Charles Mudede is latest in a line of columnists (see here, here, here, and here) drawing comparisons between the rapidly appreciating housing markets in Seattle and Vancouver, BC:
The forces at work in Vancouver BC’s housing market seem unrelated to those at work in, say, Toronto’s—a city that, like Seattle, has a real economy and lots of high-paying jobs. Vancouver, on the other hand, “relies largely on an inflow of foreign money to fuel its real estate industry.”
After acknowledging that Seattle’s demand may be less finance-driven, Mudede still says later on that we have “lost Seattle to finance” in the same way as Vancouver. That’s not the only perceived similarity between the cities. He asks Globe and Mail reporter Kerry Gold about Vancouver’s HALA-like proposal:
They have also acknowledged that their policy to build tons of market condos backfired, because they became the perfect speculative commodity. So that’s all fine and good. But their strategy, which calls for greater numbers of rental buildings and incentives for developers to build more affordable housing, largely depends on addressing demand at the same time. If they just build, build, build, which has been our way, the hyper-commodification of housing will just continue. They need to address the demand side—as in, closing the floodgates with a speculator tax, or bigger foreign buyer tax, or even banning foreign buying of existing properties, the way New Zealand just did.
I think there’s reason to believe Seattle’s market has key differences from Vancouver. In particular, legal incentives to build apartments instead of condos ($) often limit investors to the single family market. While skyrocketing single-family prices are painful for those looking for a larger house, they are largely orthogonal to the question of how many homes the City of Seattle should build. But let’s set that aside and assume that the tide of foreign money is coming for us next.
Like an overcrowded light rail train, or a gas tax that can’t raise money because no one buys gas, this seems like a nice problem to have. First, an investor that rents out her property is not contributing to the housing shortage, but instead shifting inventory from the purchase market to the rental one. This, on balance, is a progressive move.
Moreover, even outside investment in an empty tower (the dreaded “speculators”) creates working-class jobs to build and operate the building, and implies a commitment to pay property taxes (and other levies, like affordable housing funds) without consuming much in the way of services. The only cost is a tiny bit of land, land that is only scarce because of artificial zoning restrictions. In the limit where speculator money is truly bottomless, various taxes and fees on endless new buildings could probably fund all the city’s needs with little or no burden on residents.
Indeed, for all Vancouver’s outstanding success boosting transit ridership with aggressive upzones around stations, their overall zoning map isn’t all that better than ours, as Matt Nicholson’s wonderful map shows:
Vancouver has made buildable land scarce, so scarce that a bit of foreign money can absorb the zoned capacity they’ve allowed. Current policy in Seattle is going down the same road, but it doesn’t have to be that way.
And even with the restrictive zoning both cities share, the end result of this investment is building up physical housing stock, stock that is unlikely to remain idle forever. The thing about speculators is that they make a killing until they don’t. Mr. Mudede concern-trolls about “bubbles,” when in fact a post-bubble crash will help the people most in need of it, those with no property at all. If the for-sale market really is taken over by speculators, only the speculators will lose.
Someone that has an aesthetic problem with tall buildings, seeing them as a cancer only to be accepted at the minimum rate possible, may not like that future. But people most interested in creating enough housing to accommodate all who would like to live here, and enlarging the city’s employment and tax base, have nothing to fear from dropping artificial constraints on supply.
57 Replies to “Does Foreign Capital Trump Supply and Demand?”
“…when in fact a post-bubble crash will help the people most in need of it, those with no property at all. If the for-sale market really is taken over by speculators, only the speculators will lose.”
Just ignore the debilitating recession that will follow the post-bubble crash. You know, the one that will be similar to the Great Recession that we’re still reeling from.
Not only that, but:
> If the for-sale market really is taken over by speculators, only the speculators will lose.
is also entirely wrong. You have to ask yourself WHERE the money for this speculation is coming from. In many cases, it is pension funds and other investment vehicles like insurance companies all trying to search for yield in a world where the Fed is holding rates artificially low.
A crash doesn’t just take out “speculators”, it also takes out the funds that many people are relying on for retirement.
I’m constantly amazed how few people are making this connection.
I think you’re missing the initial clause, “if the for-sale market is really taken over by speculators”. I actually don’t think that’s the case. I don’t think the price rises are driven by fundamentals, not speculation.
People who rely on investments for retirement would be wise to heed the advice of my grandpa. Putting money in the stock market (or any other investment) is no different from putting it on a table in Las Vegas. You may have better odds, but you could still lose everything. A crash will take out speculators. Some of those speculators may be foolish workers and retirees trying to squeeze a few more dollars out of their savings, but they are still speculators.
People who rely on investments for retirement would be wise to heed the advice of my grandpa. Putting money in the stock market (or any other investment) is no different from putting it on a table in Las Vegas.
This is really non-responsive to people whose retirement savings are in a pension fund, over which they have no control at all as an individual, and only partial and indirect control at best, collectively.
Engineer, do you then recommend fixed income or annuities instead of stock? A big pillow:)?
A big potential problem now is that we have a Congress and a President that appears to want to loot the Social Security fund and force the public to use private investment accounts in lieu of SS, so people are looking at investments for retirement as a last resort since we have a federal government that wants to rip up the social contract.
