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
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.
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