This sounds like the long way to say that increases supply lowers prices. It does address common criticisms of this approach, however. I feel like I'm missing something.
Because the author's argument is presenting this discussion in a profoundly dishonest and unrealistic way, and glossing over in a single sentence or two very real phenomena like gentrification (here's some cherrypicked studies most readers will never click on - there you go folks, gentrification isn't real!).
One example being - this isn't a zero sum game and rental markets don't behave like one. If someone builds an expensive condo, yes this increases supply of housing in the area, but in the event that prices increase all over the place due to cartel-like behavior (spoiler - this happens often), renters don't react by shopping around for a landlord that's beating out the price of his neighbors. For one, getting approved even to be a renter is difficult for many, so this level of flexibility/fluidity is unrealistic from the start, and two, people react to rental increases often by cutting costs in other areas or by doubling up the occupancy of the home (e.g., getting a roommate), because the choice of where one decides to pay rent is far from a perfect or efficient market at all.
This issue is far more complicated than "it's supply and demand dummy" and usually this argument is presented by faux YIMBY's who intentionally or not are acting as astroturfs for the developers, who win out big in the end no matter what.
Why shouldn't developers be economically rewarded for supplying housing in an area that demands a large amount of housing?
> renters don't react by shopping around for a landlord that's beating out the price of his neighbors
Renters certainly shop around. What makes you think they don't?
> approved even to be a renter is difficult for many, and two, people react often by cutting costs in other areas or by doubling up the occupancy of the home (e.g., getting a roommate).
Yes, and both of those issues can be solved by increasing the supply of housing. If demand greatly outstrips supply, landlords can be as picky as they want on renters. If theres an excess of supply, they will be a bit looser.
> Renters certainly shop around. What makes you think they don't?
I never said they do not. I said that’s not the typical reaction, because moving is very difficult and has a ton of financial and logistical hurdles for most households. “supply and demand, dummy” arguments around the housing market tend to conveniently wave away these costs in the same manner the author waved away gentrification.
> I never said they do not. I said that’s not the typical reaction
It doesn't take many shoppers to make a huge difference.
> because moving is very difficult
There's always a fair number of people new to the area, not to mention people whose situation has changed significantly and there are a lot of people looking for new housing.
Note that rent-control takes the latter group off the market.
Note that someone taking a "new property" off the market (regardless of reason) is exactly the same as not adding said new property. (Ie, it can't make things worse.)
> It doesn't take many shoppers to make a huge difference.
Ok, sure, but when a single landlord buying the new property to do airbnb destroys this entire silly argument right away, that’s a sign to me the argument is working with a flawed premise.
He wrote a famous post years ago about gentrification prevention called "yuppie fishbowl theory".
Gentrification is caused by blocking infill development that adds new units. That's what causes existing units to get replaced.
> but in the event that prices increase all over the place due to cartel-like behavior (spoiler - this happens often)
That doesn't happen, landlords cannot enforce a cartel and are not motivated to.
Cartels are enforced in housing /by governments/ - they are what zoning laws are intended to do. And they're the only way it can happen because they have legal force. Upzoning an area is defeating a cartel.
Replacing units is what causes units to get replaced. We can look upstream of that to see why landlords choose to replace units (probably the reason you cited), but we shouldn't miss the trees for the forest either.
> If someone builds an expensive condo, yes this increases supply of housing in the area, but in the event that prices increase all over the place due to cartel-like behavior
Umm, no.
Adding a new expensive housing to a market does not increase the demand for existing inexpensive housing.
It can have the effect of reducing the demand for other expensive housing, as in "why should I pay a lot of money for old?"
Unfortunately yes, because people don't understand basic supply/demand principles. It sounds like common sense/econ 101 (which it is). But the proponents of low-income housing and rent controls don't seem to believe that increasing the supply of market rate housing decreases rents in the long term.
Most proponents of low-income housing I know of would like to vastly increase density and lower the number of SFH but the vast portion of the market and voters does not want that at all since it would lower their home value.
Cool, figure out how to pay for trillions of dollars of sprawling infrastructure then. We in the US haven't figured that one out yet and the bills are coming due.
Increasing density generally increases existing home values more than not doing that; the land becomes more valuable (for free!) if more houses can be sold on top of it, and that's almost always worth more than having renters nearby.
The more common reason people vote against it is because they want their neighborhood to be frozen in time at the precise moment they moved there; that's what they originally chose after all. And they don't want to be forced to look at anything with a FAR above 0.4, and even that much is questionable.
