What is the relationship between new construction and urban housing prices?

[pdxtex]

i was watching one of those househunters shows and the couple was looking at some shoebox sized bungalow for 850k. they thought it was a good deal. i nearly shit my pants. so i assume the first wave of chinese immigrants were hong kong refugees fleeing a new reunified city. who are the current immigrants and "investors", just newly rich chinese from the mainland? in either case, id be #$%^& pissed if i were a native bc resident. yeah, i guess i never really knew what was going on, the demographic stats and housing prices never really added up. i dont think portland is at risk for a similar trajectory, but coastal cities are popular places, and it does make me nervous that our city is getting so popular. single family home prices aren't thru the roof yet but we can all see where they are going, 15 years from now, portland will be where present day seattle is, maybe sooner. ill be living in cleveland by then, maybe sooner too!

[ssiguy]

Yes, the federal government finally put an end to the buying of passports program but the damage has been with tens of thousands of Chinese who bought here for their passports and their only interest in Vancouver or Canada is to flip properties, launder their money, and have a Canadian passport when the Chinese authorities come knocking at their door for undeclared income, illegal transferences of wealth out of the country, or corruption charges.

Vancouver's economy depends on a never ending real estate boom and house flipping. The city has almost no manufacturing, of Canada's 50 largest corporations only one ..at #48......is headquartered in Vancouver, and many high tech companies that would like to set up shop can't because of a critical lack of skilled labour as the young are leaving with their degrees in hand and other Canadians won't move here due to the low wages and extreme cost of living.

The situation is becoming so bad it's almost farsical. UBC, a good university with a good reputation, has said it may have to begin closing some programs within 10 years if they can't find enough profs to teach the students. Even at a profs salary the idea of buying a home within a 10km of the city is unrealistic and it would be very modest in a working class area. So to help entice profs, UBC is actually building subsidized housing for professors!......................yes you read that right, profs getting subsidized rent on campus to try to entice them to stay.

[pdxtex]

so canada built a resort for chinese mega tycoons all the while ignoring the needs of native canadians? what a scam! how this isn't more note worthy in continental press i dont have no idea. i mean ive heard the term hongcouver but i never really thought much of it.

[James Bond Agent 007]

I think there is little doubt that new construction is increasingly geared toward higher-end stuff.

[jpdivola]

Originally Posted by James Bond Agent 007

I think there is little doubt that new construction is increasingly geared toward higher-end stuff.

Yeah, no doubt. Particularly in our high cost urban cities. Pretty much everything is "luxury" or heavily subsidized affordable housing. But, I still think not building is far worse than building new luxury buildings.

Building new luxury units takes price pressure off existing units/slows down gentrification. Take NYC for example, if they didn't build "unaffordable" luxury high rises on the Williamsburg waterfront, those residents would have just priced out other people in older buildings in Williamsburg and then those people would have moved to Crown Heights, Bushwick, Bed-Stuy and on and on.

Yeah, there maybe some "wealthy foreign investor types", but most of them would still be in the city anyways. I say add a "2nd home property tax surcharge" but don't shut down construction.

Reducing demand from the wealthy is hard to do. But, even then, people are only going to build housing if they can make a profit doing it. Given the high land and construction prices in NYC/SF/Bos, even small basic housing units are going to be expensive to produce.

In theory, raising height limits would allow more units to packed onto similar land, but that could be partially offset by higher construction costs for taller buildings. This will still allow more units to be built and hence take more price pressure off existing buildings. But, it is unclear if the units themselves could ever be produced at a price affordable to say someone at the 70% percentile of the income distribution?

[eschaton]

I think the degree to which new construction affects local prices depends upon the neighborhood - specifically how walkable it is.

In neighborhoods which are not particularly walkable (not necessarily suburban, just without a major business district) the "halo effect" is pretty modest. The value of land in the area may rise a bit, but the value of dated houses probably falls back as well, as people who formerly just wanted to live in the area in any house now have more contemporary options.

