Discussing housing policy in left-wing spaces I often run into an argument which is, essentially "building more units doesn't help with the housing shortage because so many will be bought by speculators with no intention of living there." This view, however, implies there's an excellent opportunity to get a ton of housing built at the expense of these speculators, enough to bring down the cost of housing and transfer enormous wealth from speculators to everyone else.

Here's a recent example, Nathan Robinson writing in Current Affairs:

There is no necessary economic reason why increasing the total number of housing units in a city helps make housing more affordable for poor residents. Consider the pencil towers. Let's say that in order to build one, an early 20th century building full of lower-middle class residents was purchased, the residents evicted, the building flattened. There were 30 single-family units in the old building. Our new pencil tower is 100 floors high and has 100 units. All of our pencil tower's units are full of state-of-the-art appliances and high-end fixtures, and cost $2,000,000 each. They are swiftly bought up, 20 by rich people who live in the city, 30 by rich people lured to the city by its new pencil tower, and 50 by rich people who have no intention of living in the city but think pencil tower condos are an asset worth owning in a swiftly-gentrifying city.

While I don't think this hypothetical is realistic, especially in its proportions, I want to dig deeper into its implications. Let's say we build this tower of 100 units, funded by rich people. Then we let developers keep building, and get dozens or hundreds of towers like this, each one with 3x the units there were before, and all at no expense to the public. At some point, these "rich people who have no intention of living in the city" will realize that their investment units aren't so special after all, and the bubble will pop. Costs will fall dramatically, since there will be far more "luxury" units than people who can afford luxury prices.

What about the people who were living in the buildings before they get rebuilt 3x bigger? Unfortunately, we are already losing cheap housing quickly. Developers buy old cheap housing, gut it, and turn it into fancy condos, all without increasing capacity. Building taller is much more profitable, however, so if we let developers build towers they'd do that instead.

Speculators who buy housing with no intention of living in it are betting that we will continue to keep the supply of new housing highly constrained and that housing prices will continue to climb. Let's prove them wrong and take their money.

Comment via: facebook

New Comment
27 comments, sorted by Click to highlight new comments since:

I've always wondered why cities didn't put an extra tax on empty apartments, in which case the whole thing becomes an easy win-win. 

How do you define and enforce "empty," though?

This doesn't seem that hard compared to most lawmaking? Something like, the unit is empty if it is unoccupied more than 40% of days?

They do this in Vancouver


Not sure about the enforcement, though.

You would need to either live there, or pay tax for renting, or pay tax for empty apartment. For each existing apartment, one of these three must apply.

To certain degree you could cheat by having each family member officially live in a different apartment, or renting the place to a fictional person. But the former limits you to one apartment per adult family member, and the latter still requires you to pay some tax (and produce fake paperwork that could be audited if the fictional rent is too low).

As a side effect, it would also prevent tax evasion, when an apartment is rented unofficially. If you don't pay tax for rent, you need to pay tax for empty apartment.

Why are you introducing a tax for renting? Are you trying to add a further subsidy for home ownership?

I probably used a wrong word here. Is tax for leasing the right term? It was supposed to mean an income tax on the money you get when someone else uses your apartment.

I think the problem is, at least in the US, income tax is paid to the state and federal governments, while a vacancy tax would be paid to the local government? And while you have to declare rental income, (I think) you don't have to say what property it comes from unless you're audited.

It would be possible to change this, but I think if you want to institute a vacancy tax you just define vacant and leave it at that.

I don't know if it's important to your argument or not, but you're not necessarily dealing with ordinary speculators.

Rumor has it that a lot of sales of vacant urban units, especially luxury units, are to (and/or among) money launderers. That means that (1) much of the value of a unit doesn't come from its utility as a place to live, but from its acting as a cover story and/or a quasi-currency-value-conduit, and (2) the buyers actually expect to take some losses. In fact, in some cases overpaying may be the whole point, because it lets the buyer transfer extra money to the seller in exchange for something outside of the visible real estate transaction. There don't have to be that many launderers out there for them to represent a big proportion of the liquidity in the market, because they tend to turn properties over a lot, and they either don't care so much about overpaying or they actively want to overpay (which then distorts the price signal for everybody else).

