed value is lowered, it could trigger conditions in loan contracts that penalize the landlord or investor. Because of this, there may be an incentive for the landlord to keep buildings vacant instead of lowering their prices to market rate. [1] https://www.youtube.com/watch?v=xfHQZj3_TX4&t=580s https://www.youtube.com/watch?v=xfHQZj3_TX4&t=580s [2] https://www.reddit.com/r/nyc/comments/innhah/nearly_twothirds_of_new_york_restaurants_may_have/g49g4c5/ https://www.reddit.com/r/nyc/comments/innhah/nearly_twothird...

mancerayder 5y ago
Well, when you apply for loans the bank will want to know (and will send an appraiser) to estimate sales and rental values. If the developer's expectations on rental or sales income on a multifamily property are higher than the reality, and they lower sales prices (condos) or rental amounts, there's potential for them to get called to provide more capital. Because they may reappraise. What I've just explained probably has its own vocabulary I'm not using in the commercial real estate world, but my experience here is that my building has this problem and the brokers explained why they preferred to leave things vacant. As it turns out, after 18 months, as the city comes back after the pandemic, the vacancies are now suddenly much lower. The building for 1/3 full for years.
silexia 5y ago
I am not a housing investor, but I see many misguided articles claiming housing investors are driving prices up. The factors that primarily control pricing in the housing market are supply and demand. In Seattle, London, Los Angeles and elsewhere demand has risen steadily but supply has not. This causes prices to increase sharply. The solution is to increase the housing supply. If the government removes regulations preventing developers from building new houses and apartments, many more will be built and prices will drop. Many young people prefer to live in inexpensive high density housing. I remember looking at renting an apartment without a kitchen (there was a big shared kitchen for the whole floor) and without its own bathroom in my early twenties. Monthly rental price on this is around $300 per month as compared to $1,600 for a single bedroom apartment. Why aren’t there more of these? Government regulation prevents them from being built. Government permitting processes take years to go through and cost millions of dollars for big new apartment buildings or for residential developments. If we lighten / remove these regulations, housing supply will decrease dramatically. If you don’t want housing investors bidding up housing prices, then allow the supply to continuously increase. This will continuously drive down prices and no investors will want to buy.
- errantmind 5y ago
  While this is true for supply, the same can be said about demand. Foreign investors drive prices up by seeing some other county's housing as an investment. If taxes were increased for these investors, or some other disincentive was in place, demand would fall driving prices down
  - firecall 5y ago
    This was certainly true in Australia. Where Chinese investors would get their money out of China and into Aussie real estate!
    - silexia 5y ago
      Investors don't park money in an asset where supply is increasing dramatically.
- firecall 5y ago
  Exactly! Here in Australia we are seeing remarkable growth in property prices over the last quarter! Sydney prices grew at $AU1200 per day! In the residential housing market there just isn’t enough supply! I can say anecdotally that’s younger buyers are being accompanied by their parents, who are assisting with finance. Its well observed that people are queuing down the street to inspect properties, and literally writing offers out on the kitchen table! Properties are selling on minutes, with prices being pushed up by desperate buyers with access to finance from loans with low interest rates with deposits from their parents! When you take a 20 or 30 year mortgage, what’s $20 or $30k here and there! That’s what’s driving prices up! Supply and demand!
  - polskibus 5y ago
    It's trying to run away from inflation. USA and others have been printing outrageous amount of money, huge inflation is coming, sometimes it's already there. Solution is not to build more homes ad infinitum, but to curb the printing and get back to responsible fiscal policy without bailouts.
bdowling 5y ago
> The hypothesis speculates that, if a building's assessed value is lowered, it could trigger conditions in loan contracts that penalize the landlord or investor. This is the issue exactly. A commercial mortgage lender will insist on a certain maximum Loan-to-Value ratio. The value of the property is directly related to the long-term income that it generates (i.e., the net present value of all future cash flows). If the amounts of cash flows go down, then the value of the property goes down and the loan-to-value ratio goes up. In a commercial loan, the lender can often call the loan due at certain times during the term of the loan for any reason. One big reason to do so is if the loan-to-value ratio goes up beyond the level that the lender was comfortable with. Refinancing in such a circumstance could be very expensive. Thus, it may make more sense for an owner to keep a property vacant and lose money temporarily than to take on a tenant at a lower rent and possibly cause the lender to call the loan.
- jjeaff 5y ago
  I have heard this explanation a few times, but what i don't get is why doesn't a long term vacancy trigger an adjusted loan to value ratio? Seems like it would cause an appraisal to be much lower than just charging less rent and actually getting a tenant.
  - bdowling 5y ago
    The present value of an income stream starting in the future at the established rate may be higher in some cases than the present value of an income stream at a lower rate that starts immediately.