What you're missing is the incredibly vocal activist culture in cities like SF and Seattle, who demand that any new multi-family housing built include below-market-rate units. (These cities also typically extort new developments with expensive "link-up fees" but that's beyond the scope of the supply-and-demand issue).
The obvious fact that these requirements make it harder for developments to pencil out and therefore decrease the amount of new units built will never, ever occur to these activists.
Or, these activists are actually saboteurs, using the requirement for below-market-rate units as a form of barrier to prevent actual constructions from happening!
How can it not be obvious that forcing below-market-rate units into a development will force the developers to suffer losses?
Lots of cities came up with an arrangement to build low-income housing by having developers build low-income housing. My impression is that this wasn't activists driving it but cities finding an easy solution. The activists are now bought into the solution as way to get low-income housing.
This sounds like a good idea because it taxes the ones making money. But the result is that less housing gets built because of the extra costs and it tends to be luxury housing so developer can make money. I also not sure how much a few low-income units increase the diversity of neighborhood.
The solution is probably just tax all developers and use the money to build low-income housing. Or even better, tax everyone. Diversity can be better accomplished by building low-income housing throughout the city. Better to mix low-income housing with cheaper market-rate housing.
Because we have a million different laws preventing people from buying and selling whatever they want. The libertarian utopia that many on HN thinks should exist, doesn't. If the right to stop it didn't exist, there would be far more apartments and dense housing in these places that are zoned SFH.
I mean looking across all humanity there is very little that has not been banned in one place or another. Banning things seems to be the one thing we're really good at.
"Luxury apartments" are largely a myth. That label gets slapped on any three bedroom apartment but they're usually cheaper than the median house in the same area. Curious how you never hear about "luxury house" even though they actually do exist in numbers.
In this whole debate around availability of housing nobody ever seems to think about what has happened to the proportion of dwellings used as a primary residence. Up or down? What would that tell us?
Cheap credit, rapid price rises, and AirBnB and the like have created extra demand for 'investments'. Second homes, short term rentals, even good old fashioned land banking.
We should pay more attention to what has been happening to the demand side of the supply and demand equation.
this sort of stuff is barely a drop in the bucket, and savvy politicians consistently try and succeed in directing public complaints towards these types of scapegoats and away from the fact they have completely forgone the public interest in exchange for appeasing the de facto "landed gentry" who lucked their way into owning an expensive asset that they dont want to get rid of.
> this sort of stuff is barely a drop in the bucket
Do you know this or is this your opinion?
I know for a fact that in Melbourne the areas that experience the highest capital gains and are most 'in demand' as places to live also have the highest vacancy rates. 15% and higher vacancy rates in some inner city suburbs (as determined by water usage). Not intuitive if you think in terms of 'supply and demand 101'.
Think about it in these terms. It used to cost you money to have a second home but since interest rates started a steady decline around 30 years ago the supply of new money that has gone into property means having a second home now makes you money via capital gains (even without generating income via long term rental). The advent of AirBnB and the like also mean owning a second home can be profitable where it once wasn't. Now, given that, surely more people will be doing this now, right?
A suburb near me has around 2000 dwellings. About 50 are listed on AirBnB as 'entire homes'. That's 2.5%. A typical vacancy rate is 3% (not as measured above, but provided by real estate agents - i.e. that are available for rent). 2.5% starts looking very significant. And this is just AirBnB. There are other platforms involved. Not to mention land banked properties, second homes not listed for short term rental, etc. In short, the number of underutilised properties is significant and made worse in a booming market.
Edit: Further evidence of the existence of underutilised properties. In NZ, when interest rates shot up at the start of 2022, the number of listings for both purchase and rental rose significantly (close to 50%). Where did these properties come from? A similar example could be seen in Ireland post GFC. There was a 'shortage', then financing became difficult and suddenly a surplus of rentals and homes for sale appeared. It was accepted that there was an oversupply and the preceding boom had led to overbuilding. As the market slowly improved over 15 years the surplus disappeared again to the point where rentals are very scarce in Ireland (but short term rentals are now abundant).
Vacancy rates going up is good for renters and bad for landlords. It's not possible for it to be any other way; you simply don't make money from /not/ renting a place, compared to renting it. It's like arguing that a grocery store is hoarding food because the shelves aren't empty.
Ireland has never had an oversupply of houses in its history. A simple way to tell this is that the population of Ireland is still lower than it was in the 1800s; that's because all young Irish people move to America/Canada because they can't afford to live in Ireland.
But that's still not the best metric to look at. The right thing to look at is price; if it's too high you don't have enough units. That is the only thing you need to know. Anything else is obfustication.
Here's a real world example of supply being diminished by demand for housing as a non-primary residence.
