Good to see more recognition that the housing shortage in the West is actually caused pretty much entirely by policies that made it illegal for the market to provide sufficient housing, and not landlord greed as a popular belief.
While the story in NYC wasn’t as simple as greedy landlords made SROs illegal in the first place, we would do well to examine the role of large developers did have in making SROs illegal during the 80's, lest we suffer a repeat in 20 years.
I’m interested to see what this does to rents overall. I assume these will not be as affordable as everyone would like/assume, at least not in the next few years, and will drive up rents in larger spaces.
But I’m glad we’re trying SOMETHING in order to combat the problems with affordability; let’s just hope we don’t even up reviving how the other half lives.
Why would they drive up the rents in larger spaces? At least part of the demand in larger spaces is from roommates who would prefer to live alone, some of them might decamp for options like these, or studios and one bedroom apartments, etc., if they are available.
As with all types of housing, there is no one type of housing that solves the problem. Whether we live under capitalism or socialism, the only way we solve housing is when everyone who wants to live in New York, can, everyone who wants to live in Kansas, can, everyone who wants to live in Fort Myers, can.
With markets, a shortage results in high prices and rates. Without markets a shortage results in long waitlists. There’s no way out, without quantity.
If we want people to live in large indoor spaces, and not SROs, we can’t get there in 99% of our land use regime is focussed on limiting the total amount of floor space that is allowed to exist within a given area. Legalizing SROs is insufficient, but necessary, just like legalizing larger apartment buildings in more places, abolishing single-family zoning, etc.
I think the whole problem is that global market access plus nearly limitless product replication (software, media) has resulted in extreme differences in money availability for different subsets of the population. So we have some people who can buy many properties, and some people who can’t buy a single property. This low level of product sales friction and reach hasn’t really happened before in human history, and I’m not sure classical free market economic theory accounts for it. Back in the day there were only so many boats/shoes/whatever one company could physically sell.
Continuing to grow the population under these conditions doesn’t help either.
If this was true, it would be true of other durable goods like appliances and cars. But people with lots of money know that investing in appliances and cars is pointless because millions of new ones are created constantly. There is no scarcity to benefit from as an asset owner.
Unfortunately, in North America and other Anglosphere countries, we have decided that a scarcity in residential floor space is a public good and our planning rules tend to create such scarcity and enforce it. This allows incumbent homeowners to profit, and they fight for vociferously to protect that profit. Of course, if a company also invests in residential floor space they can also profit, but it’s not clear why we are so concerned with who profits, rather than the fact that we are enforcing the scarcity that produces the profits.
Land is fundamentally scarce, though, unlike other durable goods, so what you say does not follow. And by land, I mean land situated near geographically and/or economically useful areas. To make land like other durable goods, you need to convince people to treat all land equally, which is against human instinct (ie good luck with that).
This doesn’t mean nothing should be done and things are great, but if we mischaracterize a problem we have little hope of solving it.
There's basically no evidence that big companies own enough property to matter in the market. Even if every individual unit was owned by a different person, you'd see exactly the same outcomes we do today.
Because the law of unintended consequences is always at play in the public sector. In this case, the threat of too much regulation will kneecap the governments ability to eliminate the cost structures that will end up happening because of the drive for increased revenue per sqft.
The core reason SROs threaten larger spaces is that landlords can often extract more total rent from a single apartment by chopping it into pieces than by renting it as a whole.
Hypothetically: A landlord rents a 1,000 sq. ft. 3-bedroom apartment to a family for $4,500/month.
In order to extract more value, the landlord converts that same space into 4 separate SRO rooms with a shared kitchen. Even if they charge a "cheaper" rent of $1,500/room, the total rent roll becomes $6,000/month.
The Result: the SRO format is more profitable ($6,000 vs. $4,500). If landlords can legally choose between the two, they will naturally favor creating SROs over family-sized units.
