May 11, 2022Liked by Brian Potter

There's another factor (probably several) in large popular cites: short-term rental services like Airbnb. Our comptroller prepared a report a few years ago: https://comptroller.nyc.gov/reports/the-impact-of-airbnb-on-nyc-rents

Utilizing neighborhood level data for the years 2009 to 2016, we found that:

For each one percent of all residential units in a neighborhood listed on Airbnb, rental rates in that neighborhood went up by 1.58 percent.

Between 2009 and 2016, approximately 9.2 percent of the citywide increase in rental rates can be attributed to Airbnb.

Airbnb listings were heavily concentrated in parts of Manhattan and Brooklyn and had a greater impact on these neighborhoods. Approximately 20% of the increase in rental rates was due to Airbnb listings in midtown and lower Manhattan including neighborhoods such as Chelsea, Clinton, and Midtown Business District; Murray Hill, Gramercy, and Stuyvesant Town; Chinatown and Lower East Side; Battery Park City, Greenwich Village, and Soho as well as parts of Brooklyn including Greenpoint and Williamsburg.

In aggregate, New York City renters had to pay an additional $616 million in 2016 due to price pressures created by Airbnb, with half of the increase concentrated in the neighborhoods highlighted above.


Even though most Airbnb rentals are in expensive midtown, this has an effect in other parts of the city because people who could normally afford to live in midtown now have to live in outer areas, pushing those people to even more marginal areas, and at the lowest margin, to homelessness. There are currently 50,000 homeless in shelters ever night, most of them are there due to high housing costs primarily, not mental health or drug use (many of those people unfortunately will not/cannot be sheltered even in public shelters).

There is also actually a glut of housing at the high, luxury end, to the consternation of investors and developers who cannot meet their own projections of sellouts. Many very high end luxury units in new buildings are on the market for years, running up expensive marketing costs while providing no income, causing the overall cost of even high end housing to go even higher to compensate for vacancies.

The most acute shortage is at the low end, of course, where projects do not pencil out, without huge subsidies, or changes in the tax code that cities and state are unwilling (in the case of land value taxation, for example), or unable to make (in the case of upzoning, for example, due to community opposition).

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May 12, 2022Liked by Brian Potter

I think one of the problems in this discussion is that the word "shortage" doesn't have a clear meaning. If gas is $6 a gallon, should we say there is a shortage of gas? If I get stuck in traffic on the way to work, can I say there is a shortage of roads? If I have to park 4 blocks away from my apartment, is there a shortage of parking?

In Order Without Design, the author did a case study of South Africa, where they had a huge program after apartheid to build millions of good houses for people, but they were hours away from job centers, people cannot afford cars, and unemployment was very high. I don't know if we would say South Africa had (has?) a shortage of housing. Certainly they had many houses. But maybe the fact that all the houses were too far from job centers means they still had a shortage.

We can say a few things with certainty.

a) Since 2010, rents as a % of income have gone up nationally, reversing a long trend.

b) Housing construction is down, the opposite of what you would expect with higher rents.

c) We know why housing construction is down, building is restricted in the markets where people want to live.

d) This is not fully certain, but statistics suggest that the adjustment to lower housing construction since 2010 has been > higher rents > a few million more low-income adults living with their parents. This is true once you hold cultural factors like later marriage constant.

e) Other factors seem to be too small to matter. The number of vacancies actually seems to be down. Also yes there are a few hundred thousand Airbnbs now, but some of these are long term housing, some are still being lived in usually, and in any case, there are 130 million housing units in the US and the "shortage" is in the mid-single digit millions no matter how you cut it, so that's an order of magnitude off.

To me there is a clear trade-off - construction restrictions lead to low-income adults living with their parents, and a transfer of wealth from everyone else to property owners via higher home prices / rents - but I don't know if I would call that a "shortage". A trade-off is just a trade-off. Some people win - property owners get more wealth and their neighborhood stays the same - and some people lose - poor people and young people who don't own property.

What is more interesting to me is that the logical pretzels people go through to deny there is a trade-off! Of course if you reduce housing construction in places where people want to live, fewer people will live there and/or the people that live there will have less space or move in with someone else, how could it be any other way?

But you are correct that you can't reason from a drop-off in construction, you have to figure out *why* construction dropped off - maybe people are happy with their homes, maybe falling population, etc. It's just that here we can clearly see that it's construction restrictions, because construction costs + land costs are diverging from housing prices.

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On the incomes correlation, one thing to consider is that income differentials between cities may be partly driven by general price index differentials—that is, higher wages are demanded by workers because costs (not just for housing) are higher.

On housing in particular, perhaps a more complete model would control for differences in local property tax growth, as well as prices for real estate services, and construction materials and labor. That is, if you can remove some of the effect of growth in operations costs, you will be left with a figure that is more representative of any economic rents (which is where the effect of supply-demand imbalance would be most concentrated).