A local bubble burst would require the population to shrink, or people to suddenly not be interested in houses or more space. The latter would contradict two centuries of American attitudes so is unlikely. (Although as people move to the US from places without that abhorrence of density, it may gradually weaken.) A lowering population would require a recession. That would hurt a lot of people, especially the poorest. But the light is on the other side. Seattle experienced a “recession” of population in the 1960s, shrinking from 550,000 to 420,000 by the time it bottomed out in the early 80s. That started with white flight to the suburbs and was added to by the Boeing bust. In the 80s and 90s there was plenty of housing for everyone so it was all cheap. Prices started to rise in the late 90s when the backlog had filled up.
The Great Recession was not caused by a housing bubble. We have encountered numerous housing bubbles since the Great Depression. But none of them caused a major economic collapse, because none of them involved the financial gambling that occurred prior to the housing bubble. The financial crisis was caused by lack of regulation. Specifically, it was because insurance was being called a swap. Typically, swaps are no big deal. It is like the name suggests — a trade. But insurance is different. Insurance is money you promise to pay someone if something goes bad. But you better have that money, otherwise the entire system collapses. You also aren’t allowed to insure something for more than it is worth. In other words, I can’t insure my Honda Fit for a million dollars. That is what insurance regulation is all about — making sure the insurance companies can pay and making sure they don’t insure for ridiculous amounts.
Yet the financial institutions managed to slide by the regulators by calling them swaps. They violated both rules of insurance. They promised to pay at many, many times the value of the loss, while not having adequate money to cover the loss. So when the mortgages started to fail (which was the thing they were insuring) they couldn’t pay. When banks can’t pay, you have a financial collapse (this was a big part of the great depression). It wasn’t quite as bad as the great depression, because we still had some of the pieces of the New Deal left. Passbook savings were guaranteed, which is why the biggest collapse of a savings and loan (Washington Mutual) was really no big deal. The FDIC guarantees kicked in, other banks took over the loans (and savings) and everyone who had a savings account at Wamu was fine. It also helped that the government was still spending money, on things like Social Security.
But many financial institutions failed, and the government didn’t spend enough money. When the banks decided they didn’t want to lend money, interest rates dropped to zero, and the federal reserve was stuck doing very unusual activities (qualitative easing). The only way out of that kind of mess is to spend lots and lots of money. But the Republicans managed to convince a gullible populous into believing that deficits are evil (along with government intervention) and the stimulus was much too small. That is why the recession lasted too long.
Obviously it is complicated, and this is a summary. But it is all on Wikipedia. Anyway, the long story short is that a housing bubble is not the end of the world. It is just that prior to the last bubble, major financial institutions made a lot of bets on housing prices without having the money to pay it.
Truth, Ross, and thanks. Shows you’re watching your mirrors, as transit instructors tend to point out a lot. But windshield holds some horrors too. Very large percentage of young Americans will finish college too deep in debt ever to pay it back, for degrees useless for paper training a dog.
Martin’s hypothetical “good bubble burst” would be a local bubble burst. I think he’d agreed that a national housing market collapse would probably be a bad thing.
@AJ: The problem with bubbles and bursting, is that they don’t tend to stay local. A Seattle housing bubble burst would definitely have ripple effects throughout the West Coast and maybe the country.
Seattle is a lost cause. With average rent over $2,000 per month for a 2-bedroom, who can realistically afford to live there, besides programmers with artificially-high salaries?
Unless you are locked in to a specific employer like Amazon and have no job mobility, it just isn’t worth it. What person with job mobility (mechanical/civil/electrical engineer, nurse, nursing assistant, accountant, sales rep, insurance agent, architect, teacher, carpenter, plumber, longshore worker, truck driver, doctor, cashier, dentist, retiree, cook, janitor, etc) would willingly pay double to triple for a home compared to prices in other parts of Puget Sound? Seattle is quickly starving itself of a workforce that helps it operate. Those that stick around are “old money” with a home bought decades ago, and will soon retire out. The younger generations will find themselves priced out of having families and be forced into exurbs with a commute from hell, or simply walk away from Seattle and take a job in Everett or Tacoma, as I’ve done.
You guys are going to need to figure this out sooner than later, otherwise, you’ll be facing staffing shortages and labor strikes that impact your quality of life. What entry level teacher can afford rent in Seattle? How do you expect to keep hospitals, schools, grocery stores, pharmacies, fire departments, and other essential services staffed when the people working there can’t afford to live anywhere remotely nearby? You guys okay with commuting to Federal Way or Lynnwood to get groceries, go to the doctor, or drop your kids off at school?
Out of curiosity, what heuristic or decision rule do you use to distinguish between high earners whose salaries are “artificial” and those whose salaries are not? This seems like a strange and arbitrary distinction to me.
would willingly pay double to triple for a home compared to prices in other parts of Puget Sound?
You seem to be presenting this as if it were a rhetorical question, but to state the obvious: some people (including many people in the list of professions you just provided) place a premium on city living, and are willing to forgo some of their expendable income for the privilege of living in Seattle. Indeed, if this were not the case, Seattle wouldn’t be particularly expensive.
Or, maybe they value their time?
