I'm surprised we don't see more discussion of house prices on sites such as this. In my opinion it is THE issue affecting our generation.
Specifically for HN, the high cost of housing severely restricts entrepreneurship. If you are paying 50% of your income on a rent or mortgage, you are of course less likely to start a business, and the cost of doing that business in terms of employees salaries and commercial rents make it less viable.
Also consider that your suppliers, and their suppliers, and their suppliers ad infinitum, all have the same high costs ultimately derived from high housing costs for their employees.
This all adds up across the country and the whole economy is made less competitive and agile as a result. With lower housing costs there would certainly be less unemployment.
The sad thing is that the even intelligent people are duped into believing the myth that high house prices are good for them. Clearly lower prices mean more disposable income, which is usually a good thing? Clearly high house prices barely benefit anyone as we all need a house, and the next house you buy would likely have gone up by a greater price than the one you have now? And yet we persist - 'we MUST get on the housing ladder' and we blame those nasty banks because 'they aren't lending any more' when all they are doing is scaling back lending multiples from the absurd back to the ridiculous.
All that high house prices achieve is to keep young people into debt serfdom, keeping us on a treadmill servicing massive mortgages for the same bricks our parents bought for 20% of the price. We really could be out doing something much more worthwhile.
Word about this problem is trickling out, slowly—I like to cite Edward Glaeser's The Triumph of the City and Ryan Avent's The Gated City on the subject—but I think a lot of people simply don't understand supply and demand.
One time in Seattle I was driving home a friend, who was in law school, and she complained that there was too much construction in the city, and that construction made it less affordable. I said that more units make the city less affordable than it would be otherwise, and she said that they were tearing down "affordable" housing to put up housing for "rich people."
I tried to explain that, if given space that had 12 units now has 200, the overall affordability rises, but she totally didn't or wouldn't get that point. It was a bit like the scene where the Martian and man meet in The Martian Chronicles. Except that I'm right and she isn't. But until more people connect supply restrictions with cost, we won't get (much) improvement.
>I tried to explain that, if given space that had 12 units now has 200, the overall affordability rises, but she totally didn't or wouldn't get that point.
I don't know what your friend's reasoning was, however, I can see an argument on her side.
If the 12 units that were torn down were worth (and able to be sold for) 200k each and they were replaced by 200 units worth (and able to be sold for) 500k each, then that neighborhood is about to change character, and it probably won't continue to be affordable for the people who can't afford a 500k unit.
As I understand it, even if the builder is wrong and they can't sell at 500k (there are only 200k buyers), affordability still suffers.
Why? Because the developer won't sell the first flat for 200k even if that turns out to be the highest achievable sale price, because it would mean immediately having to write down the market value of the other 199. (A paper loss of 200 * 300k, not just the one lot of 300k). That's going to mean the flats sit there unsold for a long time, while the developer holds out hope of finding high value buyers that don't materialise.
Net upshot, for a significant period the developer has reduced the available housing by twelve 200k flats (the replacement two hundred are effectively not available for sale at the going rate).
Exactly, we can consider that the 200k unit is not the same item as the 500k unit. Indeed, the price of "de luxe" units will decrease (but maybe there were not enough of them in the first place) and, unfortunately (for poorer people), the price of the "affordable" unit will raise.
If real estate development was a free market, and a true commodity, then I would agree with you. The problem is, it isn't either thing.
The tax rules associated with large construction projects, plus that fact that large-scale commercial real estate is a cartel in most US markets means that the actual impact in terms of units doesn't equate to the number of units built. That's one reason why you see economic behavior that doesn't make sense on the surface -- prime urban residental property left vacant or rented out as tenament housing and big commercial properties left vacant for years.
Generally speaking, today, new residential construction in urban areas is pushing affordability out to the periphery of the city, or the aging out ring of suburb outside of the city.
Another issue is that location matters, and we tend to stick to desirable places in a limited area. Few people want to uproot their kids from school every few years or move away from their families and social networks. So the fact that a 3 bedroom ranch in Minneapolis costs 60% less than a 1 bedroom apartment in Queens doesn't really matter.
I'd suggest you read the sections in Robert Caro's "The Power Broker" see how these kinds of shifts impacted millions of people in NYC during the 50s and 60s.
>The tax rules associated with large construction projects, plus that fact that large-scale commercial real estate is a cartel in most US markets
Interesting. Do you have any links to contemporary discussions of this issue?
The in-depth Glaeser/Yglesias/Avent discussions I've seen mostly focus on height limits and minimum parking requirements as major problems in urban areas.
For what it's worth, specific to what I've seen in Seattle, the vast majority of the higher density apartment buildings being constructed in Seattle today are replacing single family homes, parking lots, and quite often single floor commercial development with mixed-use.
I hear this "there's too much construction, they're building luxury apartments for AMZN/MSFT workers and pushing out the artists and baristas" argument all the time on Capitol Hill, but I've sat down and looked at the many dozens of buildings that have been build in the last couple years and the ones currently under construction, and only once was a cheap building torn down for construction of a luxury building. The specific location is the NW corner of E Pine and Bellevue, and the former building was abandoned after a fire.
Along Broadway E, several blocks of commercial real estate have been replaced with equivalent commercial square footage plus 5-6 stories of apartments on top. No units lost, only gained. In Denny Triangle, Amazon is ripping out a car dealership and some parking lots to build three blocks out with 500ft tall office towers, and apartment and condo towers are popping up in the area surrounding that already.
The story is similar in Lower Queen Anne and South Lake Union. Generally, no units are being lost to new construction, and neighborhoods are getting more dense and more walkable, all of which benefits people who don't want to depend on cars.