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May 11, 2022·edited May 11, 2022

Through all these charts, as you mention, there's a cloud of uncorrelated data points and then the Bay Area, Portland, Seattle, Denver, Austin, Boston etc. If you split away those hip cities, there are plenty of things you could say about them, and with the rest of the US there are valid questions about whether there is or isn't a housing shortage. Why not treat this as two separate questions? After a lot of diligent work, the one really convincing insight I see is "The top 15 cities have a housing shortage for predictable and apparent reasons. Everywhere else, all bets are off"

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The last correlation between incomes and rents is actually a result of the supply shortage. Cities that lack adequate supply have been separating from other cities as rents rise, poorer residents must systematically move away to more affordable places, and the income of remaining residents compositionally rises as a result of the lack of housing. Migration patterns are a helpful clue about the problem and the anomalous trends we have as a result of it compared to previous eras when urban housing wasn’t as constrained.

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1. On Tokyo/Japan, see this interesting post on how they've managed to keep low housing prices: https://politics.stackexchange.com/questions/18444/have-any-cities-with-a-good-economy-managed-to-prevent-rapid-increases-in-real/73077#73077

2. Could low mortgage rates play a role here, making it easy for many people to afford seemingly expensive housing? I did a post recently looking at that angle: https://nsokolsky.substack.com/p/are-housing-prices-worse-than-ever

3. Is it a shortage of "all housing" or rather "single family homes"? Condos are still affordable in most cities and don't see the infamous bidding wars that SFHs do.

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I am surprised you never mention the elephant in the room - rent control.

It makes it harder to discover the true rent (one has to pay a large lump sum to the previous tenant to get a rent-controlled apartment) and it discourages rental housing construction.

Do you really think that these effects are best observable indirectly, as rent and construction?!

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Thanks for putting numbers and nice graphs for this important issue. Has there been any recent change to the part of total capital that's real estate? In modern economies it has remained around 30% of total capital for the last few centuries - no matter how much financial capital increases. Can't find a good ref at the moment but sure can come up with a bit more search.

Basically once food costs fall as % of income, most people keep paying, on average, about 30% of their income for housing. And this will hurt the less wealthy more when the wealth distribution becomes more skewed.

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Apr 23·edited Apr 23

Excellent article, thank you for sharing. That being said, my own particular research indicates that the ultra-accommodating monetary policies post-GFC (zero interest rates, quantitative easing, etc) have had a stronger impact on the housing market than demographics, changes in cultural trends, size of households, etc. All that easy money had to be allocated somewhere, and the equity and real estate markets were the most obvious destinations. Hence, the bull run.

I wonder how that's going to change in the post-COVID world: stubbornly high inflation, 5% interest rates, quantitative tightening, etc. Surely there has to be an impact on the housing market? The rules of the game have changed significantly: gone are the days of sub-3% mortgages that could easily be refinanced for a profit in an ever-raising bull market. Now a days, the outlook is far grimmer: 6%+ mortgage with unclear views on whether your home price/equity might go up at all in the following years. The real estate market as an investment class is not the slam dunk it had been during the last 12 years, and that surely has to dampen down demand.

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Might be good to look at job growth. I ran a few regressions since the GFC to 2021 and found that job growth is the most correlated with rent growth (highest R^2) when compared to population growth and affordability vis a vis median HH income.

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"Part of what’s screwing with our correlations here is likely spillover demand"

This cannot be tacked on at the end like an afterthought. It is the main thing. The reason something is expensive is because everyone wants it. Prices are set by people who want things, not people who obtain them.

Attempts at a fine-grained analysis will always fail because the dynamics are too complex. It's painful for scientifically minded people, but it's the way it is. The coarse factors, however, remain the same: the US keeps getting bigger, demand focuses on certain metro areas, and there are many other metro area that remain affordable (in the sense that a decent quality of life is affordable) because they are less desired, willing to sprawl, and so on.

Saying that there's no mismatch between population / construction and then saying you *do* see a connection with restrictions on building is contradictory. That's what a mismatch between population / construction is. The demand for those unbuilt buildings is coming from somewhere.

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Corruption. Maybe extend homeless addiction services to landlords and developers? 🤔

Who benefits from increasing human and drug trafficking?

Addicts, that's who.

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Great post!

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I am confused. I thought housing prices usually mean the price of buying a house, not the price of rent.

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Really appreciated this deep dive into the housing market! One thing I wondered looking at the sharp rise and then plateau in Tokyo rents is how correlated are property values and rents with the stock market?

If I understand correctly, the US and Japan are at opposite extremes in terms of how much housing costs have changed since 1990. But so too are the stock markets in both countries-- the S&P 500 has grown 10-fold in the US whereas the Nikkei 225 has still yet to recover its 1989 high.

If this correlation is indeed strong, I imagine it would speak to the incentives of investors-- why invest in low-return rental housing or lending money out at a low interest rate to someone building a home when you could more easily double your money by buying SPY?

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