In contrast, if you're adding new units in a walkable area, you're increasing the walking density. You're also presumably adding mostly units which are market rate, and cater to a more wealthy demographic than the existing neighborhood mix. This will cause the neighborhood business district to perk up, which in turn (if a large project) could cause a few more destination businesses to open up in the commercial district. Thus even the value of the dated housing units should continue to rise.

[llamaorama]

If housing has shifted to a trickle down model where we only build expensive houses new and people who can't afford those buy aged older homes; then that only means good planning and urban design is even more important.

The good news is today's new upscale developments in city centers and retrofitted inner suburbs will be good places for tommorow's middle class because they are efficiently laid out and come with parks and other nice features.

The bad news is today's new suburbs are tommorow's decentralized poverty zones, low income suburbs are really terrible places because their residents don't have as much to spend on transportation to get around and don't shop enough to back the sales tax based local government budgets. And they are homogenous, which means they'll become concentrated ghettos.

[ssiguy]

Vancouver hasn't seen prices as low as that since the early 90s.

[ssiguy]

Further proof of the Asian money coming to Vancouver and the further alienation of the actual people who live in the city.

A new elegant tower is going to built in Vancouver. It hasn't started advertising yet......or at least not in Vancouver. There is a huge billboard for the new building just erected promoting sales, in downtown Taipei.

Another little goodie. There is a new reality show that has started filming and will be on air soon. It's called "Rich Little Asian Girls of Vancouver" and no I am NOT kidding.

[dc_denizen]

Interesting article:

link

Vancouver’s real estate boom: The rising price of ‘heaven’

Qiqi Hong walks past her sleek, blue-tiled hot tub and an infinity pool that seems to disappear like a waterfall into the chilly air above West Vancouver. She leans on the patio railing and breathes in the majestic ocean view that takes in the towering Douglas firs of Stanley Park, the skyscrapers of Vancouver, the Asia-bound freighters anchored in English Bay and – way off in the misty distance – the faint, rugged outline of Gabriola Island.

“We’re in heaven,” says Ms. Hong. “I can’t find any house that can compare to my house.”

The serene West Coast lifestyle did not come cheaply: Ms. Hong’s home cost $6-million. But it is an investment she can easily afford. The irrepressible businesswoman founded a successful lighting-design business in Beijing that thrived in China’s building boom. It now has more than 100 employees. But tired of Beijing’s hectic pace and foul air, she decided to come to Vancouver – after looking in Switzerland, Germany and the United States – on the Canadian government’s immigrant investor program in 2011. She now also owns three other houses on Vancouver’s west side, each valued in excess of $1.3-million, as well as a downtown condo she uses on weekends and lends to visiting friends.

Demand from wealthy migrants from mainland China such as Ms. Hong has helped make the Vancouver area the most expensive real estate market in Canada. The average price of a single-family detached home is $1.26-million, higher than any other Canadian city. The rising flow of foreign capital – stemming from a long tradition of transpacific migration and investment – has turned Vancouver into a truly global real estate market. One large real estate firm calculated that roughly one-third of the detached homes it sold within the City of Vancouver last year went to buyers from China. Vancouver developers and real estate firms have hit the jackpot, and some have rushed to set up offices in Shanghai and Beijing. Some now say Vancouver is a bedroom community for the world.
...
At least 30,000 millionaires from Mainland China have immigrated to B.C. over the past decade using the federal government’s investor immigrant program, almost all of them settling in Vancouver. The federal program allowed those with a net worth of $1.6-million to lend the government $800,000 interest-free in exchange for permanent residency. The program was ended in the 2014 budget – with a backlog of 80,000 applicants, roughly 80 per cent of which were from Mainland China – but is expected to be relaunched soon.

“We’re going to continue to get a solid supply of millionaire investors,” Mr. Kurland says.

While Chinese demand is practically unlimited, supply in Vancouver – particularly for detached homes – remains restricted: There are mountains to the north, the U.S. border to the south, the agricultural land reserve, multiple rivers and bridges, and the vast Stanley Park. “There’s not a lot of dirt here,” says David Goodman, a principal at real estate firm HQ Commercial.