Then there’s the potential for cannibalization of supply:
If SROs become the most profitable way to use residential space, the market may see a "cannibalization" of family housing.
Landlords of market-rate buildings may subdivide existing large apartments into SROs to capture the higher yield.
Seeing this, developers then planning new buildings will design them with fewer large family units and more micro-units/SROs to maximize revenue.
This reduces the supply of 2- and 3-bedroom apartments. If the supply of family units drops while the number of families needing them stays the same, the price for the remaining large units goes up.
This will then potentially lead to increased land value as real estate prices are determined by the potential revenue a property can generate.
If a plot of land can now legally host a high-yield SRO building (generating $100/sq. ft. in revenue), the value of that land rises.
A developer who wants to build a standard family apartment building (generating only $60/sq. ft.) can no longer afford to buy that land because they will be outbid by the SRO developer.
To compete, the family-building developer must raise their projected rents to justify the higher land price. This raises the "price floor" for everyone.
> The Result: the SRO format is more profitable ($6,000 vs. $4,500). If landlords can legally choose between the two, they will naturally favor creating SROs over family-sized units.
Yes, this is the whole point! And the reason it's more profitable is that there is pent-up demand for them. There aren't enough of them. We want them to be more profitable, so more are built/converted.
Here's the thing, though -- that's a temporary situation. As supply goes up, demand gets met. Once enough are built/converted, the price comes down, and an equilibrium is reached where a landlord will make the same profit whether it's a 3-bedroom or 4 SRO's. This means the market is now maximally efficient for both types of tenants.
In a free market, the most efficient balance of apartment types will naturally come into being. By prohibiting smaller units, we prevent that balance and discriminate against people who can't afford a full-size studio with bathroom.
So it's not cannibalization of family housing. It's just reducing the proportion of lots of other types of apartments a little bit -- including studios and one-bedrooms. Because this is desirable.
Except it isn't a free market. It is a heavily regulated market that favors corporations. The regulatory bodies have been corporate captured. In addition, the corporate bodies collude on things like rent, and have a near infinite runway to leave units empty.
With the collusion of corporate entities setting prices, it raises the overall market prices of properties. As small-time landlords observe the markets, they naturally also raise their prices to increase prices.
Additionally, because of corporate capture and collusion in other markets, prices broadly increase for owning property. This forces everyone who keeps rent lower to raise rents.
The way to fix this is simple. Stop the corporate collusion by making laws that make it functionally impossible.
This can be done by the following:
- tax the hell out of corporate ownership of residential properties
- an increasingly expensive multi-home tax. First home is tax free. Second has yearly taxes and those taxes exponentially increase for each additional home.
- a vacant home tax. On top of any second home taxation, for homes besides your 1 home, there should be a vacant home tax. If a home does not have a resident in it, it should be taxed. That tax should be around what it would cost to rent the unit out.
There are some other additional factors such as penalizing foreign non-resident owners, but this covers the bulk.
Being a landlord should not be easily profitable. It should be a job that you work your ass off at.
Then and only then will the free market begin to function and optimize.
Collusion on rent is a relatively new phenomenon around RealPage and is being banned. Meanwhile, regulations like rent stabilization in NYC benefit existing tenants, not landlords.
And the taxes you describe having nothing to do with collusion. Collusion is fought using anti-collusion laws. What could possibly lead you to believe that multi-home taxes would reduce corporate collusion?
Yes, obviously RealPage should be banned everywhere. But corporate capture is not the underlying economic issue at all behind high prices. Lack of supply is.
Anti-collusion laws are ineffective. Legislation that targets easier to enforce vectors with desirable side effects makes more sense.
Whether my theory on what is occurring is true or not, the proposed solution would solve it along with countless other issues, while have very little downside for anyone but a tiny group of lazy parasites.