Even the launderers can only absorb so many units, but I imagine they may contribute to the markets staying more irrational than you'd expect for longer than you expect. Supposedly this also applies to fine art.

Searching "real estate money laundering", it does sound like this is a real thing. But the few pages I just read generally don't emphasize the "overpaying in exchange for out-of-band services" mechanism—they seem to be thinking in terms of buying (with dirty money) and selling (for clean money) at market prices, and emphasize that real estate's status as "a good investment" is an important part of why criminals use it.

(They also bring up international tax avoidance strategies. Obviously using property to "park your wealth" also relies on prices not going down and hopefully going up at a reasonable rate).

So it sounds like OP's strategy of building more and more until the speculators stop paying would work almost equally well against these types of buyers.

I'm not sure that follows. If your goal is to sell the unit on to a different money launderer, that may make it "a good investment" independent of its value as a place of residence.

I mean, we have people out there buying and selling block chain attestations to the notional "ownership" of hashes of digital images, with no limitation at all on access to the actual image content. As long as something is scarce, you can apparently use it as a store or conduit of value, regardless of whether it's useful.

To a first approximation, it doesn't matter.  If there's unmet demand (aka - a very high price, much higher than production and carrying costs), you haven't yet built enough.  If speculators want to pay a lot, take their money, use it to build more.  Repeat until there's enough for everyone, including multiple empty units for those who want to pay for empty units.  

Let people launder money all they like.  Use the surplus to make even more stuff that people seem to want.

Why do you assume that the space, materials and labor to build unlimited housing will be available? Those physical resources have to be pulled out of some other use, if they exist at all. And if they are available, that means you will burn a bunch of those resources, and cause a bunch of environmental damage, to create housing capacity that will never be used.

The significance of the launderers is that they may greatly increase the amount of such unused capacity, because they may be even less sane about prices than regular speculators.

I'm not sure that a system that burns resources because people "want" empty units (which they don't actually want for their own sake at all) is a good system. And I'm not sure what surplus you mean. Surplus money, sure, but where's the surplus wealth? Seems to me that the actual wealth is being poured down a rathole.

Why do you assume that the space, materials and labor to build unlimited housing will be available? 

Isn't that the whole premise of this discussion?  If there are people who'll overpay, use that to make more of it.   If they're not overpaying and it actually costs that much to create the housing, then the argument that "housing is unaffordable due to speculators" becomes much more tenuous.

"Make more" space? I'm pretty sure that violates general relativity or something like that.

You can make more steel and concrete, of course, and I don't think we'll run out of the raw materials for those, but we might find ourselves under water sooner if we keep cranking them out at too high a rate.

I suppose you could pay parents to make more labor for you. It's been done in the past, but I think the approach has gone out of favor these days. The lead time is pretty long, too, and the labor you get will itself need housing, so you need to make even more of it.

Also, presumably the prices of all of the above have to go up before there's a market signal to make more of them, so the price of anything else that relies on those inputs also has to rise, distorting market feedback on demand for those other items.

Seriously, money doesn't actually create anything, and there are actually finite physical resources in the world. Any political or economic system that causes physical resources to be allocated to producing physical things that don't physically benefit anybody seems like a system with a serious problem.

All you can extract from speculators is the money, not the physical stuff. The money launderers, if they exist in significant numbers, are going to be like super-speculators who provide even more money... but still no physical stuff. So they increase the misallocation. And how do you get the money from them, anyway? I mean, aren't they already naturally subsidizing construction by buying up units? Obviously they're still not solving the problem by themselves, because there are still people without housing. What's the intervention that would put more of their money toward housing, and who would be in a position to make that intervention?