If you are willing to spend 4 hours a day commuting, then you can find affordable housing. If you don’t want to waste so much time commuting, then you re looking at a limited supply of housing, and will have to pay accordingly.
Spur of the moment answer, djw: sewer main breaks right under your house. Whose salary do you think is less artificial, a guy wearing a Google- or Amazon hoodie (do they have those for dress suits, or just Google), or a few guys in hoodies made out of rubber and haz-mat masks, logo-irrelevant?
That cover it?
Mark, I have no idea what this allegedly rhetorical question is supposed to reveal. Some people do physical labor for their jobs, while others do knowledge work. Some people’s jobs might be of urgent value to me in specific scenarios, others not so much. How do these utterly banal observations help us sort out whose salaries are “artificial”?
If it’s some awkward attempt to assert that developers don’t “deserve,” by more moral or ethical metric, large salaries (while, presumably, others do), OK, but a) I have no idea what the metric here is, and b) it’s weird to conflate moral deservedness with reality and lack thereof with artificiality. Of course some people get paid more than they deserve, by any metric one could devise. How does that make it “artificial”? Only the good is real? WTF?
You guys okay with commuting to Federal Way or Lynnwood to get groceries, go to the doctor, or drop your kids off at school?
There are cities in this world far, far more expensive than Seattle, and this simply hasn’t been a result of the lack of middle class housing. Why do you think this will happen in Seattle, while it hasn’t happened in London, New York, San Francisco, Boston, Vancouver, Sydney, etc?
At the least, with cities such as London, NYC, SF (to a certain extent), Boston, Vancouver, and Sydney, you have far superior R of W public transportation systems that enable people to commute to the metro nerve centers of employment from far away. So can live in a cheaper place much farther away from the city in the aforementioned cities and depend on the transit system to get to work in a timely fashion.
Roommates. That’s how lower-paid people make it in every expensive city.
Also, FWIW, longshore workers, doctors, and dentists make good money. They aren’t the professions that would be displaced.
Seattle has the highest rate of people living alone than any other city and this isn’t going to improve if 90% of what we’re building is 1-bedroom and studios. Hard to have a roommate with one room.
I’m a little confused by this response. Obviously, I’m not Martin H. Duke, but I suspect he agrees that a lot of working and lower-income folks are being forced out of the city, and that this is bad. The primary reason for this is that more people want to live here than there are housing units, so the housing that does exist goes to the wealthier and higher earning (or those who bought in earlier.) His solution is to build more housing, so that more folks further down the income spectrum can live here, and to do so by loosening zoning regulations. If some speculation were to occur, that would be fine, because we can build enough housing to satisfy speculators and would-be residents if we weren’t so tied to single-family zoning across so much of the city, and low-rise even near light rail stations.
“What person with job mobility … would willingly pay double to triple for a home compared to prices in other parts of Puget Sound?”
Prices don’t drop by half at the Seattle city limits. Central Bellevue is more expensive, and it remains high through Shoreline up to at least the county border. I would turn it around and say why is the person so insistent on buying a house? And not just a townhouse but probably something larger and more detached. The problem is our zoning, that 75% of the land is locked up in single-family, where even townhouses and ADUs and tiny houses are either illegal or under such restrictive regulation that they’re impractical to build. You now have to go out twenty miles to get some kind of house in a subdivision at a middle-class price. Many people would rather live in Seattle than do that, even if it means renting a small place at an exhorbinant price. Because as I’ve repeatedly said, “There are no Wallingfords or Ballards in the suburbs.” I was in White Center yesterday and saw a Safeway behind a huge surface parking lot — quite a contrast from the Safeway at 22nd & Madison, or even the ones at 15th & John or downtown Bellevue which have a surface lot but hide it in back. I was so sad at the parking lot, thinking how unfortunate that land is so cheap that chain stores can throw it away on surface parking, when it could have held quite a bit of housing. The thought of living in that environment like Federal Way or outer Lynnwood, especially without a car, really depresses me and I’ll avoid it as long as I can, and hope that “some Ballards” will eventually arise in the suburbs.
You seem to accuse Martin of not taking seriously enough the cost of housing in Seattle and the fact that even high-paid tekkies may be priced out in the next decade or two. But I don’t think Martin believes that, and he is trying to sound the alarm, that’s what this article and his and others’ articles are about. I first encountered it when I visited San Jose in 1998; an article in the San Jose Mercury News said that minimum-wage companies were having trouble finding workers because they couldn’t live within twenty miles of the city. And as I took the express bus from the Fremont BART station that stops in Milpitas on its way to downtown San Jose, I saw people get in in Milpitas and going the other way that appeared to fit that description. And now it’s two or four times worse. I don’t want that to happen here, and I think Martin would agree. But fortunately or prices aren’t that high, and our distances are half as much because the total population is lower and we have more pro-density policies. So hopefully we’ll be able to keep it within “2 degrees Celsius of 1990 levels” as they say about the climate.
“I would turn it around and say why is the person so insistent on buying a house? And not just a townhouse but probably something larger and more detached. The problem is our zoning, that 75% of the land is locked up in single-family, where even townhouses and ADUs and tiny houses are either illegal or under such restrictive regulation that they’re impractical to build.”
