Quote:
Originally Posted by Doctorfever
Agreed. Simple supply and demand. As Belsarius pointed out, the cost of construction materials has also climbed significantly, making new builds way more expensive.
You can kinda compare it to vehicles. When the price of new vehicles is so high, people look to used vehicles instead, driving up the price. And of course the shortage of new vehicle supply for a period also contributed (same as housing).
|
People don't really invest in vehicles though, so people buying cars to drive don't have to compete with people buying them as investments. For the most part, their price represents their utility as a consumer good.
Housing is different. As interest rates have dropped over the last 40 years, the risk-free rate of return has also dropped. So in the '80s, you could get GICs that paid 10%, which was 5-6% above inflation. In that context, there was far less incentive to invest in real estate, which meant less money chasing it.
Once interest rates dropped significantly and the risk-free rate of return dropped close to zero, there was no real way to grow your money without investing it. So people who didn't want to invest in the stock market (which is a pretty significant number of people) turned towards real estate and they were willing to accept poorer than normal returns because there weren't a lot of other options.
And as with bonds, when investors accept lower returns (or yields in the case of bonds) because the risk-free rate is low, the underlying value of the asset goes up. So cap rates declined significantly, pushing prices up. For instance, if you needed gross rent to be 15% of the value of a property to be viable in the '80s in order to compete with GICs, you might have only needed it to be 6-7% in a near-zero rate environment. That alone nearly increases the asset by 2.5x. And anyone who wanted to buy a house just to live in had to compete with that influx of capital from investors.
And that's not really related at all to population growth, housing starts, what % of housing is owned by investors, or supply/demand in terms of units. Sure, you could maybe overcome that effect by cutting population growth to zero and subsidizing builders to build a ridiculous number of units, but both of those things have significant downsides. It would be much simpler to make housing (other than purpose-built rental units) less attractive as an investment which would mean fewer dollars chasing the housing units.