One of the big knocks people always used to give against communism was that central planning would produce too many boots and not enough chewing gum, or set unreasonable quotas that forced farmers to damage the long-term productivity of the land, or whatever. Maybe that's not absolutely intrinsic to central planning, but it seems to apply to any plan to use this speculative phenomenon, no matter how you do it.

It seems to me that you really, truly only want to build housing (or anything else) if it's going to actually get used. Obviously if you truly don't have enough units for everybody to be housed even at 100 percent occupancy, then you need to build more. But you don't want either existing or newly built units sitting vacant at any higher rate than you can avoid, no matter how much money moves around as a result.

Without having researched it in enough detail to be sure, the vacancy tax idea seems like a good first step, certainly better than anything that would create more vacant units.

Seriously, money doesn't actually create anything, and there are actually finite physical resources in the world.

Awesome - that's normally my line of argument when someone starts talking about large-scale behavior as if it were financed by a single entity.  I'm very happy to see the reminder occurring more often.

At smaller scales, however (at a city level, even), money is a fine proxy for resources.  We're talking about living space, not land area - steel, concrete, and labor are pretty elastic in their exchange rate for money.  Heck, many of the speculators (or just rich people who want to live there, and everything in between) WOULD pay extra for the underwater/floating arcologies.

 It seems to me that you really, truly only want to build housing (or anything else) if it's going to actually get used.

It doesn't seem that to me.  I don't think housing is all that special of a good, and I don't feel entitled to judge people's reasons for wanting the attributes they care about in their goods.  I want to build housing (and everything else) if someone wants it enough to pay me more than I spent to make it.   At larger scales, the exchange medium for "pay" may change from currency to other promises of future output of goods and services, but that doesn't change the underlying desire to provide everyone whatever they want, at a (small, if competition is unconstrained) profit.  

Not at all a serious suggestion, but it popped into my head: You could solve this problem by making other forms of money laundering more convenient than real estate.

(or making real estate laundering less convenient/riskier, but that's not as funny a thought)

The use of real estate as a store of value/unit of exchange makes me think of an old Diablo II issue. Officially, the medium of exchange in D2 was gold. In practice, it was a relatively rare item called the Stone of Jordan.

How did this happen? For a time, a serious bug allowed players to dupe items easily. Many of them chose to dupe the Stone. After the bug was fixed, players were left with a relatively fixed supply of a high-value item that used little inventory space. It worked very well as both a store and a medium, modulo developer attempts to clean up dupes. Thereafter, I understand that most high-level transactions were done with what amounted to counterfeit currency.

I don't know if that's still the case. I do know at one point the developer created a quest that could only be triggered by destroying Stones, presumably in an attempt to get rid of the counterfeits.

Matt Yglesias on this very topic (broadly):

I really like this bit:

What YIMBY is

Last but by no means least, this entire conversation is based on a misconception about what the YIMBY proposal is.

The way high-cost metro areas currently work is this:

  1. No building is allowed in desirable inner-ring suburbs.
  2. No building is allowed in the most expensive parts of the city.
  3. Along a relatively tiny gentrification frontier, a handful of politically well-connected developers can get permits for projects.
  4. Because the permitting process is highly politicized, various activists, neighbors, and politicians try to shake the developer down for side-concessions.
  5. Prices go up and up because this is just way too little new housing to meet demand.

Because leftists like “activists” and don’t like profit-seeking business people, they focus on (4) and see the YIMBYs as siding with the bad capitalists against the virtuous activists.

The actual YIMBY proposal, however, is to change steps 1-3 of the process so that by-right construction is possible throughout the in-demand parts of the city. Actual developers do not lobby for this change, because even though the developers like to beat the activists in step (4), the whole market niche the developers occupy is built around their expertise in navigating the permitting process. You don’t need a “developer” to convert your garage into an ADU, you need a contractor. And if you drive out to a rural area, there’s no such thing as a “developer;” there are just housebuilders.