Bingo! I’m looking to buy a condo as a starter home. Have neither the cash for major home repairs nor the time for maintaining every aspect of a detached house while trying to start a family. I’ll probably end up buying in Tukwilla or thereabouts because Seattle itself is so anti-condo. While the transit options to work are still good, this would still mean dumping money into a depreciating car, meaning less money going into the actual property investment.
The speculators referred to are Chinese investors who have been investing in the Vancouver real estate market, condos and mega mansions replacing small sfh.
This started after the change in status of Hong Kong.
Vancouver has rent control, a disincentive for investing in apts.
Seriously, what does the location, race or economic motivation of the group of outside investors inflating the values of a particular real estate market matter, unless they leave the housing vacant because of some shared motivation to do so?
Are you saying that the folks investing from Hong Kong but not occupying the units they have bought and are not leasing either are in some way different from the Russians doing the same to London? Other than where they live, it appears that the motivation is the same: they want an investment in a country with stronger property protections than their own, and they have enough money to avoid the headaches of renting the asset to people who might trash it.
It has nothing to do with the “Inscrutable Malign Asian”.
She is not saying that. She is simply explaining how so much foreign capital suddenly started flowing into Vancouver. Hong Kong was an English protectorate. There is a lot of wealth there. Some of it is invested in China, but a lot of it stayed within the Commonwealth. It makes sense, given the geography, that a lot of that wealth flowed to Vancouver, BC. There have been strong connections between the two areas for a very long time.
Vancouver has a historical strong relationship to Hong Kong and by extension now China. When Vancouver rezoned for high density in the 1960s, there was a large, wealthy Chinese population that built a lot of the condos and apartments, probably because they were less adverse to density seeing how it worked in Hong Kong. In 2000 when I was visiting Vancouver monthly, the highrises were there and you could get a downtown condo with a spectacular view for $70K — so density without high prices. That’s doubtless because Vancouver allowed the housing supply to expand to match the population, like Chicago and Houston do. My Canadian friends said, “A lot of people from Hong Kong bought condos in Vancouver because they were afraid of what Hong Kong would turn into after the Chinese takeover, but then it came and went and Hong Kong was still OK so some people started moving back.”
The meteoric price rise happened later, in the mid 2000s. It probably is to a large extent foreign investors, mostly from China, who unlike the earlier Hong Kongers buy units not to live in but as investments or trophy properties. This has happened in New York and London for a long time. And my Canadian friend says there’s probably another reason for the price spike: BC Bud manufacturers laundering drug money.
In Pugetopolis the rise of foreign buyers seems to be mostly people wanting to live here, and to send their children to Eastside schools and eventually to American universities. Sometimes because they’re concerned about the long-term stability of their own country, or a future confiscatory government. So more similar to the earlier Hong Kongers in Vancouver.
Martin, either you see, or don’t see a lot I don’t or do. I got put out of my apartment in Ballard when my good landlord sold the place to a speculator who if he was a shark, as is his reputation, could bite the “Jaws” one in half like that one did the swimmer.
Understand he owns the complex on the east side of MLKL just south of Othello. One more of an exponentially expanding scrubbing pad of reasons never to either come into or see Seattle again. Especially on LINK. My former home has signs on the office windows extolling the nice neighborhood is tenants can now live in.
We built it and most of what all made Seattle a place decent people used to be able to stand. Somebody else bought it out from under us. We soon to be former tenants made him an offer to buy Lock Haven from him, his people said it “just wasn’t in the business plan.” Pity anyone who is.
May we please have word one out of you, Martin, about one fact as indisputable as it is self-evident is that never in its history- and wouldn’t be surprised if numbers exceed the Crash of 1929- has had so few people that can afford a car to go to work from, rather than in?
And I can tell you first-hand that the disease of dispossession is spreading south like smallpox if symptoms were homes that’d shame Medina, and also make it look dense as Calcutta. Lord knows where previous residents went when their jobs in Shelton and Aberdeen disappeared. Under a bridge in Seattle?
Because the very people who were able to afford nice homes in Seattle…can now afford them here. Also the land-use patterns looking forward to transit-proofing this place. Intercity Transit used to have some decent service, before Tim Eyman sent it to Dogpatch tweny years ago.
But what enrages me most about the situation is that Nobody-To-The-Tenth-Power in power in Seattle has even thought of a quick and proven remedy to get things turned around. Make life “Affordable” by giving people well-paid work just cleaning up the mess, and then going on to build the homes they and a million others can AFFORD to live in.
Seattle is a desirable place to live. We can build enough units to house all the people who want to live here, which means lots of density, or we can ration out spots.
We’ve chosen to ration out spots, mostly based on ability to pay, with a few lottery tickets for poor people who have lived here a long time (i.e. subsidized housing with waiting lists). The losers here are people with a little too much money to qualify for public assistance, and newcomers without much money. Regrettably, you appear to have been in the former group.
Other alternatives that don’t involve massive amounts of building also create losers; they just move the losers around.
Vancouver is a complicated situation. Too much for one comment (so I’ll split it up). First, there is definitely a lot of speculation going on. But investing in real estate is different than investing in gold. With gold, it just sits there. You don’t earn any money on it — you just hope it goes up. But with real estate, you can make money off of it. So if people are building more and more towers, and renting them out, why is rent still so high?
