Housing costs

[jeffster]

The other thing is interest rates. They make the list price higher, though not monthly payments.

I think this is the largest factor. And regulations regarding mortgages. If mortgages were capped to 3x your family income, max, houses would be a lot cheaper.

However, developers are the ones raking in the cash with low interest rates. 1) Their own loans to finance a new build is very low, so it’s lower risk to build. 2) Being that they have large amounts of cash, they can lobby the government to make getting mortgages easier for their clients. The amount of money that goes to Ottawa, the influencers, MP’s, etc., is insane.

[ijmorlan]

The other thing is interest rates. They make the list price higher, though not monthly payments.

I think this is the largest factor.  And regulations regarding mortgages. If mortgages were capped to 3x your family income, max, houses would be a lot cheaper.

However, no more people would be housed, unless more housing was built.

This would still have some positive effects, because it’s probably not healthy for house prices to be so far out of what people can save up, but on its own it would not result in any more people having accommodation. Instead, the recorded sale prices would be lower and the resulting mortgage liability would be less.

[plam]

The pandemic was one data point: one could have counted how many airbnbs suddenly went onto the rental market. We certainly looked at places in Wellington, NZ which did a quick switchover. Comparing overall rents is kind of tricky, though, because there are a lot of confounding factors (like a global pandemic).

I'm not sure I get your point.

The pandemic destroyed the short term rental market, and for Airbnbs that meant investors tried to make them in to long term rentals. But I don't think that changes my point that if Airbnb was illegal, capital would be reallocated and we'd build more hotels and fewer condos. The hotels would just face pandemic bankruptcy (or bailouts) rather than conversion in to long term rental.

If we eliminated all the Airbnbs in Toronto, people wouldn't stop visiting Toronto. They'd just stay in hotels, which we'd now need more of. Land values wouldn't drop, and while the short term effect would be an increased supply of rental units (likely reducing price growth), the long term effect would be fewer condos built, constraining rental supply, and putting us back in the same scenario.

My point is about data collection, not about the downstream implications. I think it's important to know how much capacity is actually in airbnbs.

Also, zoning. Your statements are true in an unregulated market, but I'm pretty sure that both hotel and condo supply are constrained by zoning, which restricts supply of these two types of things (which should be sort of comparable) differently. Airbnb kind of evades the whole zoning thing.

The other thing is interest rates. They make the list price higher, though not monthly payments.

I think this is the largest factor. And regulations regarding mortgages. If mortgages were capped to 3x your family income, max, houses would be a lot cheaper.

However, developers are the ones raking in the cash with low interest rates. 1) Their own loans to finance a new build is very low, so it’s lower risk to build. 2) Being that they have large amounts of cash, they can lobby the government to make getting mortgages easier for their clients. The amount of money that goes to Ottawa, the influencers, MP’s, etc., is insane.

Capped mortgages would result in cheaper houses for sure. One could argue fewer houses as there is less incentive to build them. I'm not sure I buy that argument, but it is an argument. People not thinking of houses as investments would probably help in general.

Perhaps this should move to a different thread?

[ijmorlan]

Also, zoning. Your statements are true in an unregulated market, but I'm pretty sure that both hotel and condo supply are constrained by zoning, which restricts supply of these two types of things (which should be sort of comparable) differently. Airbnb kind of evades the whole zoning thing.

No surprise, the authors of the zoning code have no idea how much of what sort of real estate use is needed. This is the positive side of AirBNB, Uber, etc.; through a combination of legal hackery and just not caring about the legality, they have circumvented long-standing arbitrary limitations on market entry.

Unfortunately I suspect many will learn the wrong lesson: instead of realizing that the zoning code and other legal restrictions should not attempt to control how much of various goods are supplied, we will instead find ways to enforce these arbitrary restrictions.

Capped mortgages would result in cheaper houses for sure. One could argue fewer houses as there is less incentive to build them. I'm not sure I buy that argument, but it is an argument. People not thinking of houses as investments would probably help in general.

Cheaper houses, but not more people in them; that can be accomplished only by construction, either of more buildings or to re-configure existing buildings to fit more people. And if price drops, quantity supplied can be expected to drop as well, ceteris paribus.