A family member I spoke with a couple of weeks ago is planning to purchase an apartment in the city to make it easier to visit their grandchildren. They won't be selling their primary residence to do this (but will be using equity from that residence). They will also subsidise the purchase via AirBnB.
This is an example of a home being removed from the stock of housing available to be used as a primary residence. I don't believe that this situation is all that unique - though thirty years ago this would have been as people in their circumstance would not have been able to do this (due to low capital appreciation and lack of a large short term rental market).
That is not very harmful because an apartment is a small box in the sky, and not filling it doesn't use up the land it's on top of, since there's other units in the building. Similarly, you can make up for it by adding more small boxes in the sky.
Also, they may plan to do this, but investments involve risk and they may go out of business (sell the apartment) if it doesn't actually go like they expect it to.
You're talking about investment demand, not the rental market. The two are mostly unrelated. Because most investment properties are made available to tenants since investors want to make money. Even if 20% aren't available because of AirBnB, all you have to do is build more and that 20% that's missing will be quickly dwarfed by new housing.
What you've done is a very common mistake: the conflation of property buying with property renting. The two markets have very different dynamics, and rent is much easier to address by simply increasing supply of housing.
High rents are the most urgent problem to address. It's harder to make everyone a property owner but at least don't crush them under the weight of rent. We're lucky that it's easy to address rents by increasing supply.
The home ownership rate is not really a good proxy as it is a measure of occupied dwellings that have the owner as a resident (or at least that is the typical definition). Many non-owner occupied dwellings will be used as a primary residence too (e.g. long term rentals).
As an aside, it's often used to claim that 2/3 of people own their own home, which is obviously not true as many people share a residence with the owner.
Funny to read Noah defending market pricing. I remember him for his court economist takes on the lack of price inflation following the "housing crisis" money supply inflation.
43 comments
[ 2.6 ms ] story [ 85.2 ms ] threadOne example being - this isn't a zero sum game and rental markets don't behave like one. If someone builds an expensive condo, yes this increases supply of housing in the area, but in the event that prices increase all over the place due to cartel-like behavior (spoiler - this happens often), renters don't react by shopping around for a landlord that's beating out the price of his neighbors. For one, getting approved even to be a renter is difficult for many, so this level of flexibility/fluidity is unrealistic from the start, and two, people react to rental increases often by cutting costs in other areas or by doubling up the occupancy of the home (e.g., getting a roommate), because the choice of where one decides to pay rent is far from a perfect or efficient market at all.
This issue is far more complicated than "it's supply and demand dummy" and usually this argument is presented by faux YIMBY's who intentionally or not are acting as astroturfs for the developers, who win out big in the end no matter what.
> renters don't react by shopping around for a landlord that's beating out the price of his neighbors
Renters certainly shop around. What makes you think they don't?
> approved even to be a renter is difficult for many, and two, people react often by cutting costs in other areas or by doubling up the occupancy of the home (e.g., getting a roommate).
Yes, and both of those issues can be solved by increasing the supply of housing. If demand greatly outstrips supply, landlords can be as picky as they want on renters. If theres an excess of supply, they will be a bit looser.
I never said they do not. I said that’s not the typical reaction, because moving is very difficult and has a ton of financial and logistical hurdles for most households. “supply and demand, dummy” arguments around the housing market tend to conveniently wave away these costs in the same manner the author waved away gentrification.
It doesn't take many shoppers to make a huge difference.
> because moving is very difficult
There's always a fair number of people new to the area, not to mention people whose situation has changed significantly and there are a lot of people looking for new housing.
Note that rent-control takes the latter group off the market.
Note that someone taking a "new property" off the market (regardless of reason) is exactly the same as not adding said new property. (Ie, it can't make things worse.)
Ok, sure, but when a single landlord buying the new property to do airbnb destroys this entire silly argument right away, that’s a sign to me the argument is working with a flawed premise.
He wrote a famous post years ago about gentrification prevention called "yuppie fishbowl theory".
Gentrification is caused by blocking infill development that adds new units. That's what causes existing units to get replaced.
> but in the event that prices increase all over the place due to cartel-like behavior (spoiler - this happens often)
That doesn't happen, landlords cannot enforce a cartel and are not motivated to.
Cartels are enforced in housing /by governments/ - they are what zoning laws are intended to do. And they're the only way it can happen because they have legal force. Upzoning an area is defeating a cartel.
Umm, no.
Adding a new expensive housing to a market does not increase the demand for existing inexpensive housing.
It can have the effect of reducing the demand for other expensive housing, as in "why should I pay a lot of money for old?"