A 2013 report from Sotheby’s said 40 per cent of Vancouver’s luxury home sales went to foreign buyers – mostly buyers from Mainland China, but also from Iran and the U.S
...
“It’s globalization. As long as Vancouver welcomes immigrants, there will be people willing to move here – and inevitably prices will get driven up,” Mr. Ren says. “That’s the choice of Vancouverites: Whether we will welcome the benefits that come with this foreign investment, or whether we want to say no to globalization.”

amazing...how did Canada, and Canadian cities, embrace globalization so heartily, more perhaps than any other western nation? From mass immigration in Toronto, to the incessant drumbeat to dig up the entire country as fast as possible and send resources outside of North America (bypassing the traditional sharing with the USA in exchange for auto plants and cross-border manufacturing, etc) to Asia, to enthusiastically welcoming immigrant investors from non-western cultures (and damn the consequences for the 'native' population). Truely something has changed over the last thirty years up there that hasn't occured in the US or elsewhere.

[ssiguy]

Canada is often seen { I don't mean to be insulting} as a more welcoming country than the US and it's cities more liveable. Also remember that except in the last few years the Canadian dollar was significantly lower than the US so their Yuan went a lot further.

The federal government wanted the cash and the province and city were desperate for the money and construction jobs.

As for the oil sands, again it's all about money. The federal government which governs foreign trade and environmental laws gets a LOT of tax revenue from those developments both in taxes on construction of very high paying jobs and exports ie sales tax, income tax, export taxes, development taxes etc. They are a major cash cow and Ottawa wants the money and has gotten it with a balanced budget.

As far as "selling the country" that seems to be much more of a Western Canadian phenomenon than the rest of the country. BC by easy access to Asia and a very corrupt political system and openly accepting of money laundering and in Alberta by resource extraction to fuel the booming Alberta population and economy. Alberta will probably overtake BC with 5 to 8 years as Canada's 3rd most populace province and has long since overtaken BC in GDP. An average Albertan makes 30% higher wages than an average BCer.

[Crawford]

Originally Posted by pdxtex

i was watching one of those househunters shows and the couple was looking at some shoebox sized bungalow for 850k. they thought it was a good deal. i nearly shit my pants. so i assume the first wave of chinese immigrants were hong kong refugees fleeing a new reunified city.

I believe there is a "China effect" where areas that receive Chinese investment are overpriced and probably should be avoided by anyone who isn't Chinese. Yes, it's anecdotal, but I would swear by this in terms of investment returns.

The problem is a "clustering effect" where I have noticed mainland Chinese investors will just copy other Chinese investors, and will put their money in the same place, regardless of cost. I think this drives up costs to "artificial" levels and is not long-term sustainable.

A good example is Irvine, CA. There is nothing really distinguishing Irvine from adjacent communities. If anything, among "Americans", it's considered less desirable than the adjacent Orange County communities closer to the ocean.

But, Chinese investors took an interest in the community, which had an existing Chinese-American population. Now they flock to the area, and bid up the prices of cheaply built suburban housing to absurd levels, all because of this "flocking together" mentality. They would rather pay $1 million and have minimal returns on an investment property in Irvine than 700k and big returns on an investment property in an adjacent community. There may be something cultural that seems to require a groupthink or something.

I even see it in the suburbs of Detroit. This is more for buyers, rather than mainland investors, and many are permanent residents in the U.S., or even citizens, but I still see this mentality. My brother was looking at McMansion-type sprawl homes in Oakland County, and on one side of the road homes were 600k, and the other side of the road 450k. They were the same homes, same builder, same schools and taxes. The only difference was that one side of the street was a city called Novi, and the Chinese wanted Novi.

So the Novi side of the street with 600k homes is like 70% Chinese, and the other side of the street with 450k homes has no Chinese. Everyone else flocks to the other side of the street, because to them there is no difference, and, if anything, the concentration of a single ethnicity may be undesirable to those not of that ethnicity.

And, yeah, I get that I'm stereotyping, that there are many exceptions, and there are likely cultural factors that I'm missing. But I have seen this over and over in the U.S. and Canada.

[Crawford]

Originally Posted by ssiguy

Canada is often seen { I don't mean to be insulting} as a more welcoming country than the US and it's cities more liveable. Also remember that except in the last few years the Canadian dollar was significantly lower than the US so their Yuan went a lot further.