The YIMBY is anti-anti-developer in the sense that he does not think that obsessively harping on the bad thing that Developer X did with regard to Project Y is a constructive approach to the housing supply. But YIMBY is not about individual projects, neighborhood-level price impacts, or siding with developers. It’s about a systematic approach to making decisions about housing policy, regional housing abundance, and creating a construction boom that makes The Developer a much less relevant character to metropolitan housing supply.

And last but by no means least, while YIMBY is about housing costs to the extent that it addresses the absurdity that middle-class teachers in Silicon Valley can’t afford to live anywhere near their schools, it’s not a comprehensive solution to poverty.


Not only is this obviously true, but you can do more direct analysis.  At a given price-point, a unit of housing is affordable to n residents in a given city, who demand m units of housing.

If there are greater than m units of housing in the city at that price point, that price is unsustainable.

Eventually reality will reassert itself, especially as empty units of housing have a cost of interest, maintenance, and property taxes.  An obvious counter-move to empty speculative units is to charge a greater property tax on them.  

To assert that a policy of 'build baby build' would not eventually result in cheaper and more abundant housing and office space is like stating that allowing the toilet paper manufacturers to produce vast amounts of new stock won't alleviate shortages and high prices.  

It's simple ignorance and a rational system of government wouldn't even consider this as a possible policy.

John Maynard Keynes: “the markets can remain irrational longer than you can remain solvent.” This is especially a problem when you are evicted and need housing immediately.

Being evicted and needing housing 'immediately' is not a realistic problem that many people have in the big U.S. cities with which I'm familiar. In those cities, evicting tenants is very difficulty and takes months or even years. And that's true, tho to a lesser extent, even when a building is sold.

"immediately", for a family's primary home which they can (barely) afford and is close to work and social needs, can be over a year.  Being evicted due to changing market conditions is always going to be traumatic.  

I very much like this thinking, which is keeping the market conditions favorable to housing consumers, and less favorable to speculators (meaning: investors who don't actually create or improve supply).  It's far preferable to trying to ignore or suppress the supply/demand/price intersection.

I'm sympathetic to the real plight of people being evicted, or even just priced-out of their long-term unit or neighborhood (or city), but I don't think it's reasonable to claim that it "is always going to be traumatic". That's hyperbole.

And just because this is Sad doesn't mean there's any practical way to fix it. It's not obviously terrible that anyone is ever evicted or priced-out of their apartments or homes.

Do you think it would be ideal if everyone could stay in their current apartment or home forever? Who should be responsible for maintaining the apartment, the apartment building, or the home? Are there any reasonable limits to any of this?

I think of the effective overall form of all the ways that this has attempted to be fixed as basically giving the privileged tenants pretty strong quasi-property rights – while saddling someone else with most of the costs and responsibilities. The big tension is the fairly tight gap between the status quo and the inevitable end game – public housing.

Public housing is pretty terrible; maybe a little better in some cases than the worst 'private' rental housing. (I could be very wrong. I can't think of any particular evidence for this belief.) There doesn't seem to be sufficiently strong incentives for the relevant authorities to actually do a good job managing their properties. Or perhaps moral hazard is sufficiently significant that better management is just too expensive. I'm skeptical of the net value of public housing, but I still think it's sad that it's not better.

But – in the big expensive cities, like NYC, with which I'm most familiar – 'private' housing is extremely encumbered (e.g. as a form of 'property').. As Matt Yglesias points out in a related post, that's why real estate development is dominated by 'developers' – because navigating the legal and political environment is difficult, risky, and thus very expensive:

  1. No building is allowed in desirable inner-ring suburbs.
  2. No building is allowed in the most expensive parts of the city.
  3. Along a relatively tiny gentrification frontier, a handful of politically well-connected developers can get permits for projects.
  4. Because the permitting process is highly politicized, various activists, neighbors, and politicians try to shake the developer down for side-concessions.
  5. Prices go up and up because this is just way too little new housing to meet demand.

