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> That incentivises developers to jump through all the hoops, build some houses, and sell them. That doesn't help with affordability, as when house prices are

by Tade0 2y ago

> That incentivises developers to jump through all the hoops, build some houses, and sell them. That doesn't help with affordability, as when house prices are high they're... unaffordable anyway, so they get bought out by investors, who can produce any amount of cash as long as the investment pays off. For this reason a huge chunk of new housing is not even built to be affordable - both the margins and ROI on a "premium" apartment are just better. A win for investors and developers alike while at the same time regular people are thrown under the bus.

eru 2y ago
You are confusing housing as a capital good with housing as a service. Corporate landlords (and investors in general) don't want the houses to sit empty. So they need to rent them out, or forego rental income. And, yes, premium apartments are fine. You know that houses today are much nicer than the houses we had in 1800? That's because over time the average new house being built was nicer than the existing housing stock. When a new nice apartment is being built, there ain't a sudden bang and a newly created rich person steps out of a cloud of smoke. [0] That rich person that moves into that nice new house will (on average) vacate a slightly less nice house, that someone else can move into, and so on. This is called 'filtering'. See eg https://buildingtheskyline.org/filtering/ https://buildingtheskyline.org/filtering/ If you don't build nice new houses, rich people gentrify the existing houses; which ain't better for poorer residents. [0] So if you had a market that worked like this, that would be great. It's like an infinite money machine for the economy. Rich people can pay a lot of taxes.
AnthonyMouse 2y ago
> so they get bought out by investors, who can produce any amount of cash as long as the investment pays off. But they only do this if they expect housing prices to stay high, which they wouldn't if high prices were expected to spur construction and thereby increase supply and reduce prices. The problem is when the construction is inhibited so the investor's expectation is that prices will go up rather than down.
- eru 2y ago
  That would be reasoning from a price change. Please be careful to separate the price of houses as a capital good from the price of monthly rent. I'm arguing that all else being equal, if the price of houses goes up, the price of housing as a service (ie rent) can go down under certain circumstances. Specifically also the opposite: interventions that make houses drop in price, eg restrictions on lending like we saw in the wake of the Great Recession, can lead to less construction, and thus rents going up. The tightening of lending standards in the wake of the Great Recession saw the ratio of rents to house prices go up a lot.
  - AnthonyMouse 2y ago
    There are really two types of investors we have to regard here. One is ordinary landlords, but landlords buying properties and renting them out isn't a problem; the more of them there are the lower rents get and then the fewer of them they are. It naturally finds equilibrium. The other type is global institutional investors who are using real estate as a substitute/diversification against government bonds and then not renting it out, because their desire is for a stable investment rather than high risk high reward. Because of artificial constraints in the housing supply, appreciation in housing prices has been beating the bond market without even renting the properties out, and renting them out is actually a risk because bad tenants in jurisdictions with adverse landlord-tenant laws can be a huge problem. So they just buy up whatever is available and take profits as property appreciation rather than rent. The second type of investor is obviously really bad for housing affordability, but it also only happens when construction is restricted from increasing supply to meet demand, because otherwise the property itself wouldn't appreciate faster than inflation and would make a poor investment in the absence of rental income.
    - eru 2y ago
      Your second type of investor has exactly the same opportunity cost for not renting out as everyone else, don't they? Conversely, your first type of investor has exactly the same problems with bad renters? So why does anyone rent anything out? It looks like the problem of the occasional bad tenant can (and is) solved in practice via diversification. You buy a REIT instead of an individual property. In my earlier nomenclature, I would classify your 'second investor' as a personal union between an investor and a 'weird' tenant. A 'weird' owner-occupier, who's never home. > The second type of investor is obviously really bad for housing affordability, but it also only happens when construction is restricted from increasing supply to meet demand, because otherwise the property itself wouldn't appreciate faster than inflation and would make a poor investment in the absence of rental income. Well, a land value tax would presumable also help here. But again, the opportunity costs for renting out vs not renting out are exactly the same.

by Tade0 2y ago

eru 2y ago

You are confusing housing as a capital good with housing as a service. Corporate landlords (and investors in general) don't want the houses to sit empty. So they need to rent them out, or forego rental income. And, yes, premium apartments are fine. You know that houses today are much nicer than the houses we had in 1800? That's because over time the average new house being built was nicer than the existing housing stock. When a new nice apartment is being built, there ain't a sudden bang and a newly created rich person steps out of a cloud of smoke. [0] That rich person that moves into that nice new house will (on average) vacate a slightly less nice house, that someone else can move into, and so on. This is called 'filtering'. See eg https://buildingtheskyline.org/filtering/ https://buildingtheskyline.org/filtering/ If you don't build nice new houses, rich people gentrify the existing houses; which ain't better for poorer residents. [0] So if you had a market that worked like this, that would be great. It's like an infinite money machine for the economy. Rich people can pay a lot of taxes.

AnthonyMouse 2y ago

> so they get bought out by investors, who can produce any amount of cash as long as the investment pays off. But they only do this if they expect housing prices to stay high, which they wouldn't if high prices were expected to spur construction and thereby increase supply and reduce prices. The problem is when the construction is inhibited so the investor's expectation is that prices will go up rather than down.

eru 2y ago
That would be reasoning from a price change. Please be careful to separate the price of houses as a capital good from the price of monthly rent. I'm arguing that all else being equal, if the price of houses goes up, the price of housing as a service (ie rent) can go down under certain circumstances. Specifically also the opposite: interventions that make houses drop in price, eg restrictions on lending like we saw in the wake of the Great Recession, can lead to less construction, and thus rents going up. The tightening of lending standards in the wake of the Great Recession saw the ratio of rents to house prices go up a lot.
- AnthonyMouse 2y ago
  There are really two types of investors we have to regard here. One is ordinary landlords, but landlords buying properties and renting them out isn't a problem; the more of them there are the lower rents get and then the fewer of them they are. It naturally finds equilibrium. The other type is global institutional investors who are using real estate as a substitute/diversification against government bonds and then not renting it out, because their desire is for a stable investment rather than high risk high reward. Because of artificial constraints in the housing supply, appreciation in housing prices has been beating the bond market without even renting the properties out, and renting them out is actually a risk because bad tenants in jurisdictions with adverse landlord-tenant laws can be a huge problem. So they just buy up whatever is available and take profits as property appreciation rather than rent. The second type of investor is obviously really bad for housing affordability, but it also only happens when construction is restricted from increasing supply to meet demand, because otherwise the property itself wouldn't appreciate faster than inflation and would make a poor investment in the absence of rental income.
  - eru 2y ago
    Your second type of investor has exactly the same opportunity cost for not renting out as everyone else, don't they? Conversely, your first type of investor has exactly the same problems with bad renters? So why does anyone rent anything out? It looks like the problem of the occasional bad tenant can (and is) solved in practice via diversification. You buy a REIT instead of an individual property. In my earlier nomenclature, I would classify your 'second investor' as a personal union between an investor and a 'weird' tenant. A 'weird' owner-occupier, who's never home. > The second type of investor is obviously really bad for housing affordability, but it also only happens when construction is restricted from increasing supply to meet demand, because otherwise the property itself wouldn't appreciate faster than inflation and would make a poor investment in the absence of rental income. Well, a land value tax would presumable also help here. But again, the opportunity costs for renting out vs not renting out are exactly the same.