To begin with, it isn’t clear whether they are renting them out. Vacancy rates are extremely low, but according to one study (referenced in one of Mudede’s article) a lot of investors are just sitting on the property. I’m not sure why. It is possible that owners are conspiring (formally or informally) to keep rent prices high. They may be trying to keep the bubble growing. This would be very difficult if housing construction was spread out, but with much of the housing in the huge towers, it is relatively easy. If you are the only tower in the neighborhood, and want to sell the land next door (for another tower) choking off the supply of housing is not a bad strategy.
>> To begin with, it isn’t clear whether they are renting them out.
This is the crux of the question. Some of it may be that they are looking for a safe store of value, like a low-interest Swiss Bank account, rather than a high-yielding investment.
Another part is probably the hassle of dealing with tenants. A regrettable consequence of many renter protections is discouraging rental properties from coming on the market. Maybe that’s still worthwhile, but it has a downside.
Vancouver is trying a “vacant homes tax” where owners have to rent out their place six months out of the year if it is not their primary residence (which means, essentially, non-citizens not in Canada for work reasons are out of luck) or pay 1% of the property value to the city.
There have been mixed anecdotal responses about how many owners bothered to put their places up for rent. The tax is due early next year, so we will see if anybody sues (there is a pending lawsuit to the 15% foreign buyers tax)
“First, an investor that rents out her property is not contributing to the housing shortage, but instead shifting inventory from the purchase market to the rental one. This, on balance, is a progressive move.”
Martin, completely agree with the first sentence. I’d love to hear your logic behind the second sentence. While shifting inventory from the purchase market to the rental one isn’t the end of the world, a city in which more of the property is concentrated in fewer hands seems anti-progressive to me.
The poorer a resident is, the more likely they’re going to rent rather than buy. More rental properties means lower rent and higher purchase prices. That’s bad for a certain aspiring middle-class segment of society, but it’s good for the poor.
I would say it is short-term progressive, then (lowering rents) but in the medium- to long-term is regressive, as it removes home ownership as a means towards increasing and stabilizing wealth (particularly inter-generational wealth.)
It is also possible that rich people are simply enjoying a big portion of the real estate. This is a common problem in New York, and again it is made worse by focusing growth on a very small portion of land. If you build a tower, the property is very desirable, and building luxury apartments may be what is being built. I have no idea what the situation is like in Vancouver, but maybe they simply aren’t adding many units. Rather than 20 a floor, they have 5, but they are huge.
Fortunately, this is not the problem in this city. Demand is obviously being driven by the bottom, not the top. Rules and regulations make it very easy to build at the top, but they make building at the bottom illegal. From Apodments to row houses, the market demands more places, but the rules push developers towards fewer, more luxurious ones. In my neighborhood — which is nothing special — I’ve seen gigantic houses go up on land that was largely vacant (there was an old house on a very big lot). This seems crazy, until you look at the zoning. With 7,200 foot lots (the smallest they can create), it doesn’t make sense to put small houses on there. Constructing a bigger house is really not that more expensive. So rather than build lots of town houses, or even lots of smaller houses, they build a handful of giant houses.
“Moreover, even outside investment in an empty tower (the dreaded “speculators”) creates working-class jobs to build and operate the building, and implies a commitment to pay property taxes (and other levies, like affordable housing funds) without consuming much in the way of services. ”
This is super important, and highlights a difference between Seattle and Vancouver, I believe. Vancouver depends on VAT and income tax, which vacant owners don’t contribute to. But Seattle is much more dependent on property taxes.
If local funding is built upon property taxes, a newly built vacant condo adds value.
Vancouver is funded almost entirely by property taxes and fees.
VAT & Income tax revenues go directly to the Province & Federal Government
OK, thanks, I didn’t know. But then I’m the local government, don’t I like empty condo because they provide locals revenues for critical services while consuming minimal services?
If the Feds raised rates, you’ll see a shift away from institutional investing for sure: the IRR calculation becomes less responsive to a return within a shorter timeframe, thus, it moves in the direction of alternatives at the same or nearly same rate which may have no relationship to real estate investing.
What does this mean? If interest rates rise, mortgages will be harder to get, buyers’ enthusiasm will diminish, and less buyer competition would put a brake on prices. (Except from those who can pay cash, and with the extreme low inventory, that market might not be saturated.) But what does this have to do with institutional investors? Pension funds and 401Ks and the like have to invest in something, and if not real estate then what? They went into real estate in the early 00s because it had a higher return than stocks. So what would they go into now? Almost everything is low-return, and if there’s no better place to go, they may just leave the money there.
I’m calling BS on that one Mike, I think you’re missing some of the point here. If we are preaching such high demand for housing in the region, relative to historical mortgage rates, then the demand for housing isn’t exactly going to bottom out, if anything it will let us play a little catch up and it would be wonderful to put the brake on prices. The part of the populace that currently cannot afford to buy a home, will always be in a precarious position to by a home regardless of interest rates; mortgage qualification is directly related to political decisions that guide bank;s return on risk, not the feds. That’s a fact. Could you expand the pool of folks that can’t afford a mortgage? Sure, but the likelihood of a big change in that pool with our current regional economic health is actually quite low relative to historical changes, even with higher interest rates. Now if Amazon and Boeing and Microsoft wish to pack up and leave, then we have serious problems.
