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> 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 pric

> 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.
    - AnthonyMouse 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? People have different levels of risk tolerance, and different resource levels. For example, there are ordinary landlords that will take out a mortgage on a building, rent it out and then use the rents to pay the mortgage and the salaries of the people who fix leaky pipes and find replacement tenants when someone leaves etc. If they don't charge rent they're out of business because they'd have nothing to use to pay the mortgage and the bank would foreclose, so they have to. Then there are investors who just want somewhere to park their money. There is no bank to foreclose, they're paying cash, so they're happy as long as the property is appreciating by more than e.g. the interest rate on government bonds. They can drain the pipes and turn off the heat and make money by doing nothing, as long as supply is constrained so the price keeps going up. Meanwhile they're risk-averse, so the extra income from renting it out (much of which is offset by increased maintenance costs) isn't worth the risk of e.g. some law preventing them from evicting a non-paying tenant. > 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. That's assuming you can diversify the risk. If someone wanted to invest in, say, San Francisco real estate, they could diversify across multiple properties, but then they'd all be affected by some new law there preventing evictions. Whereas they could diverisfy by also investing in properties in Ohio and Arkansas, but those might not be expected to appreciate enough to attract their interest.

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.
  - AnthonyMouse 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? People have different levels of risk tolerance, and different resource levels. For example, there are ordinary landlords that will take out a mortgage on a building, rent it out and then use the rents to pay the mortgage and the salaries of the people who fix leaky pipes and find replacement tenants when someone leaves etc. If they don't charge rent they're out of business because they'd have nothing to use to pay the mortgage and the bank would foreclose, so they have to. Then there are investors who just want somewhere to park their money. There is no bank to foreclose, they're paying cash, so they're happy as long as the property is appreciating by more than e.g. the interest rate on government bonds. They can drain the pipes and turn off the heat and make money by doing nothing, as long as supply is constrained so the price keeps going up. Meanwhile they're risk-averse, so the extra income from renting it out (much of which is offset by increased maintenance costs) isn't worth the risk of e.g. some law preventing them from evicting a non-paying tenant. > 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. That's assuming you can diversify the risk. If someone wanted to invest in, say, San Francisco real estate, they could diversify across multiple properties, but then they'd all be affected by some new law there preventing evictions. Whereas they could diverisfy by also investing in properties in Ohio and Arkansas, but those might not be expected to appreciate enough to attract their interest.