Rich people moving in to a working class neighborhood makes the neighborhood more attractive to other rich people, both directly and by bringing in rich people amenities. So building high end housing can ultimately cause more demand and higher bids for the existing housing in the neighborhood.
Yes, but many of those people will be moving from other neighborhoods in the same city; when they move they vacate an older, less attractive, lower rent dwelling.
The history of US housing is (with a few exceptions, notably the post WWII housing boom) a story of people building premium housing that, as it ages, becomes affordable housing. Thing how many big old houses end up converted into duplexes or townhouses.
But lately we've 1) used zoning to stop the conversion of premium housing into cheaper housing and 2) used zoning and planning permission to stop the construction of premium housing and then wondered why we don't have enough affordable housing. What a mystery!
> It is complicated, though.
It's a complex system with many different forces in play, yeah, but it's not that complicated. If you build more housing, the price of housing drops. Building expensive apartments in a neighbourhood doesn't magically create affordable apartments in the same neighbourhood, but it certainly doesn't hurt.
The exception would be if, somehow, building 100 units of housing somehow attracts more than 100 families into the city from outside the area, which...I dunno, it could happen, but is it? Has it ever? It sounds unlikely at first glance.
> Yes, but many of those people will be moving from other neighborhoods in the same city; when they move they vacate an older, less attractive, lower rent dwelling.
You should probably provide a source on that one. Rents are sticky. Its equally likely they are already wealthy and want to move to a "hip" neighborhood which tend to be recently poor/urban. Rents don't fall as quick in the place they left but rise quickly in the place they're headed, which just raises the average rent in both places.
It also creates demand for people who wanted to live in the former neighborhood and can now move there because there is a vacancy (or after any slight reduction in rent brings otherwise marginal renters).
This is all just conjecture without data, and there is very little data studying this because, as the previous poster says, its complicated and there's no way to do a controlled experiment.
> if, somehow, building 100 units of housing somehow attracts more than 100 families into the city from outside the area
The problem in some cities (London) is that this does happen at some level: 100 units of housing attract enough investors to start a speculative price rise, as they buy multiple units each. Maybe 50 of those units will stay empty forever, but average prices in the area will have been pushed up for good, compounding the problem.
The British media is definitely working overtime to make this seem like a problem, but I'm not entirely sure I believe there's smoke under all this fire. The headline I've seen over and over is that there are 20k empty homes in London. But from the 2017 Housing in London report, prepared by the Mayor of London's office[1]:
> The number of recorded empty homes in London is far below its long-term average, at 1.7% of total stock.
From the same report:
> In the last two decades the number of jobs in London has grown by 40% and the
number of people by 25%, but the number of homes by only 15%
So if the number of people is increasing faster than the number of houses, and the percentage of empty houses is falling, then offhand I'd say your numbers are a bit exagerrated. Yes, certainly some people buy property as an investment and leave it empty, but even in London, it's not that many. And as for this:
> average prices in the area will have been pushed up for good, compounding the problem.
Asset price bubbles are a thing, but so far, everyone who's ever believed that prices were going to stay high forever has been burned, badly. What will keep London house prices high is that they're not building very many. If that changes, prices will fall. (And fall all the quicker when the people buying Mayfair properties as an investment decide to liquidate them before the price falls any further. As, again, is the way of asset bubbles.)
I've seen plenty of numbers on empty housing in London defined as "we asked the owners whether they live there and they said 'yes'".
Anybody who doesn't think this is a problem just needs to take a look at one Hyde park. Nearly empty. Prime location. You could demolish that and build high rise flats for a thousand people there, maybe more. The problem isn't just how many prime location empty apartments there are but how big they are too.
> You could demolish that and build high rise flats for a thousand people there, maybe more.
That sounds like a big argument in favour of "building more units will fix the problem" then. :)
> Anybody who doesn't think this is a problem just needs to take a look at one Hyde park.
I'm going to stick with data over anecdotes. If the data we have is flawed, then we need better data in order to make decisions; it doesn't mean we should just ignore data.
>That sounds like a big argument in favour of "building more units will fix the problem" then. :)
It's an argument in favour of building units people will live in (e.g. council housing) and against big units that consume large amounts of land that people won't live in (e.g. yet another block of luxury flats treated as gold-bar-like stores of wealth).
