New Empty Units

January 25th, 2021
housing
Discussing housing policy in left-wing spaces I often run into an argument which is, essentially "building more units doesn't help with the housing shortage because so many will be bought by speculators with no intention of living there." This view, however, implies there's an excellent opportunity to get a ton of housing built at the expense of these speculators, enough to bring down the cost of housing and transfer enormous wealth from speculators to everyone else.

Here's a recent example, Nathan Robinson writing in Current Affairs:

There is no necessary economic reason why increasing the total number of housing units in a city helps make housing more affordable for poor residents. Consider the pencil towers. Let's say that in order to build one, an early 20th century building full of lower-middle class residents was purchased, the residents evicted, the building flattened. There were 30 single-family units in the old building. Our new pencil tower is 100 floors high and has 100 units. All of our pencil tower's units are full of state-of-the-art appliances and high-end fixtures, and cost $2,000,000 each. They are swiftly bought up, 20 by rich people who live in the city, 30 by rich people lured to the city by its new pencil tower, and 50 by rich people who have no intention of living in the city but think pencil tower condos are an asset worth owning in a swiftly-gentrifying city.

While I don't think this hypothetical is realistic, especially in its proportions, I want to dig deeper into its implications. Let's say we build this tower of 100 units, funded by rich people. Then we let developers keep building, and get dozens or hundreds of towers like this, each one with 3x the units there were before, and all at no expense to the public. At some point, these "rich people who have no intention of living in the city" will realize that their investment units aren't so special after all, and the bubble will pop. Costs will fall dramatically, since there will be far more "luxury" units than people who can afford luxury prices.

What about the people who were living in the buildings before they get rebuilt 3x bigger? Unfortunately, we are already losing cheap housing quickly. Developers buy old cheap housing, gut it, and turn it into fancy condos, all without increasing capacity. Building taller is much more profitable, however, so if we let developers build towers they'd do that instead.

Speculators who buy housing with no intention of living in it are betting that we will continue to keep the supply of new housing highly constrained and that housing prices will continue to climb. Let's prove them wrong and take their money.

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