I don't know where you're getting your ideas. None of what you say is true. You're taking some kind of bizarre ideological stance ("tiny group of lazy parasites"?) that isn't supported by any kind of evidence. You can look up the great success of many anti-collusion laws, and your solution would be economically harmful and inefficient in a large number of ways. All I can say is, I think you need to study economics more. Landlords provide a valuable service (making rental properties available to people who prefer to rent rather than buy), and they're not making extraordinary profits relative to other industries. Remember that as demand goes up, so too does the price they have to pay to acquire their properties, and therefore the mortgages they are paying to banks. If landlords made extraordinary profits relative to other businesses or investments, everybody would be rushing to become a landlord. But they aren't, because it's hard work and involves significant financial risk.
I think your attitude (landlords are the problem; we must make life harder for landlords) is a big reason housing is so expensive because it creates a situation in which not enough people with money or access to credit want to become landlords.
You say that the landlord industry has captured its regulators, but you give no example of any action or ruling by an regulator that benefits landlords at the expense of tenants.
Except the exact opposite thing is happening in the regular housing market. Small houses (e.g., townhomes) were intended to maximize land and reduce cost, except they’re now not even affordable.
It's the same problem -- you need more. Zoning regulations continue to prevent enough new construction, and the conversion of large lots/units into smaller ones.
I honestly don't know what you're proposing instead. But for some reason you're pessimistic about what all traditional economists agree on what is the solution -- remove more zoning regulations that constrict what can be built.
It's literally just supply and demand. Prices come down when you increase supply to meet demand. Just because increasing supply a little bit doesn't work when demand is increasing even faster, doesn't mean the basic principle is falsified. It's just that you need to increase supply much, much more.
Demand for floor space in these places is very large, no doubt, but it is not infinite.
If you don’t believe we can or should allow private landowners to build as much floor space as they want for everyone who wants to live in these places, then somehow you’re going to have to have a mechanism to control who is allowed to live there. What will it be and who will get to decide who is worthy?
You can only chop up a larger space for smaller spaces when there is more demand than there is supply. The point of building housing is to have more supply than demand, or at least as close as we can get to that point.
I feel like there is a huge difference between a shared kitchen and a shared bathroom. I'm fine with the former, and I would personally take that if the price was right.
It doesn’t need to be. I had shared bathrooms in college dorms and in a European facility for unmarried adult asylum seekers and in various hostels and they were absolutely fit for purpose.
The bathrooms at my workplace are fit for purpose too, but that doesn't stop people with bad hygiene from leaving a line of fecal matter at the rear of the seat (where the cheeks meet) and not wiping away sweat, lint, and hairs, or prevent them from missing and peeing on the floor.
I feel like a toilet, shower, and sink could be added to an efficiency apartment for 3m².
If people want to see how small a room could get, see ships, especially crew quarters. I could probably design something with a kitchen, bathroom, washer and dryer, bed, desk, and storage for 15m².
SROs can't work in cities with strong tenant protections. If some junky trashes the shared kitchen and bathroom then the landlord needs to be able to evict them immediately (like in a hotel). Good luck doing that in NYC.
Yep. If eviction rules aren't loosened, these SROs will only be rented to people with >700 credit scores just like normal apartments. The people who need them most still won't get them.
It might be beneficial and necessary given where we are, but if it becomes normalized we must all see it for what it is. More austerity ultimately (regardless of the immediate causes) stemming from the massive transfer wealth to the few.
Just like the generations-long shift of families needing two incomes instead of one. Like the growing share of renters vs. homeowners. Like the growing ratio of home prices to income.
You reading this may believe you're among the few because you've stayed ahead of it so far, but you're not.
Challenge is that NYC regulates the operation of sros so much that you'd have to be insane to build them under the current rules.
Kind of a shame, as lots of people basically just want a room to sleep in and a place to sit
Good to see more recognition that the housing shortage in the West is actually caused pretty much entirely by policies that made it illegal for the market to provide sufficient housing, and not landlord greed as a popular belief.
