In the US, the federal government has acted in a big way to prop up home prices when they threatened to fall.

It's hard to imagine how we can have it both ways: If the government effectively insures real estate against loss, then investors (i.e., people with money) will take advantage of that, increase demand, and raise the price of the investments (i.e., houses you and I want to buy).

hkmurakami made a very astute comment a few days ago about this:

    > It seems that we made a pact with the devil by positioning housing as an
    > investment asset. By doing so, we've encouraged people to commit a very large
    > fraction of their net worth into a rather illiquid asset, tying their financial
    > fates to the future assessment of that asset. As a result, protecting the price
    > and appreciation of this asset has come to overshadow the other crucial roles
    > that housing plays in our society.
    > If I bought shares in AAPL at $50 (now
    > $100+) and someone comes along asking that AAPL let them buy some shares for
    > say, $65, I'm obviously not going to be happy since the value of my investment
    > is under threat. This is the kind of reaction we've unfortunately promoted for
    > ourselves. It didn't have to be this way, as other countries have shown us.
    > But now that we're here, it's hard to imagine a way to turn back time.

I live in Boston. My peers and family are pouring out their savings of the last 10 years to buying property in Quincy and Jamaica Plains because they feel it'll gentrify soon and in another 10 years they'll be making good money from it (by either renting or selling). I feel extremely conflicted about this. I think they're probably right.

This housing situation is the most fucked up thing I know of, and I just cannot think of any happy answers to solve these problems for the benefit of everyone in society - it seems any and every decision will favor one party and fuck the other.

It sounds like we're well balanced then.

Markets are efficient.

public policy variables are outside the market efficiency hypotheisis because. markets are therfore not efficient wrt to public policy in general. they only are efficient with repsect to a specificially dilineated (analytically tractavle) public policy context at a single points of time.

And specifically what externality do you think is at play here?

Market effeciency concepts have to do with incorporating information into a (well defined) market. Breaking the logic sequence of "well defined market", which can be done with trivial levels of "real world complexity", is problematic for EMH. This means you cant use EMH as a sort of backward logic to defend the status quo.

As to the concept of a market externality, I'm not sure I understand the question. If you just mean "uncaptured incentives", well surely there are myriads. But the bigger point is that this is not a simple solution. You cannot re-solve the maths as per a case of omitted variable bias.

The reason that this is so may be intuively grasped with an example. Let us posit that rent-seeking is a behavioral consequence of 'opportunistic' principals. And that rent seeking public policy architects are inevitable, because our politician is opportunistic (qua politician--behavioral assumption).

OK, but now I've just made mess for EMH, and this is why EMH has an 'H' in its name. Because general economic theory requires that we assume away several things we just introduced. And if you understand EMH you understand why having opportunistic, strongly authorized, unrestrained public policy makers is a problem. Namely, (1) they hold private information (outside emh); and (2) they are free to play zero-sum dynamic games with market participants; and (3) they can charge economic rents by implementing a 'protection racket' scheme whereby donor/lobbyists avoid (large) zero-sum losses by taking (smaller) zero-sum losses that benefit the policy holder (so called diversions).

8 million people live in London, and the centre is full of people at most times of day, hundreds of thousands of people still live near the areas you're talking about, I went for a picnic in Regent's park last weekend and it was full of kids. Characterising it as an empty city full of vacant units or one in which professionals or parents can't afford to live and parks are empty of children is absurd.

I think it remains to be seen whether the Vancouver tax changes have worked. There's been a bit of a slowdown in sales, but that could just be investors taking a brief pause to evaluate the new situation.

They really need it to be an ongoing annual tax increase (ex: vacancy tax).

It's like a capital gains tax versus a wealth tax. The latter has way more impact then the former.

So... how long before property values collapse because it's no longer a desirable place to live, and the foreign money tries to get out as quickly as possible before values drop further?

I suspect it's a pretty common phenomenon. I recently visited Venice with a Venetian friend of mine. He mentioned that most of the apartments in the historical center were empty.

Yes, I rented a flat in Rome right near the Trevi fountain, in a beautiful old stone two storey building with a lovely courtyard. There would have been somewhere between 20 and 40 apartments there.

There was a software / techical business of some sort in one corner, but I don't think I saw anyone else.

(Thank you AirBNB)

Did you rent the flat from AirBnB then? I'm not understanding your comment.

Why the down vote? seriously? I am asking for clarification because I am interested if you were speaking about the upside or the downside? Its not at all clear.

I didn't downvote you.

The thanks to AirBNB was as an aside. I think we rented AirBNB but to be honest not sure; might have been one of the many other under the radar holiday house schemes available in Italy and other places.

However the phenomenon under discussion clearly makes something like AirBNB possible -- and good luck to them.

Whether it is an upside or downside overall -- I do not know.

(I have now upvoted both of your comments)

I think Venice is a unique situation. It's due to the difficulty and cost involved in the maintenance of buildings which are partially underwater and can not be accessed by a van or truck.

Fair amount of stubborn older people living their, not much ability for a young Italian to take on the task of buying a residence. I spent time there, in a house that reminded me of Fightclub, mostly with Iraqis. No Italians.

You were walking past student accommodation in the summer holidays.

Yeah thats oddly dystopian.

Can you elaborate on the Vancouver tax change? I have not heard about this.