Narrowing the gap between 'private' housing and public housing will only exacerbate steps 3-5.

From a 2017 interview of Bill de Blasio (the then and current mayor of NYC):

Interviewer – In 2013, you ran on reducing income inequality. Where has it been hardest to make progress? Wages, housing, schools?

What’s been hardest is the way our legal system is structured to favor private property. I think people all over this city, of every background, would like to have the city government be able to determine which building goes where, how high it will be, who gets to live in it, what the rent will be. I think there’s a socialistic impulse, which I hear every day, in every kind of community, that they would like things to be planned in accordance to their needs. And I would, too. Unfortunately, what stands in the way of that is hundreds of years of history that have elevated property rights and wealth to the point that that’s the reality that calls the tune on a lot of development.

And that's certainly one way to 'solve' the problem of being evicted – the municipal government can monopolize evictions! (And also decide who can emigrate to the city and the rents of every unit in the city.)


Kenny, do you have a reason to think that housing construction and rental is a situation where you would expect good outcomes from the government running it?  

You might get a bunch of these, and the ones I have seen were somewhat shoddily constructed.  

Consider this.  There is a 'model' free market solution, with Tokyo a model example.  In 3 sentences:

       The national government handles the rules for permitting, and any developer with plans that meet the codes, which allow extremely high density, will get a permit.  Neighbors and local city governments get very little say in large areas, so replacing older homes with new can't be blocked.  The outcome of this policy is that the housing in Tokyo is inexpensive, high density, and most of it is recently constructed.  Here's a video on it.

I think "government running" housing construction and rental management could work – see Singapore for an example in that direction.

But generally, no, I would expect governments to generally lack strong incentives to do as good of a job as private enterprises.

I also am aware of the 'Tokyo model' and support something similar (or even mostly the same) in other places (e.g. the U.S.).

Practically tho, it seems like the areas in, e.g. the U.S., where housing is most expensive are stuck in 'inadequate equilibriums'. Basically, everyone is 'trapped' in the status quo. Any significant change is likely to hurt large numbers of people, e.g. repealing or rolling-back rent control and rent stabilization.

I also suspect that it's a victim of a more general problem whereby it's extremely useful for political coalitions to 'covertly' sustain the problems they're nominally against and loudly proclaim to want to solve. Were they to actually and effectively solve those problems, they'd suffer politically, because of the loss of a strong plank in their platform. (Charitably, I don't think anyone believes that about their own causes.)

a rational system of government

There's the catch.

Robinson's example is off:

Ok, a tenant lives in a unit.
City A demolishes the old 30-unit building, builds a high-rise 100-unit building instead.

30 old unit tenants get evicted, since their original 30 units need to get demolished. 
20 new rich families move from their old units to new units from within the city.
Their 20 former units in the city will then be on the market again, available for someone else.
So far, the new building has caused -10 new available units to city-dwellers so far.

30 more people move into the city, but wouldn't have moved there, if this new building did not exist.
So we might say: they are not adding more unit-space for the poor local residents.
And in our little model it does not.
We are still at -10 units supply impact of this new development.

However, those 30 other tenants must have come from somewhere, let's call it city B.
City B will now have 30 more units on the market.
So the problem is now a prisoner's dilemma.
If city A does not impose any restrictions on doing the 30->100 switch and city B does not do it, 
then it'll all average out to +20 new units on the market, for each city.

Now for those remaining 50 units owned by people, who don't live in them.....
uhm..... yeah I dunno. 
The issue is framed as rich people creating an externality for financial gain.
But how could owning a unit, that is not lived in and not rented out to other tenants be profitable, 
if building supply in general is not restricted?
This sounds like the issue is only caused by restrictions like this in the first place.
Even if not, those same 50 rich people would presumably have a need for fifty units in city A.
So unless there is a law that prevents them from buying in units in city A, not building the 100 unit high-rise would still be worse, since they'd presumably just buy 50 already existing units instead which would be empty.