Copley Place Expansion and Tower | Back Bay

[Lrfox]

Obviously we're getting off-topic (and I'm sure this will be moved), but does the concept of induced demand apply to housing at all? Especially in a major market like Boston?

The simple supply/demand concept with housing seems to be "Build more and housing will cost less!" I'm inclined to lean towards that not necessarily being the case if we build new units at anything less than unprecedented "boom" levels. I imagine it would work similar to induced demand with highways. Even if you add a few thousand units per year, they'll be filled so quickly, you'll see little improvement in terms of both price and availability. You'll reach capacity again quickly and will be back in the same spot you were in before the few thousand units were built.

In order to actually see an impact on both availability and price, you'd have to add new units at a staggering rate (tens of thousands per year). Thankfully, unlike trying to add 15 lanes to I-93, there's room for that in the city. Unfortunately, I don't think developers will be willing to flood the market with tens of thousands of new housing units. It's not a good strategy from an economic standpoint. Real estate prices demand a certain return on development and flooding the market jeopardizes the chances for a positive ROI.

As you can tell I know nothing about real estate and very little about economics, but I have a hard time seeing the "solution" to the housing crunch being as simple as just adding a ton of units.

 

[GW]

Ah....but I didn't make that claim (not saying that it is right or wrong). I only claimed that it is artificially restricting supply. You need look no further than this project to see that this is the case.

The indisputable fact is that supply is being artificially restricted.

The disputed claim is that the restriction of supply drives prices up. I do believe this to be the case, though. I think building more units is the best (but not only) solution to high housing costs.

I believe: the laws of economics apply to housing, just as they do to other goods and services. Therefore, increasing supply will drive down costs. Yes, there are examples of this. Hold on, while I get back to you with formal evidence rather.

EDIT: I edited an earlier post for clarity as to my beliefs.

Thanks for engaging and linking to the studies. I'll try to digest them when I'm not working.

For the record, I support this project in its current form, which is great, but have yet to hear a good economic argument for getting rid of the affordable housing requirements (which is what I thought you were saying), simply because I don't have faith that the market can drive down costs in a city where land is finite and demand for luxury housing - the most appealing to developers to build - is massive and increasing. I agree that the restriction of supply drives prices up, and I favor expediting construction to counter that, but ultimately I think the only way out of this is opening up city land, as Walsh is doing, moving students back to campuses, and subsidizing affordable housing. (I don't believe in an unfettered market, mostly because I think people living in a city have a right to prevent that market from pushing them out.)

The reason I asked you for studies is most times when this comes up someone on the free market side says "supply and demand!" and expects the conversation to end there. Anyways, thanks again, and sorry for derailing!

 

[jpdivola]

but does the concept of induced demand apply to housing at all? Especially in a major market like Boston?

Real estate prices demand a certain return on development and flooding the market jeopardizes the chances for a positive ROI.

As you can tell I know nothing about real estate and very little about economics, but I have a hard time seeing the "solution" to the housing crunch being as simple as just adding a ton of units.

This notion of induced demand is a bit of a red hearing. It really only applies to submarkets. Sure if you have a cheaper than average neighborhood with lots of underdeveloped lots and you start developing them then yeah, the neighborhood will become more attractive and prices will rise. But, on net, you have still added more supply to the overall housing market. The people moving to the now trendy area will be freeing up housing in other areas. The only way "induced demand" can raise prices at the regional level is if a development attracts more people to the area than it can support. In practice, it is very unlikely that adding a 10,000 unit apartment will attract 13,000 households from outside to move to into Boston.

But, on the 2nd point, you are very right that new housing is by definition expensive to build. There is also the related point that housing gets more expensive as density rises, land becomes more expensive and hence developers have to switch to taller buildings (which cost more on a psf basis). New development will only directly bring down prices if developers can "profitably" build new units at below prevailing market rates. In practice in a tight housing market like Boston, developers have no incentive to test that hypothesis. They can charge top dollar and so they do.

However, new construction can still hold prices down as there is now less demand for the older units. This is referred to as filtering. In a tight housing market, developers can charge a lot for old dumpy places (see Manhattan). They also have incentive to renovate older buildings into a "luxury" property. New supply takes the pressure off prices.

In short, more new housing will pretty much always keep prices lower than they otherwise would be.

 

[bigeman312]

...I agree that the restriction of supply drives prices up, and I favor expediting construction to counter that, but ultimately I think the only way out of this is opening up city land, as Walsh is doing, moving students back to campuses, and subsidizing affordable housing. (I don't believe in an unfettered market, mostly because I think people living in a city have a right to prevent that market from pushing them out.)