“They have also acknowledged that their policy to build tons of market condos backfired, because they became the perfect speculative commodity.”
So what should we do to restart the condo market without falling victim to this speculation? Especially when our constitution doesn’t allow taxing foreigners at a higher rate, or arguably taxing anybody at a higher rate (i.e., income/capital gains/wealth tax on the rich, differential property tax, etc), or at least that’s what the conservatives tell us.
That’s Vancouver’s problem, not ours :)
Seriously though, as I said below, Vancouver may have a problem with too much speculation, but it isn’t clear that we do. Even if we do, it isn’t the biggest problem we have. Allowing more development in the single family zoned areas would deal with the problem quite well. It would cut into the value of those investments (your condo isn’t worth as much if new condos are going in all over the city).
But if I were Vancouver, I would try and address the problem with vacant properties. There is nothing inherently wrong with investing in real estate. But if you buy an apartment building, you typically rent out the apartments. For whatever reason, they aren’t, which is where the issue exists. Increasing property taxes that are based on the value of the land, along with increasing capital gains taxes, and possibly lowering income taxes (on money made by landlords) might do the trick. But again, I think the problem would pretty much go away if they allowed more widespread development.
It is very important to also consider the cost of construction. If it costs a lot of money to add density, then it won’t happen. Or at least, it won’t happen until rent is very high.
In built up environments, adding density is often expensive, because you start by replacing what is already there. Tearing down a two story building and replacing it with a three story one only makes sense if that is your only option (because of zoning) and the demand for units is extremely high. In the case of both Vancouver and Seattle, much of the land has single family housing. The houses themselves are very valuable. If a builder decides (and is allowed) to replace a house with an apartment, they start by throwing away a valuable house. I’m reminded of this house — http://www.capitolhillseattle.com/2012/10/capitol-hill-house-standing-since-1890-wont-get-landmark-protection/ — which was clearly worth at least a million dollars. Tearing that down only makes sense if the market is really high. Zoning, of course, plays a part — building just a few blocks from there is illegal, so there aren’t many cheaper alternatives.
At the opposite end is an apartment conversion. That is relatively cheap. If we had a truly free market, it is quite possible that old, cheap houses (or empty lots) would have big apartments, but houses like that would simply be converted.
Adding a new unit on empty land is also relatively cheap. While parts of the city are relatively full, much of it is not. Again, I think of my neighborhood (Pinehurst). Most of the houses sit on 7200 foot lots. The houses vary in size, but in general, are not that big. So there is plenty of room to build a new house, while retaining the old one. There are also plenty of really big lots. These are being subdivided, but the new lots can’t be bigger than 7200 feet. This is gigantic, really. You could easily fit four houses on a lot that size. This house (https://www.redfin.com/WA/Seattle/2108-NW-73rd-St-98117/home/163631) sits on a lot that is 1,250 square feet. It isn’t a row house — there is room to the side, and a (very small) back yard, but it sits on a small lot. It is small, obviously. But this house — https://www.redfin.com/WA/Seattle/733-Martin-Luther-King-Junior-Way-S-98144/home/144460029 — sits on a similarly sized lot, and is hardly what anyone would consider tiny. They are building neither in my neighborhood, because that would be illegal. It isn’t like anyone would mind, but the code simply doesn’t allow it.
In the case of Vancouver, for years they were able to keep rent prices low, by building ADUs and DADUs (which I will call just ADUs from now on). Their liberal ADU laws allowed for this sort of cheap additional density. Unfortunately, those became saturated. Most of the houses already have some sort of ADU. Fortunately for us, we don’t have that problem. We have land that can be easily subdivided into smaller lots, as well as plenty of land that could easily support an ADU. Unfortunately, the former is going away fairly quickly. Once an oversized gets subdivided into 7200 foot lots, and they build the big houses on it, we have missed that opportunity. But there are very few ADUs in the city, and that remains a very big potential affordable growth area.
That type of growth is unlikely to be influenced by outside investors. It is possible, of course, but it is hard to imagine a company (or sets of companies) building thousands of ADUs throughout the city, then deciding they are going to just sit on them, because they will eventually become valuable. Likewise with apartment conversions. Why convert a house to an apartment, and not rent it out? That just doesn’t make sense.
But the big reason why this type of development results in lower prices is because it is cheap to build. Even if prices collapse, building a backyard apartment would make sense. That just isn’t the case with most of the city. Their are very few places where we can add an apartment, and those places tend to have valuable property there. There are also a limited number of people who are willing to sell. The Pierre family owns a lot of the car lots on Lake City Way. They have talked about selling the land, but it remains car lots. That would be a relatively small problem, if not for the fact that there are very few pieces of land that allow development.
“It is very important to also consider the cost of construction. If it costs a lot of money to add density, then it won’t happen. Or at least, it won’t happen until rent is very high.”
