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- #1
I was asked to dump my thoughts on real estate in some thread on then-A&H some time back, so here I go. This is my personal viewpoint and I have no academically rigorous sources for pretty much anything. Dude trust me.
Real estate is fucked.
On a fundamental level. Almost everything in modern (north American, European) real estate is built with the expectation and explicit goal that real estate is always an appreciating asset. Something that has inherent value. Something that creates more value by the virtue of existing.
This is simply bonkers. Real estate is not fundamentally any different as an asset from, say, a laundry machine. You buy it, perhaps on financing, get utility value out of it for a while and are happy to get a hundred back when you sell the barely functional piece of shit to someone else when you move. It is durable goods, but on a bigger scale. It becomes technically obsolete and wears down, losing its utility value every day.
The land underneath the buildings has tangible, lasting value. But only as a function of what you can use the land for, which in practice means the buildings that are on it, or potentially could be on it. That too, derives from utility value. The world is full of worthless land.
But value creation carries little to no weight on how real estate is treated. After all, we're bonkers and we think real estate keeps its value. We take out massive loans that rely on the buildings holding onto their selling price, even appreciating, during the two to three decades of a typical mortgage. This is why run-down literal crack dens can fetch millions, in a neighbourhood full of run-down literal crack dens. Just because it's in a good location where people are used to paying that much, and more. It becomes unthinkable that how we treat our homes and their neighbourhoods would affect their resale value. Renovations, good maintenance, all becomes meaningless.
The only places where residential real estate prices stay reasonably close to their utility values are rural and otherwise low volume markets where nothing much is going on, economies aren't exceptionally strong and there's generally much more real estate on the market than there are buyers for. Commercial real estate is generally more realistic as businesses have profit margins to chase and real estate is a cost to cut. Residential buyers are only restricted by how much the bank dares lend them.
Urban planning is fucked.
Contemporary land use policy, urban planning rules and practices are all informed by the fundamentally bonkers idea of real estate as an appreciating asset. The main function of land use policy is to ensure that the value of real estate cannot depreciate. Ever. Someone invested in those houses, after all. And they like it. And it's historical, with unique neighbourhood character that definitely is why it's so valuable. That business district next block has nothing to do with it. And it's depressing their property values by being seedy and noisy at night.
This works without much trouble in rural areas and other low-value places where almost anything that gets built is an improvement, or at least not substantially harmful for anyone. Most municipalities are poor as dirt, leveraged to the tits, with crumbling infrastructure making more tax base very, very appreciated in almost any form. Development still happens, urban sprawl is the name of the game.
But what happens in places that already have a strong economy, are quite popular in their own right and rather exceptionally wealthy too? After all, new buildings bring all sorts of negative externalities that could depreciate the assets of the neighbours. Everyone's assets are seemingly best protected by making it nearly impossible to build anything. In fact, real estate prices seem to go up even more if the incumbent residents of the city actively act to stop everyone else around them from doing anything. Only something everyone in a five mile radius are convinced will positively affect everyone's assets can get greenlighted. Real estate price only goes up.
Oh, also we need to stop gentrification because gentrification is very bad. How is that reconciled with protecting real estate assets? It's not. What ostensibly anti-gentrification policies such as subsidised ("affordable") housing requirements actually do is increase the cost of development further. Which drives developers to ask for even higher prices. Genuinely anti-gentrification policies amount to not limiting developers in any meaningful way, nobody does this though. Real estate price only goes up.
Thus far, this has proven successful. But how far will it go? How long will the attractive factors of cities stand against the ever-increasing cost of living with nothing more to show for it? Or is there a breaking point at all? Will big cities one day literally float away from the rest of us like some kind of Elysium? Probably not.
The answer to that is in the economy. Some places in the world are blessed with an absolute powerhouse of an economy. Cities are exceptionally good places to do business in for many reasons. And the flip-side of the city's voter base jealously protecting its real estate is weighing down the very economy that carries it this far. Fabulously wealthy employers can afford to pay more to keep attracting talent despite a sticky real estate situation. But less wealthy ones can't. They will fail, neglect to grow or move somewhere else. Bit by bit, the economy is consumed by more and more demanding real estate. Real estate that does not, in fact, create any value by existing, but seems to drive an increasingly large proportion of the overall economy.
Curiously, a hot real estate market like this can exist in parallel with colder, more reasonable markets due to how zoning policy segregates different land uses. Commercial real estate is often much more grounded to utility value for many reasons, but it is not completely immune to bonkers real estate valuation. Ever hear of property investors preferring to keep their properties vacant over renting them for slashed price? This is because the valuation of their properties is calculated based on the (potential) rents they fetch, and vacancies don't count so long they can eventually rent them for more. Enduring a dry season of no rents is preferable to adjusting property valuation and possibly getting in trouble with their financiers for not having valuable enough collateral for all their debts.
But what happens to all the real estate when the economy finally croaks? Its price is simply corrected to its utility value. That is, what remains of it after decades of refusing to let anybody develop it. So much for asset protection. Ha ha.
Avocado toast is fucked.
Fuck you for liking avocado toast, you degenerate avocado toast fan. Forget everything I said here. Your like of avocado toasts is why none of your real estate dreams will ever come to fruition. If they had already come to fruition, they will be ruined sooner or later
tl;dr: increasing disconnect of utility value from real estate prices makes bubble go whoooooa
Real estate is fucked.
