Today’s luxury apartments may be tomorrow’s affordable housing

[Barbarossa]

.

[dktshb]

I don't know, it sounds like the "trickle down economics" argument for housing and we know how well that works.

[ChargerCarl]

Originally Posted by dktshb

I don't know, it sounds like the "trickle down economics" argument for housing and we know how well that works.

Trickle down economics is just a label used to describe Reagan era tax cuts.

This has nothing to do with that.

[mhays]

Of course it's true. And it has no similarities at all to the trickle down theory.

Look at the apartments we have today. Compare units from the 1970s to ones from the 1990s or 2000s. Guess which ones have lower rents per square foot.

But more importantly it's about supply staying ahead of demand. That keeps the landlords competing with each other vs. renters competing.

Apartment developers know this, and try to predict overbuilding, because that means rents flatten or even drop (concessions more than base rents). The development curve and the rent curve tend to follow each other...booms end with stagnant rents.

[jpdivola]

Originally Posted by mhays

Of course it's true. And it has no similarities at all to the trickle down theory.

Look at the apartments we have today. Compare units from the 1970s to ones from the 1990s or 2000s. Guess which ones have lower rents per square foot.

But more importantly it's about supply staying ahead of demand. That keeps the landlords competing with each other vs. renters competing.

Apartment developers know this, and try to predict overbuilding, because that means rents flatten or even drop (concessions more than base rents). The development curve and the rent curve tend to follow each other...booms end with stagnant rents.

I agree with this basic school of thought. All things being equal, more supply equals prices being lower than they otherwise would be.

As a general rule, I tend to discount those who argue that more construction leads to higher prices. IMO, they are often conflating demand with supply and tend to view the issue through a prisim of distrust toward developers/market-based approaches.

But, I do think there is an argument to be made in limited circumstances for "development inducing supply." The basic idea is that an increased residential base makes an localized area more desirable to live. It can sustain more ammenties and generally becomes more interesting. This drives more people to move to the area, etc. But, I tend to think this is limted to a particular area of the regional housing market and not the market as a whole. For example, in many sunbelt/rust belt cities living in the urban core simply isn't that desirable. There isn't the critical mass of core urban ammenities you find in SF, Chi, Bos, etc. As development takes off these ammenities grow and it attracts more and more of the region's affluent people who might otherwise chose an upscale suburb. So in this case, increased development would probably make urban living more desirable and therefore more expensive. But, it would make the previously desirable suburbs less expensive and lower housing prices across the region.

However, in the already desirable urban cities, I don't think this rule applys as much. Adding 10,000 new units to core SF is going to have less marginal impact on the ammenity base than adding 10,000 units to Cleveland. Here development in lower income areas may accentuate the gentrification of these specific neighborhoods, but the added development will take prices presure off prices across the urban core.

So while I don't think it is possible for additional housing development to make a regional housing market more expensive, it may make certain parts of it more expensive.

[mhays]

I agree that an infusion of housing can upgrade a neighborhood and induce demand in a very localized way. Maybe it can even help attract people to a city, like the standard millennial who finally has a decent urban neighborhood and reconsiders the move away. But the main effect is that some of the locals live in that neighborhood vs. other neighborhoods.

[brickell]

Originally Posted by mhays

Look at the apartments we have today. Compare units from the 1970s to ones from the 1990s or 2000s. Guess which ones have lower rents per square foot.

But a waterfront condo is always going to be a waterfront condo. A 5,000ft home in the hills is almost always going to be that. In general I agree with you, but there's strata to this. A 10 bedroom penthouse is going to do nothing for affordability, no matter how many you build.

[mhays]

Not true. Build 10,000 of those and that's 10,000 units vacated elsewhere. And the people who move into the second 10,000 are vacating 10,000 beyond that. Quite a few people get to move up a rung. And the market will have a substantially improved supply/demand equation at every level.

[Busy Bee]

^ Doesn't that equation require 0% population growth in order to work?

[Eightball]

Originally Posted by brickell

But a waterfront condo is always going to be a waterfront condo. A 5,000ft home in the hills is almost always going to be that. In general I agree with you, but there's strata to this. A 10 bedroom penthouse is going to do nothing for affordability, no matter how many you build.

http://ny.curbed.com/2016/2/29/11133...house-split-up

[mhays]

Originally Posted by Busy Bee

^ Doesn't that equation require 0% population growth in order to work?