The reason I asked you for studies is most times when this comes up someone on the free market side says "supply and demand!" and expects the conversation to end there. Anyways, thanks again, and sorry for derailing!

I think we are mostly in agreement that supply is being artificially restricted and the solution is a combination of increasing supply (incentivize building!) and subsidizing housing for those who need it.

I just tend to think the scale is currently leaned, at least in Boston, towards a restriction of supply being our driving factor for high housing cost.

And, for the record, no I am not in the unrestricted free market boat. Subsidizing housing has a necessary place. I just recognize the downside to delaying a project like this in the name of increasing the onsite affordable units from 14% to 25%, and think ultimately that drives the cost of housing further up.

ALSO: jpdivola very succinctly summed up the pros of building more units.

EDITED: For accuracy as per datadyne's fact check.

 

[datadyne007]

I think we are mostly in agreement that supply is being artificially restricted and the solution is a combination of increasing supply (incentivize building!) and subsidizing housing for those who need it.

I just tend to think the scale is currently leaned, at least in Boston, towards a restriction of supply being our driving factor for high housing cost.

And, for the record, no I am not in the unrestricted free market boat. Subsidizing housing has a necessary place. I just recognize the downside to delaying a project like this in the name of increasing the onsite affordable units from 20% to 25%, and think ultimately that drives the cost of housing further up.

ALSO: jpdivola very succinctly summed up the pros of building more units.

Just for the sake of factual info, Copley's affordable housing percent is 14%, not 20%. 14% to 25% is even more dramatic.

 

[DZH22]

Yes, there are technically 3 options in Boston:
1.) Build the affordable housing on-site in the development you are building (15%)
2.) Build the affordable housing off-site (equal to the amount you would need to build with option 1)
3.) Pay a proportional fee into the affordable housing fund

Here's what they should do. Change option 2 so that, instead of being able to build that 15% offsite, you instead have to build a few more, in the 20-25% range. Basically, more affordable housing gets built in the areas that make sense to have it, and people who can't afford to live right next to Copley DON'T live right next to Copley.

 

[FK4]

This notion of induced demand is a bit of a red hearing. It really only applies to submarkets. Sure if you have a cheaper than average neighborhood with lots of underdeveloped lots and you start developing them then yeah, the neighborhood will become more attractive and prices will rise. But, on net, you have still added more supply to the overall housing market. The people moving to the now trendy area will be freeing up housing in other areas. The only way "induced demand" can raise prices at the regional level is if a development attracts more people to the area than it can support. In practice, it is very unlikely that adding a 10,000 unit apartment will attract 13,000 households from outside to move to into Boston.

But, on the 2nd point, you are very right that new housing is by definition expensive to build. There is also the related point that housing gets more expensive as density rises, land becomes more expensive and hence developers have to switch to taller buildings (which cost more on a psf basis). New development will only directly bring down prices if developers can "profitably" build new units at below prevailing market rates. In practice in a tight housing market like Boston, developers have no incentive to test that hypothesis. They can charge top dollar and so they do.

However, new construction can still hold prices down as there is now less demand for the older units. This is referred to as filtering. In a tight housing market, developers can charge a lot for old dumpy places (see Manhattan). They also have incentive to renovate older buildings into a "luxury" property. New supply takes the pressure off prices.

In short, more new housing will pretty much always keep prices lower than they otherwise would be.

You left out an increasingly important point - foreign money buying condos as investments, and leaving them unused. Now, this applies more to condos than apartments, of course, but it is certainly a very important factor behind a lot of new luxury construction in American cities... American real estate is a very valuable investment, and many overseas buyers do not inhabit the units they purchase, but rather sit on them for the appreciation. This does drive up costs, artificially inflating them, without easing pressures on the housing shortage.

Now don't get me wrong - I'm in favor of this development. I also am not floridly xenophobic, but this is actually an issue of rising importance in our cities here, and something we are going to need to deal with in some way on the policy level at some point, because the trend shows no sign of abating.

As an aside, the NYT did an excellent series on this issue a few months ago that is well worth reading.

 

[jpdivola]

You left out an increasingly important point - foreign money buying condos as investments, and leaving them unused. Now, this applies more to condos than apartments, of course, but it is certainly a very important factor behind a lot of new luxury construction in American cities... American real estate is a very valuable investment, and many overseas buyers do not inhabit the units they purchase, but rather sit on them for the appreciation. This does drive up costs, artificially inflating them, without easing pressures on the housing shortage.

