Thursday, August 10, 2017

Futile Real Estate Arguments

Futile Attempts to Argue Housing Costs Decrease with Density:

A friend asked me to address some links posted as "proof" that building more lowers costs.  Those who argue increasing density lowers housing costs are making futile arguments.

Before getting into it, I'll reiterate that real estate fluctuates but if it is up 50% down 10% then overall things aren't getting better if you are a renter.  I'm not sure why people want to argue increased density lowers rent unless, of course, they are builders.  Perhaps some people think endless growth is good in and of itself but they want no bad consequences for anyone, ever, anywhere.  Sorry, you can't have your cake and eat it too.  You want growth you get higher priced housing.  That is how things work in real estate.

This is well established:
"First an increase in the population size has fairly straightforward effects. Indeed, a rising population makes competition for land fiercer, which in turn leads to an increase in land rent everywhere [emphasis added] and pushes the urban fringe outward.  This corresponds to a well documented fact stressed by economic historians.  Examples include the growth of cities in Europe in the 12th and 19th centuries as well as in North America and Japan in the 20th century or since the 1960s in Third World countries."  (From page 83 section 3.3.2: Economics of Agglomeration:... by Fujita, Thisse).  

Anyway, here goes:

This one is easy to refute.  Quoting from article itself, "The oversupply is mostly in the high-end market, Shuffield said. Homes priced under $300,000 are still moving quickly in both counties, although there’s a limited supply of them for sale."  So they overbuilt the $1M+ condo market where sales are one-sy two-sy but the broad market of $300K is hot.  That is like saying the car market is weak because only 2 Maseratis were sold last month instead of 3 - while 300,000 Fords, Hondas, etc., etc. got sold.

2.  London: cksmith/wh...
Same thing only different.  Title of article is: Why Are Asking Prices For London's Luxury Flats Falling? "BuzzFeed News has identified more than £18 million worth of asking-price reductions among flats at the Nine Elms regeneration area on the south bank of the Thames"

Again, we're talking about a few houses for the rich.  The broad London housing market is continuing to climb. The very high end is suffering oversupply.  From another article on this topic:  "But these price movements don't really affect the middle of the market; prices are still rocketing in the most affordable London boroughs, so it is increasingly difficult for renters to escape the over-heated rental market.
Click on graph below to enlarge.  

The article goes on to say housing prices will grow overall at a more manageable pace simply because no one can afford any further large increases.  They won't decrease except at the very high end.  Above is a graph of housing prices in London.  Up 70% in 5 years.  Up 70% then maybe(!) down 10% - (except it hasn't actually happened yet - maybe later?).  I have never said otherwise.  Housing prices will rise as density increases, builders will over-build because they don't coordinate and no one knows where the top is until they reach it, then prices come down a little - but not much, unless we get a major recession like 2007-2009 - which no one wants to see.  

Here's a graph showing housing prices going down.  Massive unemployment at the same time.  Those are not random, uncorrelated events.  One causes the other.  I don't want massive unemployment.  Does anyone?

This article claims a lot of economists predict housing prices will fall in Melbourne, Australia by as much as 20%.  Except it hasn't happened yet!  And after rising 100% then maybe down 20%.  Covered that above.  Chart below shows Australian housing prices 'ups and downs' but big 'ups' and small 'downs'.  Click on chart below to enlarge.  Note it is a log scale so rises were sharper than they first appear.

The 2014 article claims office space is in oversupply and that investment in housing was only 10.5% which is evidently less than before.  Housing prices might decline 5-6%.  Nothing goes up forever, but 100% up and 6% down?  What does this prove?

Following chart shows housing prices doubled = 2x (after factoring out inflation) from 1985 to 2010 but GDP was up 7x.  Housing went up because the country and it's people got richer.
(behind a paywall)  This says nothing about "increasing supply lowering prices".  The article says prices have not gone up as much in the hinterland as they have in the key areas like Beijing and Shanghai.  Here's a quote: "One of those queuing, Wang Jie, bought a new apartment for 2m yuan ($307,000) in October, and has watched its value soar by another 1m since then."  And here's their graph for the article.  Does it look like a drop in prices?

6.  Austin, Chicago, and D.C.: anielkayhe...
Quote from article:  "Real estate data firm Zillow said Friday that rents have fallen 0.5 percent in the Chicago area over the past year."  Is this supposed to impress?

People believe what they want to believe.  I am not trying to address the true believers, because I know they are not convince-able.  I am trying to help articulate the reality as determined by economists and economic historians over the last 200 years for those who are open-minded and know what they hear doesn't jibe with what they see.