[danbrotherston]

Also, zoning. Your statements are true in an unregulated market, but I'm pretty sure that both hotel and condo supply are constrained by zoning, which restricts supply of these two types of things (which should be sort of comparable) differently. Airbnb kind of evades the whole zoning thing.

No surprise, the authors of the zoning code have no idea how much of what sort of real estate use is needed. This is the positive side of AirBNB, Uber, etc.; through a combination of legal hackery and just not caring about the legality, they have circumvented long-standing arbitrary limitations on market entry.

Unfortunately I suspect many will learn the wrong lesson: instead of realizing that the zoning code and other legal restrictions should not attempt to control how much of various goods are supplied, we will instead find ways to enforce these arbitrary restrictions.

Capped mortgages would result in cheaper houses for sure. One could argue fewer houses as there is less incentive to build them. I'm not sure I buy that argument, but it is an argument. People not thinking of houses as investments would probably help in general.

Cheaper houses, but not more people in them; that can be accomplished only by construction, either of more buildings or to re-configure existing buildings to fit more people. And if price drops, quantity supplied can be expected to drop as well, ceteris paribus.

I'm confused, you seem to be contradicting yourself here...if the price drops...quantity doesn't necessarily drop...housing is not a commodity item, profit would drop, but that doesn't mean that homes wouldn't still be profitable to build. I believe the limiting factor is regulation. You can have cheaper housing and more construction.

As for AirBnB I still disagree, travel is incredibly flexible, as we are seeing now...if AirBnB never was, the price to travel would be higher, and fewer people would do it, and the demand for travel accomodations would be lower.  I'm not saying that's a good thing, but it would mean certain local realestate markets would have a greater supply of housing.

When it comes to regulations...I mean, some are good, some are bad (some are very bad...I'm looking at you parking minimums), so I think regulations need to be smart and adaptive, but generally I think some regulation is absolutely needed, and Uber/AirBnB are the last folks I trust to actually do the regulating.

[ijmorlan]

Cheaper houses, but not more people in them; that can be accomplished only by construction, either of more buildings or to re-configure existing buildings to fit more people. And if price drops, quantity supplied can be expected to drop as well, ceteris paribus.

I'm confused, you seem to be contradicting yourself here...if the price drops...quantity doesn't necessarily drop...housing is not a commodity item, profit would drop, but that doesn't mean that homes wouldn't still be profitable to build. I believe the limiting factor is regulation. You can have cheaper housing and more construction.

I’m talking about house prices dropping specifically due to rules on mortgage eligibility. Let’s take a simplified scenario. There are 100 houses, and 10 more that a developer is just barely willing to build at current prices. The 100 houses are all occupied, but 10 more people would like a house. 5 of the people currently occupying a house would like to move to a new house.

So, hypothetically, 5 people can move into a new house from an old house, 5 more people can replace them, and 5 more can move into a new house from nowhere (well, nowhere in our scenario; maybe they are from out of town, who knows).

Assume furthermore that under existing mortgage rules all these transactions can be accomplished (i.e., the 10 new people all qualify, as do the 5 people who want to move).

Now change the rules so it’s harder to get a mortgage. So the maximum that the various people looking for a house can pay drops. Now the developer can’t sell the new houses for as much, so they won’t build them (note: I said they were just barely willing to build under the old rules).

Obviously, real situations are insanely complicated compared to this. But at the margin these are exactly the sorts of things that can and do happen. I should have included some people who are in houses and moving out to retirement homes. Those people will, in general, sell for whatever they can get (although, at the margin, what they can get will influence their decision to move, just as with anybody). So they would still sell to people who want a house.

But the bottom line is, the only way to actually house more people is to build more housing. Messing around with the rules won’t build housing and has a good chance to making it more difficult to build housing.

This doesn’t mean we shouldn’t have rules. For example, houses would be noticeably cheaper if we got rid of the rules around fire safety and the plumbing and electrical codes; but of course people would be dying in fires, electrocuted, and poisoned by sewer gas and mould in huge numbers. But we do have to be careful to understand the actual economic impact of rule changes.

Even safety rules can go too far. Imagine changing the electrical safety rules in a way that doubles the cost of everything electrical from where it is, which eliminates half of the remaining deaths from electrical issues. It would take a detailed study to really figure this out, but I’m guessing the increased morbidity from people being homeless due to being unable to afford the more expensive housing would outweigh the numerically tiny reduction in deaths (since our electrical systems are already very safe). I’ve actually heard of an affordable housing project that was planned as a walkup. Code required an elevator. Result: no project built. Better overall? I doubt it; those people continued to live under bridges or wherever.