On a fundamental level. Almost everything in modern (north American, European) real estate is built with the expectation and explicit goal that real estate is always an appreciating asset. Something that has inherent value. Something that creates more value by the virtue of existing.
This is simply bonkers. Real estate is not fundamentally any different as an asset from, say, a laundry machine. You buy it, perhaps on financing, get utility value out of it for a while and are happy to get a hundred back when you sell the barely functional piece of shit to someone else when you move. It is durable goods, but on a bigger scale. It becomes technically obsolete and wears down, losing its utility value every day.
The land underneath the buildings has tangible, lasting value. But only as a function of what you can use the land for, which in practice means the buildings that are on it, or potentially could be on it. That too, derives from utility value. The world is full of worthless land.
But value creation carries little to no weight on how real estate is treated. After all, we're bonkers and we think real estate keeps its value. We take out massive loans that rely on the buildings holding onto their selling price, even appreciating, during the two to three decades of a typical mortgage. This is why run-down literal crack dens can fetch millions, in a neighbourhood full of run-down literal crack dens. Just because it's in a good location where people are used to paying that much, and more. It becomes unthinkable that how we treat our homes and their neighbourhoods would affect their resale value. Renovations, good maintenance, all becomes meaningless.
The only places where residential real estate prices stay reasonably close to their utility values are rural and otherwise low volume markets where nothing much is going on, economies aren't exceptionally strong and there's generally much more real estate on the market than there are buyers for. Commercial real estate is generally more realistic as businesses have profit margins to chase and real estate is a cost to cut. Residential buyers are only restricted by how much the bank dares lend them.
Urban planning is fucked.
Contemporary land use policy, urban planning rules and practices are all informed by the fundamentally bonkers idea of real estate as an appreciating asset. The main function of land use policy is to ensure that the value of real estate cannot depreciate. Ever. Someone invested in those houses, after all. And they like it. And it's historical, with unique neighbourhood character that definitely is why it's so valuable. That business district next block has nothing to do with it. And it's depressing their property values by being seedy and noisy at night.
This works without much trouble in rural areas and other low-value places where almost anything that gets built is an improvement, or at least not substantially harmful for anyone. Most municipalities are poor as dirt, leveraged to the tits, with crumbling infrastructure making more tax base very, very appreciated in almost any form. Development still happens, urban sprawl is the name of the game.
But what happens in places that already have a strong economy, are quite popular in their own right and rather exceptionally wealthy too? After all, new buildings bring all sorts of negative externalities that could depreciate the assets of the neighbours. Everyone's assets are seemingly best protected by making it nearly impossible to build anything. In fact, real estate prices seem to go up even more if the incumbent residents of the city actively act to stop everyone else around them from doing anything. Only something everyone in a five mile radius are convinced will positively affect everyone's assets can get greenlighted. Real estate price only goes up.
Oh, also we need to stop gentrification because gentrification is very bad. How is that reconciled with protecting real estate assets? It's not. What ostensibly anti-gentrification policies such as subsidised ("affordable") housing requirements actually do is increase the cost of development further. Which drives developers to ask for even higher prices. Genuinely anti-gentrification policies amount to not limiting developers in any meaningful way, nobody does this though. Real estate price only goes up.
Thus far, this has proven successful. But how far will it go? How long will the attractive factors of cities stand against the ever-increasing cost of living with nothing more to show for it? Or is there a breaking point at all? Will big cities one day literally float away from the rest of us like some kind of Elysium? Probably not.
The answer to that is in the economy. Some places in the world are blessed with an absolute powerhouse of an economy. Cities are exceptionally good places to do business in for many reasons. And the flip-side of the city's voter base jealously protecting its real estate is weighing down the very economy that carries it this far. Fabulously wealthy employers can afford to pay more to keep attracting talent despite a sticky real estate situation. But less wealthy ones can't. They will fail, neglect to grow or move somewhere else. Bit by bit, the economy is consumed by more and more demanding real estate. Real estate that does not, in fact, create any value by existing, but seems to drive an increasingly large proportion of the overall economy.
Curiously, a hot real estate market like this can exist in parallel with colder, more reasonable markets due to how zoning policy segregates different land uses. Commercial real estate is often much more grounded to utility value for many reasons, but it is not completely immune to bonkers real estate valuation. Ever hear of property investors preferring to keep their properties vacant over renting them for slashed price? This is because the valuation of their properties is calculated based on the (potential) rents they fetch, and vacancies don't count so long they can eventually rent them for more. Enduring a dry season of no rents is preferable to adjusting property valuation and possibly getting in trouble with their financiers for not having valuable enough collateral for all their debts.
But what happens to all the real estate when the economy finally croaks? Its price is simply corrected to its utility value. That is, what remains of it after decades of refusing to let anybody develop it. So much for asset protection. Ha ha.
Avocado toast is fucked.
Fuck you for liking avocado toast, you degenerate avocado toast fan. Forget everything I said here. Your like of avocado toasts is why none of your real estate dreams will ever come to fruition. If they had already come to fruition, they will be ruined sooner or later
tl;dr: increasing disconnect of utility value from real estate prices makes bubble go whoooooa
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