Near my partner’s house they finally demolished an abanonded hospital that had been there for decades and I think they are going to build luxury condos that a lot of renters in my town cannot afford.
I expressed my concerns to my partner and he was explaining how its a good thing to create more housing regardless of whether its luxury housing or low income. I said that I wasn’t upset about more housing but how luxury condos will cause rentals in the area to go up due to increased value from slum and corporate landlords. He continued to explain I don’t know economics and doubled down that this will lower rental costs as renters will be moving to these condos freeing up housing across the city. I continued to tell him the condo prices are too expensive for this area and most will remain vacant for a long time as I have seen the rental market in my area and there are condos closer to me that have been sitting vacant for almost two years now because of the price tag and the condo fees
We dropped the conversation there because we stood very opposite in this debate. And sure I don’t know a ton about economics but what I do know is that rental prices in my area I can’t find a place under $1700 right now. I am currently fighting my landlord against an eviction because they are refusing to accept government rental assistance I applied and got approved for. I can’t move I can’t afford it I can’t beat $1100. My partner thinks my case is sad but he still stood where he does on the issue mostly because he makes way more money than me.
So please explain basic housing and economics like I am five.
In: Economics
In simple terms the people who can afford a luxury condo for $4000 a month have to settle for a $2000 apartment now because there is not enough luxury condos on the market. If they build more luxury condos they will move out of the $2000 apartments and into the condos. The landlords is then left with apartments and have to lower the price to $1700 to get people to move into them. That means a lot of $1700 flats are not finding people to live in them because they can get nicer apartments so these will lower the price to maybe $1500 to find tenants.
So building luxury condos is going to lower the rental price. It is better then leaving the old hospital in place. But they could have built maybe three times as many affordable flats. That would house three times as many people and end up lowering the prices even more.
He is correct, it is essentially supply and demand. Where you differ is that you are focused on one area vs overall. Your area may be more desirable than average for many reasons, but in the end if supply outstrips demand, prices fall. If demand outstrips supply, prices rise. And yes, some units can sit empty because it is often more profitable overall for some to sit empty while the rest command higher prices. Commercial real estate is like this especially.
It creates more overall housing, and people who move into the luxury housing vacate a less nice apartment/condo, who somebody else rents/buys, vacating their apartment/condo, and so on down the line.
Yes and no. It’s complicated.
Adding supply can reduce demand, but when supply vs demand is inelastic and landlords have options other than just renting you don’t necessarily see a big impact on costs unless supply starts to *exceed* demand.
For examples of effects you might see when there’s a housing shortage:
1. A lot of people are likely living further out because they can’t afford or can’t find accommodation inside the city where they’d rather be. If you free up houses in the city there’s a good chance they’ll be filled by people who are currently making long commutes, so costs in the city don’t go down.
2. There’s going to be a bunch of people living with multiple residents in a single house, and maybe these folks could afford apartments of their own there just aren’t any available close enough to work so they’re sacrificing comfort and privacy for short commutes. Make apartments available and they could move into them while the main tenant just keeps the house, or possibly one new tenant takes it over at the original price point. You might add 4 apartments but only free up one house, which promptly gets taken by someone who can afford to spend boatloads so rents aren’t coming down.
3. When tenants move out and into a condo a landlord might decide to turn their rental into an air bnb, so no housing is freed up.
4. Any price point reductions that do happen because of increased supply might induce more people to consider moving to the area, correcting the supply vs demand back up to where it was.
5. If land values are getting high enough that luxury condos are viable then existing landlords are also doing the math that their property is soon going to be worth more to sell to a developer than they’ll get renting it, so will start to be willing to have a house empty for longer before accepting a lower rent because a tenant free house is a potential large windfall.
If demand exceeds supply you’re not going to see significant impact on rental prices unless you majorly boost supply to the level where it equals/exceeds demand *and stays there*.
This is harder than it sounds, because the cost to build these high density luxury apartments is often several hundred dollars per square foot, and the folks building them have very very rigid ROI plans – if projections show rents have reduced and it will take 6 months longer before they hit break even they’ll put the project on ice until the break even is back where they want it. While the developers aren’t colluding (or probably aren’t…) they are all running identical financial models and making more or less identical decisions based on them (because these are tried and tested strategies), so the result is they’ll all simultaneously take a break from building rather than add supply if it’s going to reduce rents past their break even threshold.
IOW – they’re never going to add enough to meaningfully impact rents at the market level you’re looking at.
There are let’s say 10 houses in a neighborhood – the Hills.
There’s 10 houses in the valley nearby.
The hills is prettier and more desirable. People want to live there. This month one of the Hill house owners wants to sell their house it’s old, needs work, roof leaks a little.
There are three families looking to move to the Hills- 2 rich families from out of town and 1 middle class family from the valley that needs more space because they have a young kid.
Scenario A) leave abandoned building as is- three different families bid for the house – one of the two rich families ends up with the house. The other rich family starts looking for something else, maybe they start looking in the valley.
Price of old house goes up, people who live in the city (middle class family) have to stay where they are or move out of the city- they might end up selling their house to the other rich family and move out to the suburbs. Gentrification all around, middle class leaves city.
Scenario B) abandoned house turned into 5 luxury condos. Two rich people and middle class fam all bid for same old house but the price doesn’t go as high because the two rich families decide it’s a better value to go with one of the luxury condos. Middle class gets old house in the Hills, two rich families in condo. City/neighborhood gets more money for roads and schools from property taxes. Middle class old house in valley gets sold to someone moving back to the valley after college.
Everyone gets houses, housing costs don’t go up as much.
“due to increased value from slum and corporate landlords” isn’t a very useful explanation at all, indeed it clouds the issue badly. It’s simple: if people can afford the new expensive place and want to live there, then they move out of cheaper places leaving more supply for everyone else. If you want to see cheaper housing across the board, there is only one sustainable and real solution: building more housing of all kinds.
Builders generally try to build things they think will sell, and they are betting a lot of money on their ability to sell. They just need *somebody* to be able to afford it, and luxury condos have higher profit margins, therefore more room for error if they overestimated the demand. So building luxury condos is often a good business decision.
Now, let’s assume they’re right, and someone buys the condo. Let’s talk about what happens when the new owner moves into their new condo: An older unit is now available, and older things are usually less expensive than newer things, so now the market has a slightly more affordable unit. So someone with the means to upgrade moves in there, and makes a more affordable unit available, and so forth.
So that’s the basic mechanism for luxury condos putting downward pressure rents, but the issue is that these effects happen at a regional level, and often times the lower rents are showing up outside the neighborhood that the new condos are built in. And now that builders see that luxury condos sell in that neighborhood, they might offer a premium to property owners of underdeveloped plots in the area, and if those owners are landlords, they evict their tenants, and sell their property. The property becomes a bunch of units that the original tenants can’t afford, so this type of displacement is a big part of what housing justice advocates are concerned about.
So in summary, any type of housing puts downward pressure on rents *regionally*, but can cause rents in the immediate neighborhood to rise, displacing existing residents.
They are slapping the label “luxury apartments/condos” on just about anything now, and there isn’t really a definition of what constitutes “luxury”, so basically, they’re building more apartments and increasing supply.
Eventually luxury condos become trashy rundown cheap condos. Everything has a lifespan. And when those people buy a condo they free up another trashier condo.
That works in theory… By me, every free piece of land over the past 5 years has had “luxury rentals” built on it, starting at around $4000. Now every crappy old complex has raised their rent to $2500 for a one bedroom in a building built in the 60s.
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