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A complete misunderstanding of economics

So this guy has demanded that I post some kind of authoritative manifesto defending 'supply-side real-estate' and has banned me from commenting further because I dared make the assertion that adding a bunch of units to the luxury apartment market does, in fact, have an eventual impact on the moderately-priced apartment market. (To be extra conservative here, a typical comment by me is this:

The only thing worse for affordable housing than building a bunch of new luxury apartments downtown is NOT building a bunch of new luxury apartments downtown, and doing everything else the same.

Can somebody explain to me what, exactly, makes comments like that so reprehensible that they justify a chest-thump like his last paragraph? It's basic economics. If you add additional supply in any segment of a market with vast participation, eventually it affects the supply/demand balance in other segments, too.

Let me repeat for emphasis:

The only thing worse for affordable housing than building a bunch of new luxury apartments downtown is NOT building a bunch of new luxury apartments downtown, and doing everything else the same.

Paging through his voluminous response, I suppose you could best sum up his retort as "the markets are segmented, and thus adding additional supply to the luxury segment can't possibly affect the supply/demand balance for the moderate segment". He then uses a Ferarri/Camry example.

Well, his first assertion is true - the markets are 'segmented', but individual complexes can, and do, migrate from luxury to moderate segments. (Barring new construction and population growth, this is usually a function of time - for instance, the Penthouse1 and Westgate buildings near the Capitol were doubtlessly considered luxury units when built - but today are fairly cheap compared to the new lofts going up farther south). Data on those and other downtown properties can be found from downtownaustin.com. This also explains why the car analogy doesn't hold water - cars don't last long enough for entire models of cars to migrate like that. (If cars lasted 50 years, let's say, then a bunch of 50-year-old Ferraris might, in fact, be competing with brand-new Eclipses. And changes to the current production run which drastically increased new Ferrari output would lead to some people moving up from slightly less prestigious sports cars to that Ferrari, of course).

The impact of the new construction is that the migration of buildings from the "expensive" to "moderate" category will happen quicker. The 10-year-old properties can't obtain the rents they otherwise would have if a bunch of brand-new buildings are built in the surrounding blocks.

I'm not going to bother spending any time defending basic supply and demand to this person by siphoning the internet for studies on real estate. Others are more than welcome.

1: Relatives by marriage have purchased several units in this building over the last couple of years - for a pittance compared to what it would cost to buy a new loft.

Addendum: I went back to his previous entry and discovered why he's so pissed: a comment of his went to moderation and/or rejected. Dude. I didn't even see your comment; I don't force moderation on anybody - all I do is use the built-in automated Movable Type stuff based on words it thinks might be spam and some other metrics (probably number of URLs or whatnot). Try again; email me; whatever; but take off the tinfoil hat.

Addendum Deux: Wikipedia has a good overview of the differences between the real estate market and the market for, say, cars. Models for real estate economics must take into account the fact that the good being purchased is immovable (unless you live in West Virginia) and highly durable (this varies, of course).

This entry was posted in the following categories: Austin , Economics , Urban Design , metablog

Comments

Mike,

You are dead on here. The profit margins in the "affordable" segment of the market are too thin for us to see affordable housing downtown without significant subsidies. Building housing today, regardless of the segment, provides a base of housing for the future that, hopefully, will be more affordable, and the new housing limits the extent to which landlords can raise the rents or sale prices on existing housing. Housing prices follow supply and demand. Increase the supply of housing and the costs will decrease.

Part of the reason that we are in the situation that we are in is because we built little new housing in the city between 1985 and 1995. If we had built housing ten years ago, it would be affordable today.

Thanks for the comment, Jeb. Maybe a comment on the original site would have more impact, though; I think at this point me and that guy are talking past each other...

Mike, had to move my original entry to a new site and can't move your trackback so I added a trackback from the new entry. If you want to add a trackback on my entry on the new site the URL is:

http://www.politicalsuicide.org/scott-s-blog/trickle-down/tbping

It was suggested that I was getting a bit too political for the non-profit site... :)

Thanks...