The discussion about how much building more housing will help with affordability, and the nuances of the neighborhood and regional effects and what to do about them is alive and well and important.
But so far most of those conversations are assuming that when you add supply, it addresses some sort of demand, even if it’s an influx of rich people with other options.
As in, as long as there is pent-up demand for housing in a region, someone will live in the new housing that gets built.
Fairly simple, right?
Except it isn’t always true, because of:
1. Short-Term Rentals (i.e. Illegal Hotels)
Homes are being removed from the market and being turned into short-term rentals (i.e. hotel rooms) via companies like AirBnB at an amazing clip.
LAANE, in Los Angeles, first concerned about the effect on hotel workers, recently completed a massive study of AirBnB based on the site’s own publiclly available data, and discovered it is having tremendous effects on the region’s housing market. In the Venice area, for example, 12.5 percent of the housing has become short-term rentals. In a popular area with low vacancy and skyrocketing costs, the number of homes transformed into hotel rooms in the past few years is about seven times the number of new homes built. In other words, the city is actually losing housing.
Despite the company’s preferred image of someone letting people stay in their spare bedroom to earn some extra cash, LAANE found that two thirds of the listings, and 87 percent of the revenue, comes from whole apartments or homes, and a significant number of hosts have two or more (often many more) listings, and are likely to be commerical operators, not individual homeowners.
Bottom line: When landlords can shift vacant units to the tourist market instead of lowering the rents, then new supply doesn’t help with affordability.
2. Real Estate as a Place to Park Money (Often Illegal Money)
It’s not necessarily breaking news that the extremely wealthy have been buying apartments they neither live in nor rent out in hot real estate markets. New York City has 89,000 apartments owned by people who mostly spend their time elsewhere, prompting proposals for a pied-à-terre tax (which I still think is a great idea and don’t know why it hasn’t gotten anywhere).
The revelations in the Panama Papers have been not only a good reminder of this phenomenon, but a reminder that it’s not just a matter of some super wealthy folks wanting second and third homes. Luxury housing has become in many places a form of money laundering—it’s not about providing housing at all. And yet it drives up everyone else’s cost of housing.
As summarized by Tim Redmond on 48hills.org:
“On NPR this afternoon, the vice president of Transparency International talked about how the offshore deals impact ordinary people–and the first thing she talked about was housing in cities like New York and San Francisco. See, the shadowy banking system allows people with illegal money–money from arms trading, money from drug sales, money stolen from the people of a struggling country–to launder it and use it, among other things, to buy real estate.
So, she said, the bidding wars that are driving up the cost of housing in cities, and the mega-priced condos that are shoving out other types of housing in places with scarce real estate, are directly linked to this dark money.”
(As noted in HousingWire, there’s a lot in the papers to explain Miami’s real estate market as well.)
The AirBnB issue in Los Angeles is already uniting hotel workers and their unions, affordable housing developers, tenant advocates, and even hotel owners to call for better regulations of the service. Who knows exactly what sort of allies the Panama Papers revelation might bring together. After all, as Drew Schwartz writes in Vice,
“If you live in one of the 200 countries and territories that Mossack Fonseca’s clients call home–and, given the fact you’re reading this article, you probably do–the story of the Panama Papers is your story. The money the law firm helps to hide should be used to pay for your schools, your highways, your hospitals. The criminals it works with run the most violent illegal organisations your country has ever seen. The politicians who have taken and made bribes, dodged taxes and amassed fortunes of unimaginable scale are your politicians.”
And that doesn’t even get into the effect on housing markets.
(Photo credit: TaxRebate.org.uk, CC BY 2.0)