The amount of property tax paid on those apartments is pitiful and amounts to a market distortion. It needs to be raised about 100x before the owners will be incentivized to yield hoarded land to more productive use.
>I'm going to stick with data over anecdotes.
So you think if the data is simply based upon asking people if they live in their properties that it is to be believed?
That's an easy 'problem' to solve. Empty housing has no need for public services like roads / schools and they still pay property taxes. Just keep building housing and let the speculators subsidize city services. Until, the bubble bursts and suddenly you get lot's of cheap housing on the market.
Doesn't work that way in London: there's public revenue in the form of "stamp duty" for the sale of a property, but no ongoing property tax from an empty property. City services are funded by "Council tax", which is levied on residents, not properties.
So, yeah, "easy" to solve if the market is structured right. It often isn't.
London has direct property taxes. They are set low, but empty property does not require a much in the way of city services.
Granted, increasing property taxes would put pressure to rent out empty property. However, the occupancy rate is also very high so it's not currently a meaningful issue.
> That's an easy 'problem' to solve. Empty housing has no need for public services like roads / schools and they still pay property taxes. Just keep building housing and let the speculators subsidize city services. Until, the bubble bursts and suddenly you get lot's of cheap housing on the market.
Property taxes are part of the problem in many cases. When property taxes are low that doesn't really happen, but when they're high nobody wants to build new housing. Because the net present value of the future property tax comes out of what someone will pay for a new building, making it less profitable to construct one.
The property taxes are very low, which is part of the problem. It isn't property owners subsidizing us it's us subsidizing them - the value of the land, predicated upon the value of the community surrounding is not being paid for through taxes.
Raising property taxes would definitely solve the problems but the political forces arrayed against that are very powerful.
Induced housing demand is common in the majority of cities across the US. The act of creating urban housing makes an area in higher demand than the housing just built could actually supply. The action of creating 100 units of supply simultaneously generates ~120+ units of demand.
Most people refer to this as "gentrification", even if that label isn't totally accurate. It obviously doesn't last forever, you can't generate more demand indefinitely. But it absolutely does happen -- we see the results all the time.
And to be clear that's not an argument against new housing -- we obviously need to build more housing. But it's a common observation that new 'market-rate' urban housing does not lower prices, but raises them in short and medium length timeframes (yes even in non-coastal cities, yes even in small towns, etc).
We see this in Seattle too. Seattle rents are 4.5% higher than last year, or 50% higher than they were 5 years ago, according to the articles own data. They'll be even higher next year, and Seattle Times will write an article about the winter slowdown in leasing, and rents will rise even higher again a year later. Until the bubble pops, the cycle will continue.
Please accept my apologies, I should clarify. All the data I've ever seen on induced demand in major US cities suggests very strongly that building units in major cities does not create demand for a greater number of units than are constructed.
The last study I saw on the subject in San Francisco showed that for 100 units of newly constructed supply, about 85 would be consumed by extant demand, roughly 15 would be consumed by new migrants, and less than 10 new units of demand that would not have existed otherwise gets generated. This is admittedly not obvious, and generally looks like purely generated demand when viewed at a very coarse level.
Incidentally, induced demand is an idea I often see advanced as an argument against constructing housing.
While that's intuitive, that's not an argument against building high end housing.
I do agree that it's complicated, though!
As someone who lives in New York, I can attest that affluent people will just rent the apartments that already exist in the neighborhood and drive the prices up for everyone. The difference is that the shitty tenement one bedroom gets bumped to 3k/month because the affluent will displace the current occupants.
If you build luxury buildings, the affluent will move into those. Sure, that will have a second order effect on the desirability of the neighborhood (which is what I believe you are arguing), but I am of the belief that that is a separate issue. Gentrification is its own bag of worms.
A while back someone said "Luxury Housing is future middle class housing" and that rings pretty true. The economic incentives are to build nice properties and over time those properties get old. A good percentage of them get divided up into smaller places or simply rented for less as new inventory comes on line.
Alternative conclusion: So building high end housing can ultimately cause the rich people move to the high end housing away from the working class neighbourhood, making room for lower income people.