One of the most exciting housing developments in the city right now is the Apodment craze. These small dormitory-style apartments are built in very walkable areas of the city, and priced so that students, artists, and baristas can afford to live in them. They're generally built without any parking at all, which helps keep costs down. They exploit a loophole in the building code to allow this high density, and the typical NIMBY characters are quite upset. Funny, the same people who complain about luxury apartments putting bland software developers in their neighborhood abhor the thought of housing that the artists can actually afford being built.
Supply and demand isn't that simple especially in housing or other assets seen as investments. Rising prices in housing increases rather than decreases demand. People want to get on the ladder, banks throw money at people with no incomes and the world goes mad when house prices go up. It may be than supply can do a little to moderate the effects of the backwards demand curve but I don't think it can generally fix it.
Where there is a real building boom (Ireland/Dubai/Spain... 2004-2008, probably much of China now) the building industry can actually be a large part of the economy bringing in migrants (and housing demand) into the area temporarily increasing demand. Also the building tends to happen when prices are rising and people build and purchase speculatively based on the rising prices. So in the short term affordability falls due to the increased demand. In the slightly longer term prices start to fall and the building stops and therefore the demand falls further and no one will offer a mortgage to buy anything so affordability is still rubbish.
[Edit: typos. Added Spain to list of 2004-2008 boom areas and put a "probably" on China]
Something to note is that Seattle's central neighborhoods were strongly in the grip of a condominium boom. Older houses and 12-unit apartments were being torn down to build fancy 200-unit condo buildings for more than double the previous rent.
Everyone has to live somewhere; fitting 200 people on a small but tall, fancy condo plot frees up 200 people-units elsewhere. That's how supply and demand work.
Except that somewhere isn't implicitly in the vicinity of the new development. That somewhere could be in the suburbs, another city, a dorm room, a room in a parent's house, or any other options which doesn't have any real impact in the availability of housing in an area.
That doesn't take account of what quality and price-point the old and new units occupied. If the old units were older housing with fewer amenities at a lower price-point and the new units were luxury condos with in-building gymnasiums and doormen, then she was right and you were wrong. In that case, the construction was shifting the supply-versus-quality curve to more supply at higher quality and less supply at lower quality. Lower quality isn't always a bad thing, because it naturally implies a lower price for those comfortable with the no-frills approach.
One strange thing about the house prices is that people can opt out, especially in the US. You don't have to live in expensive places. You can live in perfectly nice places where house prices are 30%. One would have thought that the internet would have eased some pressure on the most desirable addresses, but the discrepancy seems to be getting sharper.
Another way of putting it is that if house prices are harming innovation, you would see more entrepreneurship in lower cost of living locations.
While the internet does make location irrelevant for a lot of purposes, there is value in being in an area with lots of other technology people. Even Superman moved from Smallville to Metropolis. :)
Another way of putting it is that if house prices are harming innovation, you would see more entrepreneurship in lower cost of living locations.
Correlation != causation.
Right now, location still matters a great deal. People are just mobile enough to stratify in their 20s (ambitious people move to the star cities) but not enough to render location obsolete outright.
In the Bay Area and New York, you have a continuous/liquid job market. If you're a startup that needs to hire a Scala expert with knowledge of 3 specific NoSQL databases, and you need to hire that person in two weeks, you can find such a person in the Bay Area, for a price. In Minneapolis, there are a lot of talented people, sure, but there isn't the critical mass that allows you to have ridiculous AND-ing in your requirement query. The same goes in job searching. You might have to choose between your location and your speciality.
The appeal of the star cities is the continuous, liquid market. For build-to-flip startups that grow rapidly and reallocate huge amounts of money without doing much, the second-tier cities just aren't an option.
The appeal of the star cities is the continuous, liquid market. For build-to-flip startups that grow rapidly and reallocate huge amounts of money without doing much, the second-tier cities just aren't an option.
In which case I think it's the build-to-flip "businesses" that deserve to die rather than the "second-tier" cities.
But what do I know? I live in a "second tier" city with its own Google, Microsoft, and Intel R&D labs alongside the nation's Institute of Technology. Somehow we're still considered second-tier and every freaking start-up still locates itself in the city 1 hour's drive south from here with Boston-scale housing prices in a country of Minneapolis-scale salaries.
It's not so much that no one would buy if they couldn't get a loan so much as it is that the availability of the loan causes prices to rise because demand goes up relative to supply.
All good points. But ask yourself, 'What's in the best interest of the wealthy and powerful, who get what they want?'. (They own a lot of real estate) Sorry if i'm too cynical.
Specifically for HN, the high cost of housing severely restricts entrepreneurship. If you are paying 50% of your income on a rent or mortgage, you are of course less likely to start a business, and the cost of doing that business in terms of employees salaries and commercial rents make it less viable.
Also consider that your suppliers, and their suppliers, and their suppliers ad infinitum, all have the same high costs ultimately derived from high housing costs for their employees.
This all adds up across the country and the whole economy is made less competitive and agile as a result. With lower housing costs there would certainly be less unemployment.
The sad thing is that the even intelligent people are duped into believing the myth that high house prices are good for them. Clearly lower prices mean more disposable income, which is usually a good thing? Clearly high house prices barely benefit anyone as we all need a house, and the next house you buy would likely have gone up by a greater price than the one you have now? And yet we persist - 'we MUST get on the housing ladder' and we blame those nasty banks because 'they aren't lending any more' when all they are doing is scaling back lending multiples from the absurd back to the ridiculous.
All that high house prices achieve is to keep young people into debt serfdom, keeping us on a treadmill servicing massive mortgages for the same bricks our parents bought for 20% of the price. We really could be out doing something much more worthwhile.
Edit - you may wish to read this to put the madness of this credit bubble into perspective: http://www.housepricecrash.co.uk/forum/index.php?showtopic=5...