As for AirBnB I still disagree, travel is incredibly flexible, as we are seeing now...if AirBnB never was, the price to travel would be higher, and fewer people would do it, and the demand for travel accomodations would be lower.  I'm not saying that's a good thing, but it would mean certain local realestate markets would have a greater supply of housing.

When it comes to regulations...I mean, some are good, some are bad (some are very bad...I'm looking at you parking minimums), so I think regulations need to be smart and adaptive, but generally I think some regulation is absolutely needed, and Uber/AirBnB are the last folks I trust to actually do the regulating.

Yes, I agree we don’t want the people who run Uber/AirBNB/etc. running things. But to take an example, if the taxi business wasn’t a government-sanctioned cartel of existing license holders, then anybody with an idea on how to run a taxi better than the incumbents could try. As it is, only a huge company that can tie things up in the courts and do massive lobbying is capable of disrupting the existing taxi companies.

[danbrotherston]

I'm confused, you seem to be contradicting yourself here...if the price drops...quantity doesn't necessarily drop...housing is not a commodity item, profit would drop, but that doesn't mean that homes wouldn't still be profitable to build. I believe the limiting factor is regulation. You can have cheaper housing and more construction.

I’m talking about house prices dropping specifically due to rules on mortgage eligibility. Let’s take a simplified scenario. There are 100 houses, and 10 more that a developer is just barely willing to build at current prices. The 100 houses are all occupied, but 10 more people would like a house. 5 of the people currently occupying a house would like to move to a new house.

So, hypothetically, 5 people can move into a new house from an old house, 5 more people can replace them, and 5 more can move into a new house from nowhere (well, nowhere in our scenario; maybe they are from out of town, who knows).

Assume furthermore that under existing mortgage rules all these transactions can be accomplished (i.e., the 10 new people all qualify, as do the 5 people who want to move).

Now change the rules so it’s harder to get a mortgage. So the maximum that the various people looking for a house can pay drops. Now the developer can’t sell the new houses for as much, so they won’t build them (note: I said they were just barely willing to build under the old rules).

Obviously, real situations are insanely complicated compared to this. But at the margin these are exactly the sorts of things that can and do happen. I should have included some people who are in houses and moving out to retirement homes. Those people will, in general, sell for whatever they can get (although, at the margin, what they can get will influence their decision to move, just as with anybody). So they would still sell to people who want a house.

But the bottom line is, the only way to actually house more people is to build more housing. Messing around with the rules won’t build housing and has a good chance to making it more difficult to build housing.

This doesn’t mean we shouldn’t have rules. For example, houses would be noticeably cheaper if we got rid of the rules around fire safety and the plumbing and electrical codes; but of course people would be dying in fires, electrocuted, and poisoned by sewer gas and mould in huge numbers. But we do have to be careful to understand the actual economic impact of rule changes.

Even safety rules can go too far. Imagine changing the electrical safety rules in a way that doubles the cost of everything electrical from where it is, which eliminates half of the remaining deaths from electrical issues. It would take a detailed study to really figure this out, but I’m guessing the increased morbidity from people being homeless due to being unable to afford the more expensive housing would outweigh the numerically tiny reduction in deaths (since our electrical systems are already very safe). I’ve actually heard of an affordable housing project that was planned as a walkup. Code required an elevator. Result: no project built. Better overall? I doubt it; those people continued to live under bridges or wherever.

As for AirBnB I still disagree, travel is incredibly flexible, as we are seeing now...if AirBnB never was, the price to travel would be higher, and fewer people would do it, and the demand for travel accomodations would be lower.  I'm not saying that's a good thing, but it would mean certain local realestate markets would have a greater supply of housing.

When it comes to regulations...I mean, some are good, some are bad (some are very bad...I'm looking at you parking minimums), so I think regulations need to be smart and adaptive, but generally I think some regulation is absolutely needed, and Uber/AirBnB are the last folks I trust to actually do the regulating.

