Absentee owners illustrate failures of market-based corrections

A class crisis is exploding in San Francisco, where housing pressures are creating a cascade of problems for residents. The city’s limited geographic footprint and rising housing costs are creating a perfect storm that drives out many lower and working class residents who can no longer afford to live there, with average rents on a steady upward trend, but wages holding fairly consistent. The city is beyond the financial reach of people who in some cases have lived there for generations, and there’s an ongoing debate over what to do about it — with many parties acknowledging that there will be no silver bullet for San Francisco, no swift and easy solution to the problem of economic disparity.

Creating fair housing opportunities, though, is clearly an important angle. People need a place to live and stable housing opens up more opportunities. Not having to spend a huge percentage of personal income on housing can radically improve economic mobility and quality of life. The best way to make more housing available when the vacancy rate is low, one assumes, would be to build more housing units, and there’s a great deal of discussion over this issue. Some are pushing for affordable housing mandates, such as inclusionary housing requirements that force developers to include a certain percentage of affordable housing in new projects. Others want to see entirely affordable projects. At the same time, developers are lobbying the city for adjustments to the standards for ‘affordability,’ and they’re dodging inclusionary mandates by being willing to pay fees or relocate projects elsewhere, knowing that the costs of doing so are offset by the ability to sell housing at the wildly overinflated market value.

Some advocates, however, push for a market-based solution. Under their argument, the more housing units that are built, the better conditions will be for everyone. They’re pushing for rapid, dense development, and sale or rental of units at any cost. Theory being that as more units become available, the market will begin to favour buyers rather than sellers, pushing market rates down and accommodating those with less financial clout. It’s a nice theory, and it’s one that certainly might promote interest from developers looking to make it easy to build — though some might prefer an atmosphere of manufactured scracity because it keeps housing values up.

These proposals are rooted in the notion that it should be possible to drive housing costs down by ensuring that San Francisco residents and those from nearby areas are buying or renting housing for their primary personal use. However, that’s not actually what’s happening, and the fact that new housing is primarily being snapped up by absentee owners illustrates the failure of relying on the market to correct itself. Roughly 40 percent of condo owners have primary addresses other than those listed on their properties, in some cases treating them as second or third homes that they rarely visit, and in others simply as unused real estate investments, assuming that holding real estate in San Francisco will pay off at some point in the future.

This is how the real estate market works. People profit by being able to buy up substantial volumes of real estate, by pushing the price up, and by selling. They don’t derive profits from driving the market rate down or selling and renting at below market rate — these things are counterintuitive and antithetical to actually generating profits. People don’t get involved in real estate out of the goodness of their hearts and in a desire to make the world a better place for everyone. Those with multiple housing units are treating them as yet another form of investment, and that’s dangerous for San Francisco, especially with groups pushing for rapid, dense development at any cost.

San Francisco’s affluent are very, very affluent, as are people from surrounding regions. Maintaining a residence that’s used part time or even less is simply a sound business strategy, but also a social one — they want to be able to come up to the city for the weekend, to be able to entertain in the city, to have a place for guests to stay. For people from well outside the Bay, maintaining a condo means they have a place to stay when they come in for meetings and events that’s more comfortable than a hotel room, with everything they expect from home. They’re not buying places to live: They’re buying status and addresses, and their concern isn’t about vacancy rates or housing affordability, but the quality of their doormen.

Some of these units are rented out under vacation rentals by owner and short term rental companies, but many are not. They just sit empty the vast majority of the time, though it’s difficult to pin down accurate statistics because the city doesn’t have a system for tracking them. A high vacancy rate in luxury apartments might seem primarily like an issue for the rich — who cares if a $7,000/month apartment sits empty most of the time — but it’s actually a problem for the economy as a whole, because it drives the construction of more units like it, since there’s a demonstrated market for them. As long as developers can choose between condos they can sell for millions of dollars and affordable housing (for San Francisco values of ‘affordable’), the best option for them is obvious, because they’re not running charity operations, but real estate investment firms.

To resolve the affordable housing crisis, the city needs to think about fundamentally different policies on development, and to do that, it needs to rethink the way that housing is defined and prioritised.

Image: Downtown, San Francisco, Davide D’Amico, Flickr