While the story in NYC wasn’t as simple as greedy landlords made SROs illegal in the first place, we would do well to examine the role of large developers did have in making SROs illegal during the 80's, lest we suffer a repeat in 20 years.
I’m interested to see what this does to rents overall. I assume these will not be as affordable as everyone would like/assume, at least not in the next few years, and will drive up rents in larger spaces.
But I’m glad we’re trying SOMETHING in order to combat the problems with affordability; let’s just hope we don’t even up reviving how the other half lives.
Why would they drive up the rents in larger spaces? At least part of the demand in larger spaces is from roommates who would prefer to live alone, some of them might decamp for options like these, or studios and one bedroom apartments, etc., if they are available.
As with all types of housing, there is no one type of housing that solves the problem. Whether we live under capitalism or socialism, the only way we solve housing is when everyone who wants to live in New York, can, everyone who wants to live in Kansas, can, everyone who wants to live in Fort Myers, can.
With markets, a shortage results in high prices and rates. Without markets a shortage results in long waitlists. There’s no way out, without quantity.
If we want people to live in large indoor spaces, and not SROs, we can’t get there in 99% of our land use regime is focussed on limiting the total amount of floor space that is allowed to exist within a given area. Legalizing SROs is insufficient, but necessary, just like legalizing larger apartment buildings in more places, abolishing single-family zoning, etc.
Well said. The only 2 ways out of a housing crisis are to:
- turn the place into a hellhole nobody wants to live it
- build more
There’s no other option.
I think the whole problem is that global market access plus nearly limitless product replication (software, media) has resulted in extreme differences in money availability for different subsets of the population. So we have some people who can buy many properties, and some people who can’t buy a single property. This low level of product sales friction and reach hasn’t really happened before in human history, and I’m not sure classical free market economic theory accounts for it. Back in the day there were only so many boats/shoes/whatever one company could physically sell.
Continuing to grow the population under these conditions doesn’t help either.
If this was true, it would be true of other durable goods like appliances and cars. But people with lots of money know that investing in appliances and cars is pointless because millions of new ones are created constantly. There is no scarcity to benefit from as an asset owner.
Unfortunately, in North America and other Anglosphere countries, we have decided that a scarcity in residential floor space is a public good and our planning rules tend to create such scarcity and enforce it. This allows incumbent homeowners to profit, and they fight for vociferously to protect that profit. Of course, if a company also invests in residential floor space they can also profit, but it’s not clear why we are so concerned with who profits, rather than the fact that we are enforcing the scarcity that produces the profits.
Land is fundamentally scarce, though, unlike other durable goods, so what you say does not follow. And by land, I mean land situated near geographically and/or economically useful areas. To make land like other durable goods, you need to convince people to treat all land equally, which is against human instinct (ie good luck with that).
This doesn’t mean nothing should be done and things are great, but if we mischaracterize a problem we have little hope of solving it.
There's basically no evidence that big companies own enough property to matter in the market. Even if every individual unit was owned by a different person, you'd see exactly the same outcomes we do today.
Because the law of unintended consequences is always at play in the public sector. In this case, the threat of too much regulation will kneecap the governments ability to eliminate the cost structures that will end up happening because of the drive for increased revenue per sqft.
The core reason SROs threaten larger spaces is that landlords can often extract more total rent from a single apartment by chopping it into pieces than by renting it as a whole.
Hypothetically: A landlord rents a 1,000 sq. ft. 3-bedroom apartment to a family for $4,500/month.
In order to extract more value, the landlord converts that same space into 4 separate SRO rooms with a shared kitchen. Even if they charge a "cheaper" rent of $1,500/room, the total rent roll becomes $6,000/month.
The Result: the SRO format is more profitable ($6,000 vs. $4,500). If landlords can legally choose between the two, they will naturally favor creating SROs over family-sized units.
Then there’s the potential for cannibalization of supply:
If SROs become the most profitable way to use residential space, the market may see a "cannibalization" of family housing.