The problem is that there are more jobs than housing. Existing homeowners oppose residential construction because it lowers their property value. They don't oppose commercial construction because it increases their property value.
If these people truly valued the "character" of their city then they wouldn't try to make it more attractive to other people. They want those new people and they want them to buy their overpriced property.
..and create whole areas like Capitol Hill which are mostly tech people moving in, pushing out others .. or what's going on in Freemont where homes that people bought for $120k now go for $800k (and you see low-to-middle income workers like cashiers, nurses, hair-stylists, cash out on their houses and move way out).
This is a good start, but I hope they don't stop building and complete all the existing projects. The prices are still high. ST3 will help make it easier to live where you want, with a lower income, and still be able to commute reasonably, by train, to work.
Can someone explain the economics of this? Presumably the landlords in the working class neighbourhood are already charging as much rent as the market will bare. When richer people moving in, are they outbidding locals? Are the landlords looking at the new tenants and noticing they can charge more? Why is the rich person willing to pay more if, presumably, the apartments/houses in this neighbourhood aren't as nice as ones in other areas?
Is it a slower, more secondary effect where over a period of time more rich people move in and somehow raise demand which leads to overbidding by a second wave of newcomers?
Maybe I'm presuming too much, but I don't understand why rich people would be willing to overpay for "low quality" housing in the working class area? Are they actually paying market rent, but what's happened is that all of the current residents are somehow paying below-market rent?
If the market rent increases in the neighborhood because its not more hip or desirable, the landlords can renovate the apartments to sale or rent with higher prices. Before they wouldn't necessarily have economic motivation to do it.
It's also worth noting that rents have been declining in hot US markets since (at least) Q3 of 2016. The trend is nationwide, and owes more to macroeconomics than to construction in a particular market:
Hasn't the Chinese government been clamping down more and more on "capital flight"? I read articles a few years ago how that [capital flight] was driving up rents in some markets. However, I imagine that would only have some impact in the so called "hot investment cities", but not /nationwide/. Any idea what the macroeconomic causes are?
So, I've also been told that rich Chinese people were buying up condos and letting them sit empty.
That's the thing, though, I kinda don't believe it. I mean, sure, people from China buying US real estate; I can totally believe that one (and that would increase demand and thus put upwards pressure on sale prices)
The part I have a hard time swallowing is the idea that they'd let them sit empty. The real estate agent they bought from would be super happy to hook them up with a full service property mangement company that could deal with renting the things out; I'm sure said agent could (for a hefty cut, of course) set it up so the owner need not be bothered at all.
I mean... I guess there could be something I'm missing, but the idea of people buying up some of the most valuable realestate in the world and then letting it sit empty (and supposedly paying somene to come by and check on it, etc...) just seems really unlikely vs. buying and renting it out.
It's a thing in Seattle. One of my friends lives in a wonderful neighborhood in South Bellevue. Multi million dollar homes. At least 40% sitting empty.
I think it's more than just wear-and-tear... There are a lot of legal protections that make it hard to displace existing renters. Presumably most of these unoccupied homes are owned as rainy day assets, to either be sold or occupied in an emergency, and renters would limit this ability.
(It's hard to find data on how prevalent this is... From one article, it looks like a Palo Alto realtor estimated in 2015 that about 20% of home sales were to Chinese investors, with about half of these leaving the house unoccupied: http://sanfrancisco.cbslocal.com/2015/04/28/realtors-printin... )
Interest rates. The reversal of quantitative easing. Both have been propping up asset bubbles across the US (including, you guessed it: tech investment) -- which are now beginning to slowly deflate.
I think that's a fine point! Interest rates going up is def going to cool off investment. However, there can be more than one cause for an economic effect. Seattle had very low inventory and I'd be surprised if hundreds of new units coming online didn't put downward pressure on prices.
But yeah, I haven't done the digging to attempt to quantify that effect.
My second point remains, however. Building more housing does not inflate prices. (and yes, I know it's not quite as simple as econ 101 supply and demand, but)
I knew someone in Seattle who worked closely with some of the big housing agencies (like Pillar and the like). He tried to tell me a lot of these larger property managers were held by Chinese companies, and they intentionally kept a lot of completed or renovated units empty to drive up the price.