Either way, it's about supply staying ahead of demand.

With zero growth in households, the addition of new units can make existing units worth less. Like a lot of stagnant parts of the US.

With 1% growth in households and a 5% rental vacancy rate, 1% growth in housing units should keep housing prices steady. If housing units don't grow that quickly, rents would rise quickly since 5% is often roughly equilibrium.

[ChargerCarl]

Originally Posted by mhays

I agree that an infusion of housing can upgrade a neighborhood and induce demand in a very localized way. Maybe it can even help attract people to a city, like the standard millennial who finally has a decent urban neighborhood and reconsiders the move away. But the main effect is that some of the locals live in that neighborhood vs. other neighborhoods.

This is a good post. I think it's important to differentiate between neighborhood and regional effects.

Increasing housing in a particular neighborhood often comes with an increase of local amenties which raises demand for that particular neighborhood. However, this relationship is decreasing to scale (because the demand curve for amenities slopes downward) meaning there is a threshold past which the increase in housing supply outweighs the benefits accrued from any increase in amenities. The correct response is to let neighborhoods just keep adding housing supply until p=mc if you care about affordability.

As for the region, all housing supply increases lower prices on the margin.

[llamaorama]

The thing I worry about his how well today's 'luxury' buildings adapt to becoming affordable housing for low income tenants and the costs to maintain them 40 years from now. At least urban buildings seem better than suburban apartment complexes. Those by the nature of their design are autocentric, insular, are not family friendly, etc.

It's nice to think that today's new buildings will stick around a good 80 years and provide a surplus of affordable housing. But all of us here know examples where buildings become too hard to renovate and get torn down and the empty lot just sits there, or they get a reputation as sociological failures and the city funds their demolition to remove blight.

This is why I like more fine grained neighborhoods. They can't be replaced in one go, change happens more gradually, people take ownership of spaces around their homes and are more concerned about their neighborhood, etc.

[mhays]

That may happen in shrinking/stagnant cities. Teardowns are very unusual in growing cities that have affordability issues.

[Eightball]

Manhattan Luxury Rents Slide as Condo Buyers Seek Tenants

http://www.bloomberg.com/news/articl...s-seek-tenants

The median rent for a Manhattan luxury apartment -- defined as the top 10 percent of the market -- fell 4.2 percent in February from a year earlier to $8,000 a month, Miller Samuel and brokerage Douglas Elliman said in a report Thursday. It was the seventh time in the past year that prices for the borough’s costliest rentals were either flat or declined.

[chart from linked Bloomberg article]

[mousquet]

I think there are only 2 possible ways to achieve affordable luxury.

1 - Going through severe decline like Detroit, MI did. But that's only a temporary solution, and you'll see prices skyrocketing in Detroit sometime soon.

Or 2 - Building a lot, and more and more at faster rate, constantly, which by definition NIMBYs hate and fight against.

Conclusion: NIMBYs are the total enemies to make everything overpriced, often cynically, on purpose. I can't stand them. I would burn them alive on a public square, medieval style, with all the media witnessing and broadcasting.
Of course sane preservationists are no NIMBYs, since NIMBYism threatens valuable historic buildings and districts on the very long run.

[jbermingham123]

Heres how the "trickle down" works:

1. person X has a lot of money

2. new ultra-high-end condo towers go up all across the city

2. person X moves into 99 Church Street on a high floor

4. person X puts his previous luxury apartment in Chelsea up on the market

5. nobody buys it, because everyone shopping in the luxury market is instead buying into the new developments

6. person X is forced to lower his price until he finds a buyer

7. price goes down

8. rinse

9. repeat

[Crawford]

Not in NYC. Relative age of property has almost nothing to do with relative value of property. You will never get more affordable housing by building more luxury housing, at least around here. Location is easily the most important factor in the relative value of housing.

There is no filtering of housing happening in NYC. Maybe somewhere like Fort Worth or Kansas City, but the filtering concept is totally foreign around here. If your housing sucks you can upgrade it. Can't upgrade the location.

[mhays]

Manhattan is massively underbuilt relative to demand (including offshore demand). That's what keeps prices high.

This is like the weight topic. Calories taken in vs. calories used. The details matter too, but it still comes down to this basic fundamental.

[ardecila]

Originally Posted by Crawford

If your housing sucks you can upgrade it. Can't upgrade the location.

Sure you can. Isn't that the whole impetus behind deBlasio's streetcar?