One common argument against new urban housing runs as follows: “If we build new housing, it will all be bought up by rich investors who will sit on it. So new supply doesn’t restrain housing costs.” This argument (at least as I have phrased it) strikes me as absurd. Here’s why: for the argument to justify restraining supply, the argument presupposes that if you build 100 new condos/houses/apartments, every single one of them will be bought by an investor, and every single investor will irrationally choose to sit on the unit rather than renting it out. I can’t prove this is wrong, but it seems really hard to believe.*
Even leaving aside the logical weirdness of the argument, it seems to have a questionable factual basis.
If there was really a wave of nonresident investors in expensive cities, we might find (1) that the most expensive markets had the highest housing vacancy rates and (2) that these vacancy rates have been rising as housing costs rose. But Census data suggests otherwise.
Here’s some data: (all for central cities, not metros)
| Expensive | 2010 | 2015 |
| Manhattan | 12.7% | 13% |
| San Francisco | 9.8 | 7.9 |
| Los Angeles | 6.7 | 6.5 |
| San Diego | 7.8 | 7.1 |
| Boston | 9.1 | 8.0 |
| Not so Expensive | 2010 | 2015 |
| Dallas | 12.8% | 10.6% |
| Houston | 14.0 | 12.1 |
| Philadelphia | 14.1 | 13.3 |
| Chicago | 13.8 | 13.2 |
By and large, the expensive cities have lower vacancy rates- exactly what you would expect in a free market. The only exception is Manhattan. But it seems to me that if pied-a-terres led to higher rents, Manhattan’s empty-house rate would have climbed as rents did- which does not seem to have been the case.
The only way to save the “empty house” theory is to suggest that expensive cities’ empty houses are different from everyone else’s – that is, they are especially likely to be prime properties held by investors, while Chicago’s empty houses are more likely to be rotting-out houses in tough neighborhoods. But I do not know of any way of proving or disproving such a theory.
*I note, however, that there is a much more reasonable version of the argument- that even though new supply does some good because some people buy the housing units and live in them, the supply would do even more good if cities did something to discourage investment by nonresidents. This argument would not justify restraining supply, but might justify policies to discourage investment by nonresidents. I am not going to address such policies in this blog post.
Don Crawford says
May 27, 2017 at 12:12 pmLet’s see. If building new housing does not provide additional places for people to live, I wonder if tearing down housing would work better? Sheesh.
This kind of idiocy, let’s don’t allow more building to alleviate a housing crisis, is why it is wrong to allow people to “vote in” regulations/restrictions into commerce. The voters are not qualified to decide these questions and giving them the power to disrupt transactions, such as building housing, is just wrong.
If building housing is a bad idea, then no one will purchase or rent that housing, and the market will punish people who do it. If building housing is a good idea, then people will snap up the housing, and the market will reward people who do it. Also the profit generated for the those who build housing will attract more people to build even more housing. Then even more will be built. That will keep happening until there is so much housing available that people will have plenty of options available to them, and there will be more vacancies, and then the purchasers will be able to drive down prices. This happens regularly in commercial property when the market is left unfettered.
And then the people who kept properties off the market will be sorry. Their housing units will now be worth less because of an oversupply. But because we allow people who don’t understand the first thing about markets to interfere with transactions, there is not enough housing being built. That is what is rewarding those who keep their houses off the market. Again, the basic problem with allowing people who don’t know what they are doing to “vote” on proposals to interfere with the marketplace is that their proposals cause problems which they then propose to fix with even more interference.
RalphUNC says
May 28, 2017 at 9:19 amAren’t absentee owners of property (ones who don’t rent it out and just sit on it) a great asset for a city?
I ask this because it seems like they are paying significant amounts of property taxes (typically more so when non-owner occupied) while using little to no public services (schools, roads, ambulances, etc.)
It seems like a city would want lots of these buyers so they could funnel the surplus of property taxes into affordable housing for others.
I read into this with NYC’s situation, and it seems the problem is that the ultra-expensive penthouses are paying barely any property taxes. https://www.citylab.com/equity/2015/05/why-billionaires-dont-pay-property-taxes-in-new-york/389886/
That to me seems to be the problem, not that rich people would buy housing and sit on it. We should be fine with that (cities can make a huge profit of that) – but not when they pay a small fraction of the rate paid by middle-class homeowners.
Kevin Schultz says
May 29, 2017 at 2:26 pmI think you’re misrepresenting the counter argument. What is the definition of “vacant”? I think you’re defining it as buying an apartment and treating it as a safety deposit box for storing value over time, but absolutely never living in it. I think of “vacant” as “not the owners primary residence”.
I’m happy to have all the construction we can muster for places that end up used as primary residences. I’m less interested in building pied-à-terres. Looking around Manhattan, what seems to happen relatively frequently is that crappy buildings that are primary residences for a few people get bulldozed to build a very large luxury building that houses many apartments that are essentially vacation homes. I think that’s a lost opportunity.
Our zoning laws are clearly out of wack and creating bad outcomes, but the debate has boiled down to nothing more than “Building: Good or Bad?”. I’m sure that building new supply would help drive prices down, but I’d love to see a combination of loosening restrictions on the outer envelope you can build with some rules that increase internal density.
baklazhan says
May 29, 2017 at 5:53 pmApparently it’s the problem in London, too, that the ultra-expensive properties pay a negligible amount in taxes. California also has Prop. 13, though that only helps those who have owned something for a long time.
It’s also been pointed out that areas that become expensive see a pretty big drop in population– both because of vacant units, and because other buyers may remodel two apartments housing a family each into a large, fashionable flat for a couple. This can cause problems because the local infrastructure is often geared toward a larger population, and local businesses go under for want of customers.
Finally, it would be much less of an issue if cities were willing to allow increases in density, because you’d just get a lot more apartments popping up, and prices would level off (which would also make existing apartments lousy investments, so you’d have fewer absentee owners anyway). But that’s decidedly not the case today.
Kenny Easwaran says
May 30, 2017 at 6:44 pmI think relatively more expensive neighborhoods in a city tend to be occupied by young singles and couples rather than large families or roommates, both of which tend to be more financially constrained household types. Thus, if a neighborhood goes up in price relative to the rest of its metro, it may shift its balance to smaller households, even without any remodeling to remove units.