Notice the chart in the middle of the article entitled: "New apartments in the Austin area vs. average monthly rents, 2000 - 2023"
It's literally a classic exposition of how markets work. As rents fall, production quickly falls, and when rents begin rising again, production picks up. And notice, in the long term, rents have more than doubled despite increased units. A great example of how markets won't overbuild for long, and won't build rents down in the long run. They will follow rents.
In this particularly case, Austin is well known to be a highly elastic US building market. It's the YIMBY deregulatory mecca. Yet elastic building has not produced lower rents. The Austin market, like the California market, is driven by rapid increases in high-wage job densities.
I would be willing to bet that there is directly relationship between the long-term average slope of rent increase shown in the chart and the long-term increase in median income over the same time, normalized for increases in construction costs. Expensive new luxury apartments are built to accommodate influx of high wage employees, and stop being built when that in-migration stalls or ends, or must wait for area-wide wages to increase.
Here's an example of where housing construction is being stalled because interest rates offer a better investment. It shows construction costs set a floor for rents, and it shows that new production won't take place until there is enough market support of high-salaried job growth to create new markets of potential renters who can afford the rents high enough to produce competitive yields to investors.
"Most of San Mateo’s large developments on hold by finances"
In case you hit a pay wall, here are the money quotes:
"Mike Field, principal at Mecah Ventures, said high interest rates and escalating construction costs remain some of the primary culprits of construction hold-ups, but it’s also a consequence of ongoing remote work patterns and therefore, declining or plateaued rents.
“Lenders are looking at deals, seeing that interest rates keep going up, rents are not going up, and they’re saying the deal is going to be underwater when it gets built,” Field said, adding it suppresses developers’ appetite as well. “The demand issue for multi-family [residential] and the lack of rent increases is driven by the back-to-office delay. They’re intrinsically tied together.”
...
“Equity investors are looking at the anemic returns on multi-family development deals, and saying, ‘Why would I go invest at 4.5% or 5%, when I can go buy a 10-year treasury bond at 5.5% and take no risk?” Field said.
To riff on the idea that housing is a financial asset comparable to other financial assets, I’ve heard housing described as a deflationary investment (rather than inflationary.)
This comports with the ideas of Knut Wicksell: in an inflationary monetary environment, money is circulating throughout the economy. But in a deflationary environment, money remains in banks or in vaults.
In other words, inflation means demand for money in the real economy is high. There are many projects competing for money and hence offer competitively higher returns. The yield curve will be upward sloping and interest rates will be rising over time.
The real economy will be humming or in rude health. Rather than invest your money in housing, you will loan money to banks to lend into the real economy, buy riskier bonds or invest in firms or vehicles connected to the real economy. House prices will fall.
Conversely, in a deflationary monetary environment, demand for money is weak, demand for safe and liquid instruments like government bonds is high. Buying safe instruments drives interest rates lower. The yield curve begins to flatten or fall across maturities. Interest rates fall over time. In this environment housing becomes more attractive as financial investment. While housing is less liquid than bonds, it offers safety in the form of property that will not corrode and usually has the full protection of the presiding government - including its military - behind it.
Will deregulation in the housing sector at least deliver productivity growth since more people can now to higher productivity labour markets? Australia's actual problem is the low productivity growth since the GFC. What would you recommend?
Location also gets better as incomes offered by jobs in the area go up. It is difficult to have sustainable arbitrage between income and cost of living - just as difficult as it is to have uneven queues in the supermarket.
Here's an example of the absorption rate equilibrium. https://www.austinmonitor.com/stories/2024/02/austin-apartments-boomed-and-rents-went-down-now-some-builders-are-dismantling-the-cranes/
Notice the chart in the middle of the article entitled: "New apartments in the Austin area vs. average monthly rents, 2000 - 2023"
It's literally a classic exposition of how markets work. As rents fall, production quickly falls, and when rents begin rising again, production picks up. And notice, in the long term, rents have more than doubled despite increased units. A great example of how markets won't overbuild for long, and won't build rents down in the long run. They will follow rents.
In this particularly case, Austin is well known to be a highly elastic US building market. It's the YIMBY deregulatory mecca. Yet elastic building has not produced lower rents. The Austin market, like the California market, is driven by rapid increases in high-wage job densities.
I would be willing to bet that there is directly relationship between the long-term average slope of rent increase shown in the chart and the long-term increase in median income over the same time, normalized for increases in construction costs. Expensive new luxury apartments are built to accommodate influx of high wage employees, and stop being built when that in-migration stalls or ends, or must wait for area-wide wages to increase.
Here's an example of where housing construction is being stalled because interest rates offer a better investment. It shows construction costs set a floor for rents, and it shows that new production won't take place until there is enough market support of high-salaried job growth to create new markets of potential renters who can afford the rents high enough to produce competitive yields to investors.
https://www.smdailyjournal.com/news/local/most-of-san-mateo-s-large-developments-on-hold-by-finances/article_45d447e4-0b86-11ef-8256-af01ceecaed0.html?utm_medium=social&utm_source=email&utm_campaign=user-share
"Most of San Mateo’s large developments on hold by finances"
In case you hit a pay wall, here are the money quotes:
"Mike Field, principal at Mecah Ventures, said high interest rates and escalating construction costs remain some of the primary culprits of construction hold-ups, but it’s also a consequence of ongoing remote work patterns and therefore, declining or plateaued rents.
“Lenders are looking at deals, seeing that interest rates keep going up, rents are not going up, and they’re saying the deal is going to be underwater when it gets built,” Field said, adding it suppresses developers’ appetite as well. “The demand issue for multi-family [residential] and the lack of rent increases is driven by the back-to-office delay. They’re intrinsically tied together.”
...
“Equity investors are looking at the anemic returns on multi-family development deals, and saying, ‘Why would I go invest at 4.5% or 5%, when I can go buy a 10-year treasury bond at 5.5% and take no risk?” Field said.
To riff on the idea that housing is a financial asset comparable to other financial assets, I’ve heard housing described as a deflationary investment (rather than inflationary.)
This comports with the ideas of Knut Wicksell: in an inflationary monetary environment, money is circulating throughout the economy. But in a deflationary environment, money remains in banks or in vaults.
In other words, inflation means demand for money in the real economy is high. There are many projects competing for money and hence offer competitively higher returns. The yield curve will be upward sloping and interest rates will be rising over time.
The real economy will be humming or in rude health. Rather than invest your money in housing, you will loan money to banks to lend into the real economy, buy riskier bonds or invest in firms or vehicles connected to the real economy. House prices will fall.
Conversely, in a deflationary monetary environment, demand for money is weak, demand for safe and liquid instruments like government bonds is high. Buying safe instruments drives interest rates lower. The yield curve begins to flatten or fall across maturities. Interest rates fall over time. In this environment housing becomes more attractive as financial investment. While housing is less liquid than bonds, it offers safety in the form of property that will not corrode and usually has the full protection of the presiding government - including its military - behind it.
Will deregulation in the housing sector at least deliver productivity growth since more people can now to higher productivity labour markets? Australia's actual problem is the low productivity growth since the GFC. What would you recommend?
The queue analogy is really good.
Location also gets better as incomes offered by jobs in the area go up. It is difficult to have sustainable arbitrage between income and cost of living - just as difficult as it is to have uneven queues in the supermarket.
Yes, see my news articles from San Mateo CA and Austin Tx above