Housing Hunger Games Pt. 2
Part 2: Whose Fault Is It Anyway?
In Part 1, we discussed the core cause of the housing crisis. In this Part 2, we tackle the boogeyman. You can skip ahead to Part 3 here.
Can big (greedy) developers just take less profit to lower rent?
Unfortunately, generally not. To see why policy responses premised on curtailing developer profit are likely to backfire (as nearly all price controls are), let’s assume (probably sensibly) that developers are indeed greedy assholes who will bleed renters dry at every chance they can. Does it make sense to expect such pricks to voluntarily accept lower profits? Obviously not.
So you may be thinking: “Fuck ‘em, then, let’s just make laws in our city that cap their profit.” But remember, we’re assuming maximum greediness, so the only developers who will build in our city with its price controls are developers who believe they can make at least as much building in our city as they can investing elsewhere, such as the stock market. Thus, if we’re assuming developers are greedy, we have to assume the only ones who will build in our city are builders who think they can make more profit in our city than just putting their money in their 401(k)s.
What does that mean for limiting profit? It means that any price cap that results in developer profits materially dropping below the stock market’s will drive developers away and halt building. Those developers will just put their cash in the stock market and leave renters clawing each others’ eyes out for apartments. One hint as to why this policy won’t work is that over the last 50 years, even the largest landlords in the US have made profits in line with the stock market, so there’s not much room to drop their profits without stifling supply.
The table below shows historic large landlord performance vs the stock market.
| Year | Corporate Landlord Profits | Your 401(k)'s Profit |
|---|---|---|
| 2015 | 2.30% | 1.40% |
| 3-Year | 10.30% | 15.10% |
| 5-Year | 11.60% | 12.60% |
| 10-Year | 6.90% | 7.30% |
| 15-Year | 10.80% | 5.00% |
| 20-Year | 10.30% | 8.20% |
| 30-Year | 9.40% | 10.40% |
| 40-Year | 12.00% | 11.40% |
| 1972-2015 | 9.80% | 10.30 |
Source: The Intelligent REIT Investor: How to Build Wealth with Real Estate Investment Trusts
That means we should expect any profit cap to just result in developers building less and investing more in the stock market, leaving renters with fewer options and likely higher rent. They recently tried a version of this in the Netherlands. Predictably, rents went up.
Nobel-prize winning economist, Paul Krugman, succinctly explaining what he laws of supply and demand tell us about the prospects for price controls.
I don’t buy it. My landlord is an asshole. Are you denying that powerful landlords abuse renters?
Even in ultra-competitive markets like the NYC area, landlords can be assholes. We all have experience with or know someone whom a landlord screwed over, and landlords absolutely shouldn’t be let off the hook.
But in the NYC area’s extremely competitive real estate market, one of the few things that landlords can’t do is set rent much higher than market rate for comparable units (and there are a lot of comparable units). This is a crucial point but may seem counterintuitive given how much power large landlords have over renters once renters sign rent contracts (e.g., neglecting repairs, taking my damn deposit, doing zero about my noisy neighbors etc.). Your landlord knows that you can move along to their competitors as soon as your lease is over. The asshole a block away is happy to undercut your current asshole and get your business.
Comrade, if you’re telling me that NYC-area landlords compete prices down, why are prices still high?
Prices stay high when supplier costs are high. If you’ve ever taken an Uber trip when passenger requests exceed available drivers, you’ve experienced surge pricing. In surge pricing, the many passengers need to compete with each other to get rides from the few drivers. Those drivers can demand higher rates. Uber passes on the higher driver rates to you in the form of higher fees. But Uber’s own service fee percentage doesn’t increase on surge trips, meaning their profit margin stays constant, even when prices are high.
Similarly, new landlords need to buy their rental properties from older owners at market prices. In a superheated market like in the NYC area market, those market prices are massive, and landlords pass on those extreme costs to renters. Fundamentally, the reason rent is high in the competitive NYC area is that to be a landlord in the NYC area, you have to start by buying an extremely expensive building.
Sigh, OK, so if regulating landlords isn’t a viable path to lowering rent, what is?
We cover that in Part 3.
TLDR: NYC-area renters have been paying surge pricing rent for over a decade.
Part 3 walks you through the policy response to the crisis.
