brockm
Active Member
I happen to know a lot about real estate. In turns out that I have a background in real estate capital markets and, as it turns out, in economics. And in fact, in <a href="#post628272">this post</a>, I make specific mention of the nature of speculation driving real estate prices.
But anyways: there is ample evidence from around the world that historical protectionism has a direct effect on prices. It has been observed by many economists -- for instance, Edward Glaeser who I've already mentioned -- for a very long time.
Rent prices are a far better indicator of desirability to live in an area than sales prices, however. Any economist knows this. Rent prices do not have much speculation in their signal, and tend to be bound by wage levels. Unlike sale prices, which are bound by debt availability. In fact, Toronto's rental prices have been relatively stable since 2007, slightly lagging inflation, while sale prices have continued to out-pace wage growth.
I've been collecting MLS data for a few years in a spreadsheet to create a sample. Here's a slice:
18 Yonge St. One Bedroom + Den + Parking Space (median of spread)
Jun 2007: $1580
Jun 2008: $1578
Jun 2009: $1600
Jun 2010: $1600
Jun 2011: $1620
Jun 2012: $1634
4.4% rental price growth in 5 years! I don't need to compare this to the sale price.
Anyways, so we've agreed that desirability of living downtown isn't the prime factor driving prices.
But I think we can agree that the very small inflation in rental prices on that building over 5 years is indicative of supply keeping up with demand. And as long as that continues to happen, the rental prices will continue to grow slowly. At or below the underlying inflation trend.
When we look at other cities like Paris or London, who take a far more "careful" approach to allowing any new development in their city centers, we see that rental prices are out of control. The rental prices in Toronto are suppressed because we keep adding supply. And the rental prices are inflated in Paris and London because of suppressed supply. And the supply is not suppressed for any other reason, at least in central London and central Paris, than the strict restrictions on building up. This is irrefutable.
Real estate speculation aside, if London and Paris were to start allowing vertical construction like Toronto is now experiencing in their city centers, rental rates would fall as supply would expand to exceed demand at those affordability levels.
This an absolutely simple and demonstrably true economic axiom.
The problem exists in Manhattan, too. Where I believe (my memory is fuzzy) about 1/3 or more buildings are under historical protection. The effect of this has been greatly studied by economists, and once again, the consensus among those who have is that the historical protectionism in NYC is inflating rental prices in Manhattan.
Space is a limited commodity. When the productive potential of space is retarded by any force: be it business or the government, it represents a negative externality on its surroundings.
To argue that protecting historical buildings to stop the construction of new high rises has no effect on affordability is just plain bullshit. Especially when we take sale prices off the table and just look at rent -- which as I've already explained, is actually the more important measure. It is saying you can have one's cake and eat it too. You can't. All distortions of the market, no matter what their intention have externalities.
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