Developers were building apartments and condos in 1990 and making a profit, and landlords were also doing fine — they certainly weren’t exiting the market. Since then the price of real estate and rents have doubled, all out of proportion to inflation and taxes and labor and materials, so they’re raking in twice as much profit as they did when they were already profitable, while inflation has been 2% or less for the entire time. So when a developer says something “doesn’t pencil out”, it probably means that it will make a profit but not the huge profits their Wall Street investors demand. That’s another change in the market, although it started earlier. Up through the 70s the developers were mostly local and intended to keep the building long-term, so they were more willing to make a mediocre investment for long-term income. Now the investors are mostly Wall Street money that wants to make a short-term killing and then bail for the next project, and aren’t satisfied with the profits mom n pop might get.
A future of large-scale McMansions would be sad, but it seems like it’s still a small fraction of the houses now. I don’t anticipate it will accelerate rapidly. There are some people who want McMansions, but many people think they’re too big or require too many resources to heat and light or they can afford a house but not a mansion.
Cost of construction is important depending on the building size & complexity. Adding density by building triplexes, townhouses, ADUs, and whatnot aren’t really any more expensive to build than single family homes. Building multi-story apartment buildings is more expensive than garden apartments as you add elevators. Next big leap is when you hit 6 or 7 stories and need to start using concrete instead of wood, and last big leap is high-rise.
Mom & pop investors can add housing on the margin – a duplex here, a few ADUs there. If you want someone to come in and build a 6-story apartment building with a few hundred units, that isn’t a mom & pop investor. In Ross’ example, the Pierre family isn’t going to build significant density in Lake City unless they access additional capital – Wall Street money, in your parlance. We have a similar situation in Issaquah, where one local family owns a big chunk of the central area – again, it’s mostly auto dealerships right now. The family wants to grow – they just opened the tallest building in Issaquah, a hotel – but they only do one project at a time. It will take them literally decades to redevelop their land at their current pace.
Seattle is going to add around 12,000 apartments next year. That’s effectively entirely funded by “wall street” money. Given the growth in jobs, we need all that housing. Unless you’re a socialist who thinks Seattle should be in the business of building ten thousand housing units a year, we need that outside capital to fund this construction boom. “Mom & Pop” developers are irrelevant at this scale of development.
Developers were building apartments and condos in 1990 and making a profit, and landlords were also doing fine — they certainly weren’t exiting the market. Since then the price of real estate and rents have doubled, all out of proportion to inflation and taxes and labor and materials, so they’re raking in twice as much profit as they did when they were already profitable, while inflation has been 2% or less for the entire time. So when a developer says something “doesn’t pencil out”, it probably means that it will make a profit but not the huge profits their Wall Street investors demand.
This overlooks a key variable–the land owner. What if they’re the ones reaping most of the profits from the doubling (or more) of rents and purchase prices, because they sell land to developers at a price that captures much of those gains?
Then there is the role that parking plays. Adding parking for apartments is expensive. It is also expensive when adding low rise development. Look at those houses that sit on small lots again. The first one is old, and grandfathered in — https://www.redfin.com/WA/Seattle/2108-NW-73rd-St-98117/home/163631. There is no parking. So not only would that be illegal because the lot is too small, but the lack of parking would be a violation as well. Affordable houses have been outlawed.
Then there is this: https://www.redfin.com/WA/Seattle/733-Martin-Luther-King-Junior-Way-S-98144/home/144460029. This is obviously at the other end of the scale. It is extremely expensive. But a large part of the cost, is the space taken by the parking. Not the garage itself (although that does add to the cost) but the driveway that leads to it. You could easily add another house or two, if not for that parking. Making matters worse, the city has pushed a lot of the parking to the back. This is great from an aesthetic standpoint (putting the parking lot in front of the house is ugly) but it means more space used for parking. You not only have the space for the parking spot itself, but the path to the back. Managing parking (by either not mandating it, or allowing for more off site options) would result in a lot more affordable development.
There was that video a few weeks ago about how a small drugstore or fast-food joint with typically five or six customers at a time is required to have five or six parking spaces, taking up as much space as the building itself.
It is pretty clear, then, that changing the zoning regulations would dramatically help the situation in Seattle, even if the problem is due to big investors speculating on housing prices. There are several things we can do:
1) Liberalize ADU laws. Here is a nice rundown of changes that would help things: https://www.citylab.com/design/2017/11/how-cities-get-granny-flats-wrong/546392/. The great news is that this city’s ADU laws are so terrible, that making even relatively small changes could result in a lot more units. For example, allowing someone to own both properties without living in one would be a huge improvement.
2) Allow for smaller subdivisions. This would have little effect in much of the “old city” because houses generally fill up each lot. But in a lot of the city, you could see a lot more houses.
3) Encourage apartment conversions.
4) Ease up on the parking restrictions, or find creative ways to deal with it.
All of these changes address common complaints by those who want to keep the current zoning. One (sometimes unspoken) complaint is that people don’t want to live next to renters. Fine — allow someone to own that DADU. Another is the fear that many of the pretty houses will be replaced by ugly apartments. I think most of these people would be fine if the house was converted to an apartment (beats having it be replaced by a monster house, which is legal right now). Finally, parking is just where we have to win the political battle. Those who want more cheap parking are just going to have to live with the fact that housing is more important.
But in all the other issues, you have the possibility of compromise — the preservationists getting pretty much everything they want — while still building a lot of affordable housing.