Landlords of market-rate buildings may subdivide existing large apartments into SROs to capture the higher yield.
Seeing this, developers then planning new buildings will design them with fewer large family units and more micro-units/SROs to maximize revenue.
This reduces the supply of 2- and 3-bedroom apartments. If the supply of family units drops while the number of families needing them stays the same, the price for the remaining large units goes up.
This will then potentially lead to increased land value as real estate prices are determined by the potential revenue a property can generate.
If a plot of land can now legally host a high-yield SRO building (generating $100/sq. ft. in revenue), the value of that land rises.
A developer who wants to build a standard family apartment building (generating only $60/sq. ft.) can no longer afford to buy that land because they will be outbid by the SRO developer.
To compete, the family-building developer must raise their projected rents to justify the higher land price. This raises the "price floor" for everyone.
> The Result: the SRO format is more profitable ($6,000 vs. $4,500). If landlords can legally choose between the two, they will naturally favor creating SROs over family-sized units.
Yes, this is the whole point! And the reason it's more profitable is that there is pent-up demand for them. There aren't enough of them. We want them to be more profitable, so more are built/converted.
Here's the thing, though -- that's a temporary situation. As supply goes up, demand gets met. Once enough are built/converted, the price comes down, and an equilibrium is reached where a landlord will make the same profit whether it's a 3-bedroom or 4 SRO's. This means the market is now maximally efficient for both types of tenants.
In a free market, the most efficient balance of apartment types will naturally come into being. By prohibiting smaller units, we prevent that balance and discriminate against people who can't afford a full-size studio with bathroom.
So it's not cannibalization of family housing. It's just reducing the proportion of lots of other types of apartments a little bit -- including studios and one-bedrooms. Because this is desirable.
Except it isn't a free market. It is a heavily regulated market that favors corporations. The regulatory bodies have been corporate captured. In addition, the corporate bodies collude on things like rent, and have a near infinite runway to leave units empty.
With the collusion of corporate entities setting prices, it raises the overall market prices of properties. As small-time landlords observe the markets, they naturally also raise their prices to increase prices.
Additionally, because of corporate capture and collusion in other markets, prices broadly increase for owning property. This forces everyone who keeps rent lower to raise rents.
The way to fix this is simple. Stop the corporate collusion by making laws that make it functionally impossible.
This can be done by the following:
- tax the hell out of corporate ownership of residential properties
- an increasingly expensive multi-home tax. First home is tax free. Second has yearly taxes and those taxes exponentially increase for each additional home.
- a vacant home tax. On top of any second home taxation, for homes besides your 1 home, there should be a vacant home tax. If a home does not have a resident in it, it should be taxed. That tax should be around what it would cost to rent the unit out.
There are some other additional factors such as penalizing foreign non-resident owners, but this covers the bulk.
Being a landlord should not be easily profitable. It should be a job that you work your ass off at.
Then and only then will the free market begin to function and optimize.
None of this is true.
Collusion on rent is a relatively new phenomenon around RealPage and is being banned. Meanwhile, regulations like rent stabilization in NYC benefit existing tenants, not landlords.
And the taxes you describe having nothing to do with collusion. Collusion is fought using anti-collusion laws. What could possibly lead you to believe that multi-home taxes would reduce corporate collusion?
Yes, obviously RealPage should be banned everywhere. But corporate capture is not the underlying economic issue at all behind high prices. Lack of supply is.
Anti-collusion laws are ineffective. Legislation that targets easier to enforce vectors with desirable side effects makes more sense.
Whether my theory on what is occurring is true or not, the proposed solution would solve it along with countless other issues, while have very little downside for anyone but a tiny group of lazy parasites.