The more common reason people vote against it is because they want their neighborhood to be frozen in time at the precise moment they moved there; that's what they originally chose after all. And they don't want to be forced to look at anything with a FAR above 0.4, and even that much is questionable.
The obvious fact that these requirements make it harder for developments to pencil out and therefore decrease the amount of new units built will never, ever occur to these activists.
How can it not be obvious that forcing below-market-rate units into a development will force the developers to suffer losses?
This sounds like a good idea because it taxes the ones making money. But the result is that less housing gets built because of the extra costs and it tends to be luxury housing so developer can make money. I also not sure how much a few low-income units increase the diversity of neighborhood.
The solution is probably just tax all developers and use the money to build low-income housing. Or even better, tax everyone. Diversity can be better accomplished by building low-income housing throughout the city. Better to mix low-income housing with cheaper market-rate housing.
If you cannot stop renting, if nobody can, will this have a parasitic effect on society?
It's statistics employed to defend harshly hierarchical societies while claiming to care for the disadvantaged.
What makes you think you have the right to stop either side of that transaction from engaging in it?
Thats an incredibly shallow argument. It’s so shallow in fact it could be used to argue for the ban of anything.
There is no such thing as a luxury apartment though, so you don't have to worry about that.
Cheap credit, rapid price rises, and AirBnB and the like have created extra demand for 'investments'. Second homes, short term rentals, even good old fashioned land banking.
We should pay more attention to what has been happening to the demand side of the supply and demand equation.
Do you know this or is this your opinion?
I know for a fact that in Melbourne the areas that experience the highest capital gains and are most 'in demand' as places to live also have the highest vacancy rates. 15% and higher vacancy rates in some inner city suburbs (as determined by water usage). Not intuitive if you think in terms of 'supply and demand 101'.
Think about it in these terms. It used to cost you money to have a second home but since interest rates started a steady decline around 30 years ago the supply of new money that has gone into property means having a second home now makes you money via capital gains (even without generating income via long term rental). The advent of AirBnB and the like also mean owning a second home can be profitable where it once wasn't. Now, given that, surely more people will be doing this now, right?
A suburb near me has around 2000 dwellings. About 50 are listed on AirBnB as 'entire homes'. That's 2.5%. A typical vacancy rate is 3% (not as measured above, but provided by real estate agents - i.e. that are available for rent). 2.5% starts looking very significant. And this is just AirBnB. There are other platforms involved. Not to mention land banked properties, second homes not listed for short term rental, etc. In short, the number of underutilised properties is significant and made worse in a booming market.
Edit: Further evidence of the existence of underutilised properties. In NZ, when interest rates shot up at the start of 2022, the number of listings for both purchase and rental rose significantly (close to 50%). Where did these properties come from? A similar example could be seen in Ireland post GFC. There was a 'shortage', then financing became difficult and suddenly a surplus of rentals and homes for sale appeared. It was accepted that there was an oversupply and the preceding boom had led to overbuilding. As the market slowly improved over 15 years the surplus disappeared again to the point where rentals are very scarce in Ireland (but short term rentals are now abundant).
Ireland has never had an oversupply of houses in its history. A simple way to tell this is that the population of Ireland is still lower than it was in the 1800s; that's because all young Irish people move to America/Canada because they can't afford to live in Ireland.
But that's still not the best metric to look at. The right thing to look at is price; if it's too high you don't have enough units. That is the only thing you need to know. Anything else is obfustication.
A family member I spoke with a couple of weeks ago is planning to purchase an apartment in the city to make it easier to visit their grandchildren. They won't be selling their primary residence to do this (but will be using equity from that residence). They will also subsidise the purchase via AirBnB.
This is an example of a home being removed from the stock of housing available to be used as a primary residence. I don't believe that this situation is all that unique - though thirty years ago this would have been as people in their circumstance would not have been able to do this (due to low capital appreciation and lack of a large short term rental market).
Also, they may plan to do this, but investments involve risk and they may go out of business (sell the apartment) if it doesn't actually go like they expect it to.
What you've done is a very common mistake: the conflation of property buying with property renting. The two markets have very different dynamics, and rent is much easier to address by simply increasing supply of housing.
High rents are the most urgent problem to address. It's harder to make everyone a property owner but at least don't crush them under the weight of rent. We're lucky that it's easy to address rents by increasing supply.
The home ownership rate is not really a good proxy as it is a measure of occupied dwellings that have the owner as a resident (or at least that is the typical definition). Many non-owner occupied dwellings will be used as a primary residence too (e.g. long term rentals).
As an aside, it's often used to claim that 2/3 of people own their own home, which is obviously not true as many people share a residence with the owner.