If you're talking about the foreign investment in Canada, I think we're all aware that those factors you list are not relevant to the conversation.

Canada is/was a huge mecca for Chinese investment because it had very favorable laws for investment. It has nothing to do with "more welcoming" or "livable cities" or even the Canadian dollar, as if your average Chinese investor is even considering such things.

[pdxtex]

^^^^clearly ottawa was welcoming chinese money though. i dont really know a ton about immigration programs. i know the US has a immigrant investor program which will grant a green card, but the investors need to start a business on US soil and employ 10 american citizens, not just purchase property or make an "investment", whatever that means. i guess just make a loan to the canadian govt.

[mhays]

I believe the investor in the US only has to put $500,000 or so in as an investment, not start a business.

[pdxtex]

from wikipedia, the us eb5 visa....

"The EB-5 visa provides a method of obtaining a green card for foreign nationals who invest money in the United States.[1] To obtain the visa, individuals must invest $1,000,000 (or at least $500,000 in a "Targeted Employment Area" - high unemployment or rural area), creating or preserving at least 10 jobs for U.S. workers excluding the investor and their immediate family.[1] Initially, under the first EB-5 program, the foreign investor was required to create an entirely new commercial enterprise; however, under the Pilot Program investments can be made directly in a job-generating commercial enterprise (new, or existing - "Troubled Business"[2]), or into a "Regional Center" - a 3rd party-managed investment vehicle (private or public), which assumes the responsibility of creating the requisite jobs. Regional Centers may charge an administration fee for managing the investor's investment."

well the canadian program certainly is popular. from a vancouver sun article....

"Immigration Department data obtained by the South China Morning Post suggests there was a backlog of more than 45,000 rich Chinese waiting for approval of their applications to move to British Columbia as of January last year. They are estimated to have a minimum combined wealth of C$12.9 billion (HK$90 billion) The Chinese queue for British Columbia under the scheme – which halted new applications to deal with the backlog in 2012 – is about six times the combined annual applications from all nationalities to the investor migrant programs run by the US, Britain and Australia."

Here's the article from the Vancouver Sun.
http://blogs.vancouversun.com/2014/0...althy-chinese/

[jpdivola]

I get that Chinese investors may be bidding up the price of housing in Vancouver. But, is that really due to new construction?

Seems the spiking price is due to rising demand, not new supply. If Vancouver blocked all new construction, it seems the situation would be even worse.

[ssiguy]

When I was mentioning more "welcoming" and more "liveable" I was referring to those who buy and flip houses. They may want the country as an emergency exit.

[jpdivola]

Another "contra supply and demand" argument I hear repeated is:
Certain desirable US cities have elastic demand, so building more housing won't help.

The idea is that if demand is perfectly elastic price will not change even if new supply is added, because demand will simply increase. Build more homes in NYC and more people will simply come in and buy them up.

I don't buy this argument for 2 reasons:

1) If demand is perfectly elastic and prices won't change as new supply is added, the reverse should also be true. If NYC or SF, suddenly condemned half of their existing housing stock. Prices shouldn't rise as people would simply move away. This seems unlikely, its more plausible that demand is only somewhat elastic. Ok, so increase is supply will be partially offset by increasing demand. But, even so prices still fall modestly with increasing supply.

2) Demand elasticities have to do with how a fixed aggregate level of demand changes as prices changes. However, it doesn't deal with changes in overall demand. If aggregate demand is growing faster than supply prices will rise (even with a perfectly elastic demand curve). Supply increases are still need to offset rising overall demand.

IMO, the "elastic demand" argument doesn't undermine the central idea that building more housing will put downward pressure on the existing supply base.

[mhays]

I don't buy it either. New housing can help a whole neighborhood rise, but that's about the ranking of neighborhoods within a city...some neighborhoods rise, others decline or stabilize. The quality of housing doesn't cause major migrations into cities.

It can coincide of course. When a city becomes a big safe haven or second-home center for rich people, they'll tend to buy much of what's available in that city, which will often be new construction, and that will fuel new construction.