The original HALA changes didn’t go this far, but they did head that direction. The plan was to liberalize the ADU laws. Unfortunately, the mayor killed off the key part of his own committee’s recommendations, and thus began the distracting sideshow that is called the “grand bargain”. This will help things a bit, but be nowhere near the fundamental change in housing that needs to happen in this city. We need to grow where *most* of the city can grow, which is in the single family zoned areas.
“They have also acknowledged that their policy to build tons of market condos backfired, because they became the perfect speculative commodity.”
Why is the commodization of condos a problem? A bushel of wheat is a commodity. There are entire companies built on trading & selling wheat futures – speculators, aghast! But wheat is cheap & abundant, because there are no legal limits on supply.
If condos were truly a globally traded commodity, that should help, not hinder, our housing shortage because then developers would have the confidence to build expensive condo towers, confident they can either buy futures (pre-sale) or sell into this global market. We would get an (even bigger) building boom, and boom! oodles of housing for people to own or rent and a reasonable vacancy rate closer to 10%.
But no. 1, condo aren’t a commodity, they are a still a high risk alternative investment, so a developer won’t put millions at risk unless there is a sufficiently large return to merit the risk of a multi-million, multi-year investment. and 2, supply is highly limited irrespective of the finances.
I’m with Martin, this seems like a good problem to have. Our real problems are elsewhere.
“Why is the commodization of condos a problem?”
There is a moral problem with speculating on a necessity of life. There’s enough wheat for everybody so futures trading is benign, and it gives farmers protection from boom-and-bust cycles the way the fed guards the economy. But if there were a shortage of wheat as big as the shortage in housing and speculators were bidding it up to double the price and the poor can’t buy bread, then that would be a major problem.
I was listening to a recent piece on the radio (KUOW I think) that was focused on the supposedly large amount of money “laundered” though casinos in Vancouver. Evidently the preferred place to park the money is then Vancouver’s hot real estate market.
I was under the impression that a foreigner could not actually own real estate in Canada. That perception comes from looking at the possible purchase of a ski condo in Canada many years ago so perhaps that has changed? However, Canada is part of the British Commonwealth as was Hong Kong. That, and the fact that the geography is similar is what I’m told lead to the large influx of people when Hong Kong was returned to China. Essentially, anyone from a Commonwealth country has free or easy immigration status.
Anyway, back to the radio piece, the presenter argued that tighter laws regarding the cash for chips laundering (he said hockey bags full of bills) and disclosure laws when buying real estate with cash were sorely needed but the BC government is loath to crack down because they are drunk with the tax revenue all this generates.
What is the status of the proposed tax on vacant property in BC?
See my post above. Americans own a lot of property in BC– and are subject to the vacant home tax (1% of the property value assessed). Taxes are due early next year.
Some have raised the issue of retroactivity– Americans who bought years ago are now subject to the tax (if their building/condo allows rentals). I keep expecting 45 to tweet about this– some of his rich buddies like Peter Thiel probably have properties up there and will have to pay the tax, rather than renting out their properties for six months out of the year (it has to be rented out, or else you are subject to the tax). LOL
There theoretically could be a challenge under NAFTA and similar treaties– part of the foreign buyer suit raises this issue. Canada has a bunch of treaties– and the treaty citizens how to be treated equal to Canadians. Americans, unless they renounce their citizenship or break immigration laws (a lot are retirees who aren’t getting work visas from Canada), can’t claim their Canadian property as a primary residence. So, Americans are being punished in effect. Arguably a treaty issue.
There is no restriction on foreign ownership in Canada. The vacancy tax applies to vacant property regardless of the nationality of ownership. However, the property transfer tax is charged at a much higher rate on foreign purchasers versus domestic purchasers. This was a recent, and controversial change, and it isn’t clear that it has had that large an impact on prices. Volume at the very high end has decreased, but no collapsed, and prices are steady. My suspicion has always been that Vancouver’s property bubble is the product of local mania more than international money.
Let me start by saying that I have little regard for Mr. Mudede’s analytical skills and I stalwartly believe in up-zoning and increased density. Having said that, I think the author of this post is being too dismissive of concerns re: large volume purchases of housing by non-resident speculators.
To answer the question posed in the headline: Foreign capital cannot trump supply and demand; but commodity speculation can distort supply and demand. It is in Seattle’s interest to ensure that there is affordable housing for people who want to live and work here. It is not in Seattle’s interest to create investment vehicles for non-residents. An increase in demand from non-resident investors/speculators will soak up supply and make it harder for us to balance housing supply with housing demand.
The author’s position seems to be that, even if this is happening, it’s ok because either: 1) out-of-town speculators will simply put the units back on the rental market; or 2) it will encourage even more construction, meaning local jobs, and some day there will be a housing crash which will benefit low-income residents.
Neither of these arguments are persuasive to me. I don’t see any reason to believe that condos bought by out of towners will necessarily end up on the rental market. Many buildings have limits on the percentage of units that may be rented and, besides, if you’re part of the global 1% you don’t need to fill that unit to make ends meet.
The second argument, cheering speculation on the grounds that it will lead to a local housing bust, seems perverse. A housing bust will cause serious local economic hardship and is not something to be wished for. Focusing exclusively on the increase in affordable rents after a bust seems like a case of missing the cloud for the silver-lining.
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