Comment by johncolanduoni
4 days ago
How do I distinguish the world where institutional investors are meaningfully contributing to high housing prices and the world where they aren’t? Is there some metric you’ve seen that substantiates the mechanism? For example, are they only 1% of holders but 50% of trading volume or something?
Because if I saw a house 15% below market where I live, I would buy it (to live in). I don’t imagine I’m the only one. Institutional investors can’t stop me from doing that if it’s offered - can they stop the seller from offering that?
You could be 50% of trading volume just by trading a small number of properties back and forth constantly! That doesn't mean anything.
I don't get how that hasn't had an effect on prices.
There's not enough houses on the market (zoning, and people want to keep their low-rate mortgages), there's people worried they can't afford houses (prices inflated faster than wages, rates went up), and a large amount of housing transactions (someone quoted 29% of starter homes) are being paid for by institutional investors (who can pay cash).
Wouldn't these institutional investors buying houses be "marginal consumers", kind of like the marginal producers who set the price of inelastic commodities such as oil? Seems like 29% of transactions is even more than marginal.
I assume that sellers would need to come down in price to what non-institutional buyers could afford if institutional buyers were removed from the equation.
As an aside, I'd rather see supply increased, but maybe demographics over the next decade or two will fix that problem anyways.
Manipulating markets by controlling liquidity while not holding a large percentage of the overall stock is a thing. The fact that you could juice trading volume by doing something stupid for no reason doesn’t make it a useless statistic for evaluating what is going on in a market (unless you’re alleging that institutional investors would do this, and I can’t see the motive). This isn’t some shitcoin whose creators are faking trading volume to appear on the leaderboards - it’s houses with deeds.
To be clear, I don’t think institutional real state investment is a substantial part of the reason housing prices are so high. I’m just trying to push whatever argument they were thinking of toward something quantifiable.
Just wanted to say these are great comments – you are good at explaining complex economic concepts clearly.
You're looking at the symptoms rather than the cause. Land is scarce and finite and you cannot make more of it.
That has not very much to do with money though. There are many ways to allocate scarce resources, such as rationing. Even if money is used, the mere fact of scarcity doesn't define the price of something. Silver is also finite, but it still costs $2.50 a gram and not $25000 a gram. Land was always finite but was still much cheaper in the past.
The main contributor to the price here is financialization. The more money the average buyer can raise for one of the scarce things, the more they cost. Nobody wins from this except the banks, so perhaps it should be more regulated.
Building regulations are also a problem. Legalize whatever you feel is the minimum safety standard of homeless encampment or slum, and watch house prices crash overnight, since prices are set at the margins and a lot of people (including me) would be happy to find a way to work with simple concrete box if it was cheap and secure, but it's not legal to build those.
You're getting at the problem but you still don't understand the essence. Land is special because you can't make more of it. Even the Netherlands don't count since what they did is considered an 'improvement'.
Yes, you still need to solve the problem with 'money', or more accurately a tax. That tax is based on the assessed land value using market knowledge, but it would ideally be set to drive down the price of land to zero. However since we don't live in a world of spherical cow, tax would be set below that ideal to avoid land abandonment.
This is not even new by the way. The crisis we face is the same as in the 19th century when Land Value Tax and Georgism was proposed.
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Okay, but institutional investors didn’t create that fact of reality, and I don’t think they’re responsible for the fact that people want to live in or near cities either (instead of the middle of nowhere, which remains dirt cheap). If they’re not holding significant stock, what effect are they having on scarcity?
> and you cannot make more of it
The Netherlands and Tokyo beg to differ.
Yes, you can make more. Make multi-level buildings.