"Foreigners [not permanent residents] who buy residential property in the Vancouver area will have to pay an extra 15-per-cent tax as part of a B.C. government plan to slow the foreign speculation that many blame for making the region’s homes the most unaffordable in Canada."

http://www.theglobeandmail.com/news/british-columbia/bc-to-t...

The tax is new and was enacted just before August so the impacts are still uncertain.

Is there a reason they didn't tax non-use? The "foreigner exclusion" sounds like fighting a symptom.

Simply require proof of residency in the property (or an active lease agreement / market listing) to qualify for a tax break. Otherwise, if you're parking-and-holding-without-using, you get slapped with a higher tax rate.

Something like this was suggested by economists at the local university.

http://www.theglobeandmail.com/news/british-columbia/bc-prof...

The Mayor of Vancouver is also interested in taxing non-occupancy and in the same special session of the legislative assembly that passed the 15% foreign buyer tax the Province granted the City of Vancouver (but not others) the powers to tax non-occupancy. It can be pretty involved to find out occupancy and the City has limited means so it'll be interesting to see if that goes anywhere.

>Is there a reason they didn't tax non-use? The "foreigner exclusion" sounds like fighting a symptom.

The cynical answer to this by the way is that there's a Provincial election in early 2017, so in the near term appearing to address the problem is more important than addressing the problem in an effective way.

Cambridge MA, has a resident tax abatement program. It hasn't seemed to help much as we are starting to see foreign all cash sales...

Starting? It's been rampant for well over a year. We opted out of the whole mess and moved to Salem. $200/sqft for a beautiful historic mansion in an eminently walkable small city that's a quick train ride from North Station. Don't fight it. Just bail.

> Is there a reason they didn't tax non-use?

That would be much more difficult to enforce. You'd have to hire people to walk around knocking on doors or have neighbours snitching on each other. No thanks.

Interesting so was this a high profile issue then in Canada and B.C in general. For those unaware, in some places these foreign investors(speculators, non-primary residences.) are getting tax breaks. So not only on their making out on the appreciation on the property but they are receiving tax breaks on top of that:

http://www.businessinsider.com/foreign-billionaire-tax-break...

On the other hand i recently walked through Notting Hill and South Kensington and it wad full of life, with all the flats and houses feeling very much lived in.

with real estate going up the way it's been going up, do you think 15% really that big of a deterrent?

Foreign investment money is a good thing for a city and country.

Empty buildings are not ideal though (though its still better than less investment). I think maybe there should be a requirement to rent out your investments if it's in a high density area.

I guess I am confused why they would not want to collect the money from renting the buildings out. Any ideas?

In any city with a high price-to-rent ratio, rent isn't really a factor in prices. Investors are buying homes in those places because it's really hard to make more of them, just like gold and high-end art. The price is determined by what other rich people will pay for them to hold as a speculative asset, just like gold and art. Collecting rent is possible, but it makes an illiquid asset even less liquid: many home buyers want to live in the home they buy, which is hard when there's an active lease.

This does not happen in cities where it's easy to build more homes in desirable areas. They have lower price-to-rent ratios because prices are determined by the value of the rental income stream. We can make it easy to build more homes in every city by repealing laws that push lower income families out of desirable places—that's what density restrictions were invented to do.

Eviction can be very difficult (1 year +) when it comes time to sell.

Also, it's risk. They can fuck up the place, and if their rent is not much, then the insurance will be more than the rent.

That's not the case in London. The notice you need to give a tenant is specified by the lease agreement (general an Assured Shorthold Tenancy). It's usually specified as 6 months minimum, after which either tenant or landlord can give 1 month (or sometimes 2) months to end the lease.

If the tenant refuses to move out (despite the landlord serving notice correctly) you can usually get that resolved in 2-3 months at most: 1 month to get a court date, 1 month to give the tenant time to comply with what the court orders, and 1 month to get a bailiff to physically remove them (if it comes to that).

(Source: I'm from London, and I've signed several leases as both a landlord and as a tenant. I've once gone to court to evict a tenant who had stopped paying rent, and the matter was resolved in <2 months from first filling in the court paperwork)

They don't care. When you have billions in the personal bank accounts, the few tens of thousands you would collect per month from a luxury house in London means nothing.

It would be more of a nuisance - the tenants need registering, then you have to pay taxes, for what gain?

A $5 million home rents for roughly $20k a month, or $240k a year.

Probably the owner of said home makes more money than that in his/her sleep.

Passive income on capital assets (e.g. letting out property) is exactly how they make that money.

You hardly have to do anything. Various agencies will do everything for you. You'll never hear about your tenants.

The point is, why would they bother even with the minute hassle of vetting and hiring an agency just to make a few pennies every year as compared to their existing billions?

It's not even worth their time to do that much, apparently, since the houses in question are sitting empty in a high-rent area.

A lot of these cities have renting laws that basically give the renter more rights over the property than the owner.

This causes it to make more sense to not rent it out.

> A lot of these cities have renting laws that basically give the renter more rights over the property than the owner.

Situated as it is, in Britain, London is a long way from being such a city. More's the pity.

I believe they keep them empty so they can visit at any time. They are their holiday homes.

Some investors buy flats and keep them empty and in bubble wrap for a couple of years until prices increase, then sell. Not "buy-to-let" investors, but "buy-to-sell"!