Wednesday, July 24, 2019

Housing: Part 355 - Homes and population growth

I noticed that housing units per adult has actually started to level off.  This is interesting because total permits and total starts are still below past averages.

So, maybe the new neutral run-rate for new units is less than 1.5 million annually.  Maybe the need for new units is less acute than I have been saying.

But, there is a problem of causation here.  More people means we need more homes, but also, a lack of adequate housing can lead to less people - both by limiting migration and by limiting family formation.

And, it is true that population growth has slowed.  Before the financial crisis, it tended to run at 1-1.2%.  Since the crisis, it's more like 0.7%.  So, in a way we solved the housing shortage, in part, by reducing population growth.  If this is the new normal, then maybe 1.2 million units a year isn't an unsustainably low peak.  But, if population growth, either through immigration or through family formation, returns to anywhere close to historical norms, then housing starts probably need to catch up a bit and then settle at something closer to 1.6 million units annually.  (Ignore the big drop in housing/adult in 2000.  I haven't taken the effort to try to account for the discontinuity in the data there.  I suspect that mostly that discontinuity comes from an overestimate of the housing stock in the late 1990s, but it isn't central to the main trends I am discussing here.)

Certainly an argument can be made that population growth through family formation has been naturally slowing, so that we shouldn't expect population growth to continue at historical norms.  On the other hand, there are many good reasons to counter that decline with more generous immigration policies.  And, while there is a long term down trend in natural population growth, there was a sharp downshift that appears to have been related to the economic turmoil of the crisis and to the lack of housing growth since then.  Even without immigration, it seems likely that natural population growth has declined more than it otherwise would have after the crisis.

Also, there is always the important signal here of rent inflation, which has persistently run high for the past 25 years and returned to high rates during the post-crisis recovery.  That is not a signal we would see in a country where housing was being depressed by natural declines in population growth.


  1. I wonder if the US should shoot for a declining total population.

    The country seems unable to build (or even maintain) infrastructure, and housing starts are feeble by past standards.

    Recently, there has been a spate on articles on Toronto, which is growing and booming, in contrast to sad-sack Buffalo, just across the border.

    A one-bedroom in Buffalo rents for $931 and in Toronto for $1,231. The average house in Buffalo sells for $105,200 vs. $867,000 in Toronto.

    I grabbed these numbers off the web from different sources, and methodologies could be whack, but still...(I think Buffalo rents are probably lower).

    Housing costs in Japan are well below that of the US.

    Hong Kong has the worst housing costs.

    There is a powerful narrative out there that population growth is good, and immigration is usually sacralized.

    But again and again, we see cities and even nations cannot handle population growth. Places like India are a mess. Africa too. Latin America for that matter.

    In the US, metropolitan population growth is often a disaster for housing costs and commutes.

    The average rent for a one-bedroom apartment in Sapporo Japan is less than $450 dollars, outside city center. It is about triple that in L.A.

    So really, who benefits from population growth?

    1. Toronto is interesting. Rents are apparently not too high there, so I think high priced there are more attributable to low property taxed and interest rates, which is less of a structural problem than what we have in the coastal metros.

  2. Toronto is a destination for foreign capital.

  3. Foreign capital has amazing powers.

    1. Land value taxes (or even the blunter instrument of property taxes) are a great way for the locals to benefit from foreign investments in real estate.

  4. Well...okay not to flog the horse too much, but...

    "A staggering new analysis of foreign-owned residential properties in Canada reveals that at least 10 per cent of all condos built in Toronto between 2016 and 2017 are owned by non-residents."

    Well, I would not call that "staggering" but if prices are set by the marginal buyer, then...well foreign demand could drive prices up. (Also, it is unclear whether foreigners, but who are residents, own another chunk of the Toronto condos/ They say Toronto has neighborhoods where foreign-borns outnumber Canadians)

    Now here is a viewpoint:

    1. We accept that current-account national trade deficits axiomatically result in equal capital inflows.

    2. There is no assurance that foreign capital inflows evenly or proportionately flow into stocks, bonds and property. Foreigners may prefer the security of real-property ownership.

    3. Foreign buyers of real estate can leverage up 10 to one, or for some commercial properties, 20 to one. This may also encourage foreign property ownership, as opposed to stock and bonds. A foreigner with $1 million can buy a $5 million property. If it can be arranged that rents cover the mortgage, this is a great retirement vehicle, or gift to kids when they older, etc.

    3. And in fact, the commercial property decline after 2008 (in the US) was larger than the much-ballyhooed residential price decline.

    I am trying to think of a developed nation that runs large current-account trade deficits and does not have strong property price appreciation.

    The IMF somewhat agrees with me. They say chronic large current-account trade deficits can result in bloated asset values, and then a sharp decline when conditions change.

    1. A decent percentage of US equities are owned by foreigners. Does that mean stocks are ovwrvalued?

  5. I have seen some sketchy analysis of that. Roughly one-third of US stock market capitalization is owned offshore (as usual, who knows if this captures all offshore ownership, or perhaps counts Americans who owns vehicles in Bermuda as "foreigners." There is a veritable cottage industry in LA of money managers forming US-based limited partnerships to buy US assets, usually property. I have never determined if these US-based entities are counted as foreign capital or not. Likely not.

    All that said, yes, FDI into equities markets is often talked about in the Far East as driving markets. I can imagine if owners of one-third of US stocks start to sell, that would drive values down.

    BTW, here is an interesting story. HK is usually (incorrectly) touted as a free-market bastion.

    So you too can share a nanoflat!

  6. Just for fun:

    Why criminals look to Canada to launder their money through real estate
    May 10, 2019 - News that some $5 billion was laundered through British Columbia's real estate market in 2018 comes as no surprise to experts, as Canada's ...

    1. So, do you think this can explain a 3% inflation in Vancouver prices? 5%? 10%? 20%? 100%? 200%?

    2. That's the real power in the behavioral explanations or the foreign capital flight explanations. They can be invoked to explain the problem at any of those scales.

  7. Kevin: Just for fun, I will try to track down the $5 billion figure, and see it that was equity only. That is, there was $5 billion in dirty money laundered into BC real estate in 2018, which then leveraged up five-to-one to become $25 billion.

    If course, I cannot prove anything. But I imagine if foreign money leveraged up to $25 billion and it was spent in one year on BC real estate, it might have some effect. Trade deficits come back axiomatically as capital. More demand for property, but supply cramped by zoning and other impediments.

    Why would trade deficits not lead to higher property prices?

    1. Leverage doesn't just make capital magically appear out of thin air. That's not how it works.