by afuchs 5y ago

mancerayder 5y ago

Well, when you apply for loans the bank will want to know (and will send an appraiser) to estimate sales and rental values. If the developer's expectations on rental or sales income on a multifamily property are higher than the reality, and they lower sales prices (condos) or rental amounts, there's potential for them to get called to provide more capital. Because they may reappraise. What I've just explained probably has its own vocabulary I'm not using in the commercial real estate world, but my experience here is that my building has this problem and the brokers explained why they preferred to leave things vacant. As it turns out, after 18 months, as the city comes back after the pandemic, the vacancies are now suddenly much lower. The building for 1/3 full for years.

silexia 5y ago

I am not a housing investor, but I see many misguided articles claiming housing investors are driving prices up. The factors that primarily control pricing in the housing market are supply and demand. In Seattle, London, Los Angeles and elsewhere demand has risen steadily but supply has not. This causes prices to increase sharply. The solution is to increase the housing supply. If the government removes regulations preventing developers from building new houses and apartments, many more will be built and prices will drop. Many young people prefer to live in inexpensive high density housing. I remember looking at renting an apartment without a kitchen (there was a big shared kitchen for the whole floor) and without its own bathroom in my early twenties. Monthly rental price on this is around $300 per month as compared to $1,600 for a single bedroom apartment. Why aren’t there more of these? Government regulation prevents them from being built. Government permitting processes take years to go through and cost millions of dollars for big new apartment buildings or for residential developments. If we lighten / remove these regulations, housing supply will decrease dramatically. If you don’t want housing investors bidding up housing prices, then allow the supply to continuously increase. This will continuously drive down prices and no investors will want to buy.

errantmind 5y ago
While this is true for supply, the same can be said about demand. Foreign investors drive prices up by seeing some other county's housing as an investment. If taxes were increased for these investors, or some other disincentive was in place, demand would fall driving prices down
- firecall 5y ago
  This was certainly true in Australia. Where Chinese investors would get their money out of China and into Aussie real estate!
  - silexia 5y ago
    Investors don't park money in an asset where supply is increasing dramatically.
firecall 5y ago
Exactly! Here in Australia we are seeing remarkable growth in property prices over the last quarter! Sydney prices grew at $AU1200 per day! In the residential housing market there just isn’t enough supply! I can say anecdotally that’s younger buyers are being accompanied by their parents, who are assisting with finance. Its well observed that people are queuing down the street to inspect properties, and literally writing offers out on the kitchen table! Properties are selling on minutes, with prices being pushed up by desperate buyers with access to finance from loans with low interest rates with deposits from their parents! When you take a 20 or 30 year mortgage, what’s $20 or $30k here and there! That’s what’s driving prices up! Supply and demand!
- polskibus 5y ago
  It's trying to run away from inflation. USA and others have been printing outrageous amount of money, huge inflation is coming, sometimes it's already there. Solution is not to build more homes ad infinitum, but to curb the printing and get back to responsible fiscal policy without bailouts.

bdowling 5y ago

> The hypothesis speculates that, if a building's assessed value is lowered, it could trigger conditions in loan contracts that penalize the landlord or investor. This is the issue exactly. A commercial mortgage lender will insist on a certain maximum Loan-to-Value ratio. The value of the property is directly related to the long-term income that it generates (i.e., the net present value of all future cash flows). If the amounts of cash flows go down, then the value of the property goes down and the loan-to-value ratio goes up. In a commercial loan, the lender can often call the loan due at certain times during the term of the loan for any reason. One big reason to do so is if the loan-to-value ratio goes up beyond the level that the lender was comfortable with. Refinancing in such a circumstance could be very expensive. Thus, it may make more sense for an owner to keep a property vacant and lose money temporarily than to take on a tenant at a lower rent and possibly cause the lender to call the loan.

jjeaff 5y ago
I have heard this explanation a few times, but what i don't get is why doesn't a long term vacancy trigger an adjusted loan to value ratio? Seems like it would cause an appraisal to be much lower than just charging less rent and actually getting a tenant.
- bdowling 5y ago
  The present value of an income stream starting in the future at the established rate may be higher in some cases than the present value of an income stream at a lower rate that starts immediately.