I don't know where you're getting your ideas. None of what you say is true. You're taking some kind of bizarre ideological stance ("tiny group of lazy parasites"?) that isn't supported by any kind of evidence. You can look up the great success of many anti-collusion laws, and your solution would be economically harmful and inefficient in a large number of ways. All I can say is, I think you need to study economics more. Landlords provide a valuable service (making rental properties available to people who prefer to rent rather than buy), and they're not making extraordinary profits relative to other industries. Remember that as demand goes up, so too does the price they have to pay to acquire their properties, and therefore the mortgages they are paying to banks. If landlords made extraordinary profits relative to other businesses or investments, everybody would be rushing to become a landlord. But they aren't, because it's hard work and involves significant financial risk.
I think your attitude (landlords are the problem; we must make life harder for landlords) is a big reason housing is so expensive because it creates a situation in which not enough people with money or access to credit want to become landlords.
You say that the landlord industry has captured its regulators, but you give no example of any action or ruling by an regulator that benefits landlords at the expense of tenants.
Housing is expensive because of greedy landlords gobbling up all the property and turning warm homes into cold revenue sources.
Landlords should be an exception, not the standard.
This belief is probably causing the housing crisis.
Except the exact opposite thing is happening in the regular housing market. Small houses (e.g., townhomes) were intended to maximize land and reduce cost, except they’re now not even affordable.
This will happen with these too.
It's the same problem -- you need more. Zoning regulations continue to prevent enough new construction, and the conversion of large lots/units into smaller ones.
I honestly don't know what you're proposing instead. But for some reason you're pessimistic about what all traditional economists agree on what is the solution -- remove more zoning regulations that constrict what can be built.
It's literally just supply and demand. Prices come down when you increase supply to meet demand. Just because increasing supply a little bit doesn't work when demand is increasing even faster, doesn't mean the basic principle is falsified. It's just that you need to increase supply much, much more.
I think you are assuming infinite demand.
Demand for floor space in these places is very large, no doubt, but it is not infinite.
If you don’t believe we can or should allow private landowners to build as much floor space as they want for everyone who wants to live in these places, then somehow you’re going to have to have a mechanism to control who is allowed to live there. What will it be and who will get to decide who is worthy?
You can only chop up a larger space for smaller spaces when there is more demand than there is supply. The point of building housing is to have more supply than demand, or at least as close as we can get to that point.
I feel like there is a huge difference between a shared kitchen and a shared bathroom. I'm fine with the former, and I would personally take that if the price was right.
But the latter is gross.
It doesn’t need to be. I had shared bathrooms in college dorms and in a European facility for unmarried adult asylum seekers and in various hostels and they were absolutely fit for purpose.
The bathrooms at my workplace are fit for purpose too, but that doesn't stop people with bad hygiene from leaving a line of fecal matter at the rear of the seat (where the cheeks meet) and not wiping away sweat, lint, and hairs, or prevent them from missing and peeing on the floor.
I feel like a toilet, shower, and sink could be added to an efficiency apartment for 3m².
If people want to see how small a room could get, see ships, especially crew quarters. I could probably design something with a kitchen, bathroom, washer and dryer, bed, desk, and storage for 15m².
This type of housing is somewhat common in Japan. It's called a "share house"
They should build these like the capsule hotels in Tokyo.
There are capsule hotels in New York as well!
Really! Did not know that.
SROs can't work in cities with strong tenant protections. If some junky trashes the shared kitchen and bathroom then the landlord needs to be able to evict them immediately (like in a hotel). Good luck doing that in NYC.
Yep. If eviction rules aren't loosened, these SROs will only be rented to people with >700 credit scores just like normal apartments. The people who need them most still won't get them.
It might be beneficial and necessary given where we are, but if it becomes normalized we must all see it for what it is. More austerity ultimately (regardless of the immediate causes) stemming from the massive transfer wealth to the few.
Just like the generations-long shift of families needing two incomes instead of one. Like the growing share of renters vs. homeowners. Like the growing ratio of home prices to income.
You reading this may believe you're among the few because you've stayed ahead of it so far, but you're not.