Yes, I agree we don’t want the people who run Uber/AirBNB/etc. running things. But to take an example, if the taxi business wasn’t a government-sanctioned cartel of existing license holders, then anybody with an idea on how to run a taxi better than the incumbents could try. As it is, only a huge company that can tie things up in the courts and do massive lobbying is capable of disrupting the existing taxi companies.

I mean this is a long scenario, but I fundamentally disagree with your base assumption, that in today's market there is any housing whatsoever that couldn't be built if the selling prices were lower.

Certainly you can go too low, but I don't think we're anywhere near that...I don't even think the margins are occupied...the margins would only be occupied with housing that is already being built as cheaply as possible that would now be sold for less because they would now be equal or greater than the price of more expensive housing...because if housing wasn't sold for as much, they can also build it for less by building cheaper housing...i.e., no granite counters...

Basically if there are cheaper houses being built for only the barest minimum that housing actually costs to be constructed, those prices don't have to fall as much or at all than more expensive housing...more expensive housing can now be less profitable or built more cheaply depending on the demands of the market. But I don't even believe that there is any housing being sold at or near minimum cost.

Fundamentally I think the problem with the housing market is not the actual cost of constructing housing, but the profit that is being generated from doing so and the regulations which limit who can build and where.

I have no love for the taxi industry...but frankly, I dislike Uber more--but that's another discussion.

[tomh009]

As for AirBnB I still disagree, travel is incredibly flexible, as we are seeing now...if AirBnB never was, the price to travel would be higher, and fewer people would do it, and the demand for travel accomodations would be lower.  I'm not saying that's a good thing, but it would mean certain local realestate markets would have a greater supply of housing.

While you can do very cheap AirBNB by sharing rooms etc, actually renting a house or an apartment isn't substantially cheaper than a hotel room, in general. It's different: you typically get privacy and more space, whereas a hotel may be newer and will provide more facilities (fitness room, bar, free breakfast etc).

And I do agree about the need for reasonable/rational regulation.

[ijmorlan]

I mean this is a long scenario, but I fundamentally disagree with your base assumption, that in today's market there is any housing whatsoever that couldn't be built if the selling prices were lower.

You do understand my assumptions are suppositions for an example meant to illustrate a very specific point, specifically, that lower prices don’t necessarily improve the ability of people to obtain housing?

I don’t believe that a tiny decrease in housing prices would bring construction to a halt in the real world. On the margin maybe some tiny number of projects would be cancelled or deferred, but not anything really noticeable.

Fundamentally I think the problem with the housing market is not the actual cost of constructing housing, but the profit that is being generated from doing so and the regulations which limit who can build and where.

I have no love for the taxi industry...but frankly, I dislike Uber more--but that's another discussion.

The profit is not a problem in itself; it’s more of a symptom. If large profits are possible it’s probably because it’s too hard to build, meaning that only those who can navigate the system are able to build.

[danbrotherston]

I mean this is a long scenario, but I fundamentally disagree with your base assumption, that in today's market there is any housing whatsoever that couldn't be built if the selling prices were lower.

You do understand my assumptions are suppositions for an example meant to illustrate a very specific point, specifically, that lower prices don’t necessarily improve the ability of people to obtain housing?

I don’t believe that a tiny decrease in housing prices would bring construction to a halt in the real world. On the margin maybe some tiny number of projects would be cancelled or deferred, but not anything really noticeable.

Fundamentally I think the problem with the housing market is not the actual cost of constructing housing, but the profit that is being generated from doing so and the regulations which limit who can build and where.

I have no love for the taxi industry...but frankly, I dislike Uber more--but that's another discussion.

The profit is not a problem in itself; it’s more of a symptom. If large profits are possible it’s probably because it’s too hard to build, meaning that only those who can navigate the system are able to build.

No, sorry, I didn't understand that...I took your statement to be an expression of belief about the actual situation, my mistake.

I think some profit is just fine, but property owners and developers aren't earning *some* profit. I'm not sure how profits interact with regulations and NIMBYism, I believe you are right that restrictions on building make it more profitable for those who do, but I don't think it is not the only factor. To some degree it is self-reinforcing, realestate is going up because there is huge investment in realestate specifically because realestate is going up.

