Ever since I’ve been blogging, I’ve been complaining about the high cost of housing, and I traditionally blamed it on regulations which prevent enough housing units from being built.
Some interesting events have happened since then. There was a real-estate crash, and allegedly one of the causes of the crash was overbuilding of houses! How can there be too many houses if there aren’t enough houses? This real estate crash certainly hasn’t led to lower rents in Manhattan. My rent this year is the highest I ever paid for my crappy apartment, and I expect the greedy building owner to raise the rent again when my lease expires.
Part of the story is that developers built houses in places where the government allowed the houses to be built, but which weren’t necessary desirable places to live. For example, Maricopa, Arizona. Why would anyone want to move to the middle of nowhere?
I also find it weird whenever I read a local real-estate story about developers losing money on condos because they had to sell a one-bedroom condo for only $500,000, or $1,000,000, or some number that would buy several brand-new two-bedroom houses in the Midwest. What causes condos in New York City to be so expensive to build? I don’t work in the real estate industry, but these are guesses:
(1) The developer has to pay a lot of money for the land that condo building is built on, and then it takes time and money to remove the structure that was previously there.
(2) The zoning and approval process takes a long time, which means the money invested in the land has to sit there a long time, and the developer needs to pay interest on that money.
(3) The zoning and approval process uses up a lot of billable hours from attorneys, and BIGLAW lawyers bill at high rates
(4) The unionized construction industry in New York City means the labor costs for the construction of the condo are a lot higher than in the Midwest.
(5) In many cases, condo developers are required to build 20% “affordable” units, which are money-losing units, so the developer needs to charge more for the market-rate units in order to break even.
(6) New units in NYC have really expensive “finishes,” whereas that cheap house in the Midwest probably has wall-to-wall carpeting and GE appliances.
But still, the cost of many of these things above can be alleviated with easier zoning and regulations, and by allowing denser construction so the costs can be spread among more units.
However, there’s still the problem of positional competition among the really rich people who live in New York City. One factor that significantly raises the cost of housing is the existence of a lot of rich people. It’s a factor that I’ve only recently come to understand and didn’t get nine years ago when I started blogging. Some conservative types always ask, “why should I care if someone else gets rich? I should be happy for them!” Actually, you should care because they bid of the price of all goods and services that are in limited supply. Part of the reason why housing is so expensive in New York City is related to the reason why pre-school costs $30,000 in New York City, and even with such high prices the waiting list is so long that mothers have to apply while they are still pregnant otherwise their kids don’t get in.