The Housing Bubble

A weekend topic starting with Better Dwelling. “The value of Canadian real estate has been debated for some time. Those that benefit from ownership, often say ‘fundamental value’ is sending prices higher. Further adding that the increase of home prices, results in an increase of wealth for the country. Housing activists say that real estate has become highly commoditized. They argue, escalating home prices result in decreasing wealth for the public. These two opinions are very different from each other, but are both correct. At least according to a 200 year old puzzle, known as the Lauderdale Paradox.”

“James Maitland, a.k.a. the 8th Earl of Lauderdale (1759-1839), was a Scottish nobleman. He spent a great deal of his personal time, observing money and wealth. Maitland speculated there is an inverse correlation between public wealth, and private wealth. He defines public wealth as ‘all that man desires that is useful or delightful to him.’ You know, things like air, water. Private wealth is pretty much the things you classify as public wealth, but ‘which exists in a degree of scarcity.’ Scarcity is the keyword here. In order to for something to have value, people have to believe there is only a limited quantity.”

“Finding things to monopolize is hard, good thing you can create artificial scarcity.”

“Looking at the numbers from 2011 to 2016, 146,200 homes formed. CMHC data shows 175,825 new completions occurred during that period. Almost 30,000 more homes were created than homes formed, adding to the housing supply. Despite this, pricing pressure actually increased, and inventory available became more scarce. The construction of extra supply had almost no impact on easing prices, and it wasn’t even sold for predatory increases. It just wasn’t available for some reason.”

“Two interesting trends occurred right around this period – the rise of foreign buyers, and vacant homes. According to the CMHC, non-residents owned 2.7% of all homes in 2017, a 35% jump in ratio from 2014. From 2011 to 2015, the CMHC estimates 8.48% of new condos were sold to non-residents. From 2016 to 2017, that increased to 11.65% of new Toronto condos. Developers increased their offerings overseas, despite significant domestic demand. This is a process known as massification, and it’s a method employed by luxury brands to create artificial scarcity.”

“Vacancy also appears to be a problem in Toronto, with non-regular occupancy growing with the ‘lack of inventory.’ By 2016, this number grew to 99,236 homes, or 4.43% of all dwellings. The rate actually scaled up, and grew larger than it was in 2011. This is despite the fact that the city reached record low inventory available for sale. Yes, homes are being kept empty, creating even more inventory pressure.”

From ABC 30 in California. “Seasoned realtor Don Scordino says the market is holding steady, but buyers are dealing with low inventory. Right now in Fresno County, about 1,300 homes are for sale. Experts say home prices are steadily increasing. Salazar says that’s positive news for those who are already homeowners, ‘If you are a current homeowner right now, congratulations because your equity is growing. Just stay tight.’”

From Palo Alto Online in California. “Fran Wagstaff doesn’t have to look far to see the transformation of Palo Alto’s housing market. Over the past decade, her Midtown neighborhood has gentrified, with property values going through the roof and out-of-town buyers gobbling up properties as investments, she told the Weekly. The house across the street is only occupied by its owners for one or two weeks per year, she said.”

“‘Every scrap of land is being redeveloped,’ Wagstaff said.”

From Orlando Weekly in Florida. “Back in December, Florida Gov. Rick Scott touted that Orlando leads the state in job growth, which is certainly something to be proud of. But Orlando doesn’t have a job shortage – it has a shortage of well-paying jobs and places for these people to live. According to the National Low Income Housing Coalition’s annual report, the Orlando-Kissimmee-Sanford area currently ties for second worst in the country for available affordable housing, offering only 17 available and affordable units per 100 renters.”

“While the Orlando area tied with Los Angeles, the only other major metropolitan area with a worse affordable housing rate is Las Vegas. The bottom line is Orlando is building plenty of new units, just not any its citizens can afford. From 2005 to 2015, the number of homes renting for $2,000 or more per month increased by 97 percent, while the number renting for less than $800 declined by 2 percent, according a 2017 report from the Joint Center for Housing Studies.”

From the New York Daily News. “There’s a hidden city in the five boroughs. Though its permanent population is zero, it is growing faster than any other neighborhood. Early numbers from the Census Bureau’s Housing and Vacancy Survey show the unoccupied city has ballooned by 65,406 apartments since 2014, an astonishing 35% jump in size in the three years since the last survey.”

“Today, 247,977 units — more than 11% of all rental apartments in New York City — sit either empty or scarcely occupied, even as many New Yorkers struggle to find an apartment they can afford. The Vacant City has tripled in 30 years. A generation ago, there were just 72,051 apartments in the Vacant City. Back in 1987, when rents were cheap by today’s standards at a median $395 a month, the Vacant City made up less than 4% of rental apartments. Today, the median rent is $1,450, having risen twice as fast as inflation, even while the Vacant City tripled in size.”

“For years, development officials, the real estate industry and think tanks have told us that artificially low rents are holding the city back. Higher rents, the argument went, would free landlords to make a reasonable amount of money and serve as an incentive to increase the housing supply. The new Census gleanings finally put the lie to that reasoning. We have higher prices for sure — but the only part of the city’s residential real estate that has grown is the Vacant City. More apartments are being held off the market than ever.”

“Some remain vacant for legitimate reasons. Almost 28,000 of those unused units have been rented or sold but not yet occupied, or are awaiting a sale. Almost 80,000 are getting renovated, 9,600 tied up in court, and 12,700 vacant because the owner is ill or elderly or simply can’t be bothered. But that still leaves more than 100,000 units — 74,945 occupied temporarily or seasonally, and 27,009 held off the market for unexplained reasons.”

“Oksana Mironova, a housing analyst with the Community Service Society, says that the growth of the Vacant City tends to confirm charges made by the organizing group Picture the Homeless and others that landlords are deliberately holding apartments off the market, perhaps in order to rent them out on services like Airbnb. Additionally, many of the 75,000 temporary apartments are pied-à-terres, weekend or vacation crash pads for the rich, up from just 9,282 in 1987.”

“Given the apparent benefits of bringing busted-up apartments back into use, it was possible to argue that encouraging more renovation and construction would be good for the city. In 2017, the Census Bureau couldn’t even locate enough dilapidated apartments to count — but did find a median asking rent of $1,875, 30% higher than what a typical existing tenant pays. What’s more, the vacancy rate for those expensive units is huge. Almost half the apartments available for rent in New York cost more than $2,000 a month — and the vacancy rate for them is above 7%.”

“More than 63,000 New Yorkers are living in homeless shelters (almost three times more than in 1987), and 30% of city households are shelling out more than half their income in rent.”

“We’ve largely conquered dilapidation and abandonment. Statistically, there are no more slums in New York City. But we’ve achieved this through a supply-side fantasy that created an unaffordable and increasingly vacant city.”