[tomh009]

[quote='danbrotherston' pid='83415' dateline='1598282155']
I mean this is a long scenario, but I fundamentally disagree with your base assumption, that in today's market there is any housing whatsoever that couldn't be built if the selling prices were lower.
(...)
I don’t believe that a tiny decrease in housing prices would bring construction to a halt in the real world. On the margin maybe some tiny number of projects would be cancelled or deferred, but not anything really noticeable.

Fundamentally I think the problem with the housing market is not the actual cost of constructing housing, but the profit that is being generated from doing so and the regulations which limit who can build and where.

The profit is not a problem in itself; it’s more of a symptom. If large profits are possible it’s probably because it’s too hard to build, meaning that only those who can navigate the system are able to build.

I think it's actually simpler than that: while construction costs have been going up, the real driver is the cost of the land. And the increases in the cost of the land have been driven by scarcity of (desirable) land for development. And that, in turn relates very closely to zoning restrictions.

[danbrotherston]

The profit is not a problem in itself; it’s more of a symptom. If large profits are possible it’s probably because it’s too hard to build, meaning that only those who can navigate the system are able to build.

I think it's actually simpler than that: while construction costs have been going up, the real driver is the cost of the land. And the increases in the cost of the land have been driven by scarcity of (desirable) land for development. And that, in turn relates very closely to zoning restrictions.

This is a good point...of course, the land is all owned, which means when the land value goes up, people profit...

[tomh009]

This is a good point...of course, the land is all owned, which means when the land value goes up, people profit...

That's true. But I'm less concerned about those profits (or the lack thereof) than about the affordability of housing (and not just affordable housing, but the affordability of all housing).

[nms]

Is there any chance of the last few pages getting put some place else? I lost track of where we stopped talking about restaurants that have closed and started talking about housing prices and population density.

In related news, I don't have any restaurant casualties to report.

[plam]

Even safety rules can go too far. Imagine changing the electrical safety rules in a way that doubles the cost of everything electrical from where it is, which eliminates half of the remaining deaths from electrical issues. It would take a detailed study to really figure this out, but I’m guessing the increased morbidity from people being homeless due to being unable to afford the more expensive housing would outweigh the numerically tiny reduction in deaths (since our electrical systems are already very safe). I’ve actually heard of an affordable housing project that was planned as a walkup. Code required an elevator. Result: no project built. Better overall? I doubt it; those people continued to live under bridges or wherever.

Electrical is a bit far-fetched but earthquakes are a reasonable example of something that is legit expensive to provide but worth it when the earthquake happens.

Certainly you can go too low, but I don't think we're anywhere near that...I don't even think the margins are occupied...the margins would only be occupied with housing that is already being built as cheaply as possible that would now be sold for less because they would now be equal or greater than the price of more expensive housing...because if housing wasn't sold for as much, they can also build it for less by building cheaper housing...i.e., no granite counters...

Basically if there are cheaper houses being built for only the barest minimum that housing actually costs to be constructed, those prices don't have to fall as much or at all than more expensive housing...more expensive housing can now be less profitable or built more cheaply depending on the demands of the market.  But I don't even believe that there is any housing being sold at or near minimum cost.

Fundamentally I think the problem with the housing market is not the actual cost of constructing housing, but the profit that is being generated from doing so and the regulations which limit who can build and where.

I think it's actually simpler than that: while construction costs have been going up, the real driver is the cost of the land. And the increases in the cost of the land have been driven by scarcity of (desirable) land for development. And that, in turn relates very closely to zoning restrictions.

I think that both of these perspectives are valid to some extent. Certainly people convince each other that a detached house is worth $1M, then the "new money" that then goes into housing (which could be profitably used for things that are not housing) also pays for granite countertops, which really aren't mandatory.

I guess it works like this: the market brings the expected cost of a new house to $3X instead of $X, which is financed by the bank. Then the developer now has $3X to play with, and can buy granite countertops with that money, which wouldn't have been possible at $X. (By the way granite isn't that great. I prefer quartzite.)

I don't think it really is the cost of the land. I read something once about estimating the land value. It's kind of made up, even more than the cost of the granite countertops (which is tethered to reality in some sense). (The keyword here seems to be "residual land value")

But we don't really know how these numbers work. Here's a link: https://www.biggerpockets.com/blog/2009-...and-profit

Options For Homes developed the first condo I had in Waterloo. They're a non-profit land developer. They don't seem to be active in Waterloo anymore but they are still occasionally building stuff in Toronto.