Apparently they'd keep enough of these units off that they could keep the 1 bedroom price around $2k, but not too many so the city wouldn't catch on.
I couldn't find anything else though, either in the news or other people in knew in real estate, to corroborate that; so maybe he was blowing smoke or taking tokes.
I worked on some pricing recommendation/forecasting software for apartments. Many things come into play, but yes the general multifamily goal is to sustain ~95% occupancy. That, along with competitor info, is primarily what drives the prices. Anything that increases vacancy or makes the competitors cheaper drops prices...kind of obvious of course.
"Last year I was in Seattle and all I heard was complaints about all of the highrises going up as if that was what was causing the high rents."
Well, no. People are complaining about the change in their neighborhoods, of which high rents and new construction are both observable qualities.
But not to worry...if rents are truly declining, the new construction will rather quickly stop. Real estate investors are smart enough not to build into falling markets for long. They will leave holes in the ground before they complete a project that won't pencil out on financing -- just as they did in Seattle and San Francisco during the last bust.
(Edit: you guys...really. The article itself says that construction has already slowed down:
"Developers and banks that lend money for new construction have taken notice of the market cooling. While tons of new buildings are already approved or under construction now, the pipeline for future projects that exist only on paper is shrinking."
If rents decline from new construction, it happens over years of economic shifts, not because developers rush headlong over the cliff like a bunch of lemmings.)
Sigh, not sure why I feel the need to respond to posts like these, but this pattern, where a poster expresses haughty distain that others dare downvote them, then posts "evidence" that likely misses the point of the downvotes in the first place, is annoying.
I don't think anyone who understands supply and demand thinks that new construction won't slow - it's pretty self evident that if demand slows that people will stop adding supply. If anything, I think folks are objecting to the tone of your post that makes it sound like declining rents will leave a wake of "holes in the ground" instead of a normal and healthy adjustment.
"not sure why I feel the need to respond to posts like these, but this pattern, where a poster expresses haughty distain that others dare downvote them, then posts "evidence" that likely misses the point of the downvotes in the first place, is annoying."
I didn't post "evidence" (scare quotes yours). The quote is right there, in the article. It's something that's actually happening, and I quoted it because of the irony.
Likewise, I lived in SF during the last crash. I saw the holes in the ground, with my own eyes -- developers pulled construction equipment out of foundations, and left them there, at mid-Market, in downtown San Francisco. I lived near two of them.
Nothing I'm saying here is even remotely theoretical. The real issue is that there's a certain popular narrative here, and any facts that disagree with that narrative are immediately ejected from the conversation. It isn't "haughty disdain" to observe that people are rejecting facts that don't fit their biases.
You're not wrong, people are just objecting to your bombast.
Also note, 2008 was unusually dramatic; one of the big projects in downtown sunnyvale went bankrupt and changed hands several times before completion. Yes, declining home prices do sometimes leave long term holes in the ground, but mostly only when prices decline a lot more quickly than expected, as they did in 2008.
I was here in 2001, too, though (or a little up the peninsula) and there was a bigger drop in rent (though not sale prices) then than in 2008. In 2001, sure, you saw 'for rent' signs, but as far as I remember, the 'holes in the ground' as you put it, of buildings who's builders had gone bankrupt partway through were rare.
Nah, people are objecting because they don't want to hear facts that contradict their preferred narrative. They want to believe that construction instantly lowers prices, and any information that contradicts this narrative is voted into the dirt on HN.
I grant you that 2008 was exceptional, as recessions go...but it's not rare to see projects abandoned. I saw it in Seattle in 2001 as well. It just depends on the state of the projects when the recession hits -- you might not get "holes in the ground" unless the decline hits quite suddenly (as in 2008), but you definitely see projects abandoned. That's universal.
Certainly here in Portland that's what people complain about. The rent here isn't as bad as, say, New York City or San Francisco. But it does mean that over time people can no longer afford to live in the neighborhood they grew up in, and it means change that the existing residents don't want.
Last year I was in Seattle and all I heard was complaints about all of the highrises going up as if that was what was causing the high rents. headdesk