I really like this post by Daniel Hertz talking about the inherent tension in American housing policy.

Here’s his conclusion:

We are, in conclusion, profoundly conflicted as a nation when it comes to housing: we want it to be affordable, but we also want its prices to rise fast enough to be valuable as a financial investment. That’s a contradiction we need to acknowledge if our housing policy debate—and, ultimately, our housing policy—is going to be coherent and constructive.

Of course, this situation isn’t unique to the US. Though the US does have homeownership subsidies – such as the mortgage interest tax deduction – that other similar countries, like Canada, do not have.

Still, I feel a similar kind of contradiction here. We worry about excess supply and housing bubbles when the reality is that both of these things are desirable outcomes if, and only if, the primary objective is to maintain housing affordability.

But I don’t think that is the primary objective in practice. At least in this part of the world, I think we worry first and foremost about making sure that home prices continue to go up and that wealth is being built. Then, we worry about providing affordable housing for those that are unable to participate.

I’m not making a judgement call on whether or not that’s a good or bad thing. It just strikes me that this tension, and there certainly is a tension, is not an equal one.

Whenever you’re starting to feel like real estate prices in your city are getting out of hand, just turn your attention to New York. It’ll make you feel better.

The New York Times published an interactive overview of the Manhattan real estate market today. It was spurred on by the fact that the average residential sale price in Manhattan just hit $1.7 million (a new record) and that there’s a growing number of 8-figure apartments being bought up.

Last year half a dozen apartments sold for more than $50 million in the One57 tower at 157 West 57th Street. (The New York Times calls this building the “undisputed center of Manhattan residential extravagance.”)

Here’s one of their diagrams showing the number of residential sales over $10 million in 2009 and then in 2015:

And here’s another one of their diagrams showing the bottom and top 10% of the current market:

It’s interesting to see the clustering in certain areas and also the lack of clustering at the high end around the top of Central Park.

When you build a new office building, the typical strategy is to pre-lease a certain portion of it. That is, you sign leases with a tenant or a few tenants so that you know for sure that X% of the building will be occupied upon completion. It’s a way to manage risk. If you don’t do this, then you are said to be building the office building “on spec.” 

When you build a new condo building, the typical strategy is to pre-sell a certain portion of it. That is, you sell suites to purchasers based on plan drawings, certain finishes, and a model suite intended to illustrate what that future suite will more or less look like. And the reason this is typical is because most construction lenders will require you to do that.

So when you see office buildings and condo buildings going up, there are usually already tenants and residents who plan to move in or investors who plan to rent out their suite and have generally transferred that risk away from the developer. 

Because really the only time that a purchaser or investor wouldn’t close on a condo suite (and walk away from their deposit) is when the market corrects so badly that it actually makes financial sense to do that. That happened in the U.S. in 2008-2009 in a number of markets.

But by contrast, when you’re building a rental apartment building you don’t have anything to pre-sell and your tenants (unlike office tenants) aren’t going to sign leases with you for some space that will be ready in 3 years. If you’re lucky, they might sign a lease with you for an apartment that will be ready in 3 months. This means that by default you are also building “on spec”.

Now rental apartments are often considered to be the safest real estate asset class and the least correlated with the macroeconomy. But as a developer and city builder, this dynamic is still something to keep in mind.