More myths, drivel and balderdash hurting real estate

Common misconceptions perpetuate the housing crisis

Man pluggin ears in front of construction
(Illustration by The Real Deal with Getty)

This is the second of two columns about real estate myths. Read the first one here.

Yesterday, we discussed the idea that the real estate industry conspires to keep prices high; why capitalism can create plentiful and affordable everything except housing; why only price controls can solve the affordability problem; and how real estate causes gentrification by hatching rich people out of thin air.

Today, we present four more misbegotten notions about real estate that are bandied about on social media — and sometimes in the halls of government.

Greed is the problem

On Twitter, activist tenants often blame greed for housing costs. In this telling, landlords charge high rents because of avarice.

It’s the tenant equivalent of rich people blaming poverty on the personal failings of poor people: It makes you feel better, but makes no sense and accomplishes nothing — because it’s the wrong way to think about the problem.

For some reason, only developers, landlords and pharmaceutical companies seem to be condemned for not underpricing their products. No one blamed McDonald’s for profiting $13 billion in the past year. Or supermarket chain Kroger for charging customers $31 billion more than it spent in just 12 months.

Whether it is called greed or profit motive, the desire to make money is essential to capitalism. It’s what motivates producers to supply what consumers want. Government’s job is to ensure a competitive marketplace in which McDonald’s must compete with Burger King on price and quality.

Housing providers also compete. If New York’s government allowed unlimited competition in residential development, housing would be like fast food — plentiful and affordable. No law limits how many burgers McDonald’s can make, but we limit how many homes builders can create. Then we wonder why housing is expensive.

But if not for “greed,” even less housing would be built, and it would be even harder for New Yorkers to get.

The economists are wrong

Rejecting economic principles is necessary to perpetuate myths such as “development causes everyone’s rents to go up.” In this self-defeating argument, new apartments are said to attract people with disposable income, causing landlords of nearby buildings to raise rents.

Extrapolate that and its falsity becomes clear. If 1 million new homes suddenly materialized across New York City, shoppers would be able to pick and choose rather than bid madly against each other. Rents fall when supply outpaces demand, as we saw when Covid hit. They rise when the opposite happens.

Yet activists fight housing one neighborhood at a time, ignoring the cumulative effect of their efforts. Too many of their elected officials join in, congratulating themselves for stopping gentrification.

They myopically focus on a particular area, saying projects marketed to higher earners will bring good restaurants and Starbucks, and even more high earners will come. The “amenity effect” is real, but research shows the addition of housing supply more than cancels it out.

A common response to these studies is “those academics are all paid by Big Real Estate” (false) or “I don’t need no stinkin’ studies — I’ve seen gentrification with my own eyes!”

Just like humans for thousands of years saw the sun rise and set every day and concluded that it traveled around the Earth.

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New supply never lowers rents

“There’s development in my neighborhood,” people tweet, “and my rent went up. See?”

With junk science like that flying around Twitter, who needs ipecac syrup?

This gag-inducing refrain misses two obvious points. One is that without new units, rents would go up even more because people would be competing for even fewer homes. A single data point never proves anything. It takes careful study to isolate factors and identify cause and effect.

The second point is that correlation is not causation. Developers tend to build in areas where rents are increasing. Casual observers thus blame new housing for rents rising in other buildings.

Economists know to ask, How much would rents have risen without supply being added? The folks who blame rising rents on development somehow ignore high-demand neighborhoods like the Brooklyn Heights historic district, where development is essentially banned — and home prices have risen astronomically.

Landlords are middlemen

The idea here is that developers and landlords merely add costs by inserting themselves between homes and people. Eliminate their profits, people say, and homes would be that much cheaper.

The problem: Who would build the housing and maintain rental buildings? NYCHA? The Housing Authority is recognized every year as the city’s worst landlord, which is saying something.

Without a profit motive, and constrained by rules, rent limits and political considerations, public housing agencies in the U.S. have proven to be terrible housing managers.

If tenants were put in charge of their apartment complexes, they would still have to hire private management companies to do the dirty work, both literally (unclogging toilets, processing trash, etc.) and figuratively (evicting tenants).

Most New York tenants live paycheck to paycheck. Poorer ones tend to move a lot. It’s hard to see them fitting everything from boiler replacements to refinancings into their already challenging lives. And if they sympathetically refused to evict Mrs. Smith for not paying rent, the building’s revenue would start to fall short.

Without professionals in charge, many buildings would deteriorate physically and financially — especially rent-stabilized buildings with incomes insufficient to sustain the property.

Over time, markets weed out unnecessary middlemen, such as door-to-door salesmen. Useless middlemen, such as car dealerships, only endure if protected by archaic laws. It’s fair to say that if landlords were useless, they would no longer exist.

The irony of tenant advocates’ never-ending war with landlords is that they perpetuate it by keeping New York a rental-dominated city. Two-third of city units are rentals, roughly twice the national average.

Among the reasons: Nearly 1 million apartments are rent-stabilized and tenant-backed laws make that status virtually permanent. On the rare occasion that a real estate firm attempts to turn a rental into a co-op, giving tenants the chance for ownership, politicians and advocates rally against it.

Rentals are preferred housing for people who might want to move in a few years, have bad or no credit or can’t afford a down payment. They are particularly important in a city such as New York, where many immigrants arrive with nothing and try to work their way up. But rentals, by definition, have landlords — for good reason. Like most things in real estate.