Now don't get me wrong - I'm in favor of this development. I also am not floridly xenophobic, but this is actually an issue of rising importance in our cities here, and something we are going to need to deal with in some way on the policy level at some point, because the trend shows no sign of abating.

As an aside, the NYT did an excellent series on this issue a few months ago that is well worth reading.

I think the foreign investor is potentially an issue in some cases, but that is a demand for housing issue that is largely unrelated to supply (new construction). Foreigners could just as easily buy up older existing units (as they do in London). Sure at the margin, new lux construction may "induce" some demand. But, again, it is unlikely that building 100 new condos will cause 110 foreigners to buy property in Boston (who otherwise wouldn't have).

Foreign investors tend to buy in supply constrained cities (NYC, LON, SF, PARIS), precisely because there is such limited new supply. No one is concerned that foreigners will come in and buy up all the new condos in Atlanta or Chicago.

Plus, mitigating the "foreign investor" issue is that the vast majority of "investors" rent out their units. So essentially they are just converting condos to rentals.

If you are concerned about passive investors bidding up the price of homes they don't use, IMO, the solution isn't to stop new condo construction. It seem a better solution is to enact a pied-a-terre tax and funnel the money into "affordable/middle class" housing.

 

[BPLange7]

The money that the mysterious "Foreign Investor" pays to purchase the housing doesn't disappear into the ether. It goes to pay the salaries of everyone involved with building the development and the investor to get a return on their investment and fund more housing units. This is undoubtedly behavior that should be encouraged, not discouraged.

 

[JumboBuc]

The money that the mysterious "Foreign Investor" pays to purchase the housing doesn't disappear into the ether. It goes to pay the salaries of everyone involved with building the development and the investor to get a return on their investment and fund more housing units. This is undoubtedly behavior that should be encouraged, not discouraged.

Just about everyone agrees that producing "exports" is a good thing for a local economy. Exports bring in money from abroad to provide local jobs for local people and return for local capital. Whenever someone from abroad buys a condo in Boston it can pretty much be thought of as a "housing export". These "exports" result in the exported good no longer being available for local consumption, but they also have all the same economic benefits of any other export that could be produced here and sold abroad.

And if foreign investors are buying condos and then renting them out, great! This doesn't detract from the local housing stock at all and functions merely as a financial arrangement where foreign capital takes an increased equity share in Boston's rental housing inventory. More foreign investment leads to more available capital which leads to more resources for construction of more housing. Win, win, win.

 

[fattony]

Foreign investors tend to buy in supply constrained cities (NYC, LON, SF, PARIS), precisely because there is such limited new supply. No one is concerned that foreigners will come in and buy up all the new condos in Atlanta or Chicago.

This.

If our property values weren't rock solid and climbing, there would be no interest from foreign investors. They are investors, they are just following the money. They aren't buying in Boston because they love the Common, they love ROI.

Our overly constrained housing market drives up prices, generating the ROI that investors are looking for. Building the uber-lux towers is a response to that demand, not its cause.

We would all be better off with an expanding housing supply and no interest from investors. Well, all of us that don't already own a home...

 

[kmp1284]

We would all be better off with an expanding housing supply and no interest from investors. Well, all of us that don't already own a home...

So would you prefer then to live in a place like Atlanta or Boston?

 

[fattony]

So would you prefer then to live in a place like Atlanta or Boston?

Don't be an ass. You know exactly what I meant. Expanding housing supply and suburban sprawl need not be linked.

 

[kmp1284]

Don't be an ass. You know exactly what I meant. Expanding housing supply and suburban sprawl need not be linked.

Yes, I do know. You want a city with all of the amenities and attributes of a Boston or San Francisco without investors around driving up prices. Would you like a pet unicorn too?

 

[Arch21]

I wouldn't take personally what anyone says on this forum. Once you hit 1000 posts they become professional posters/experts. Kinda reminds me of the movie Step Brothers.
"You and your mom are hillbillies this is a house of learned doctors"

 

[jpdivola]

At some point these last 10-15 posts will be split of on to a more appropriate thread, but in lieu of actual project news:

In fairness, Chicago and Toronto are world class city that have managed to keep prices affordable through high density development. Toronto condo prices are out of sorts right now and the city appears on the verge a major housing price correction. But, rents in prime Toronto locations are much better than in SF or Bos. (Rents are less susceptible to bubbles since nobody views their rent as an investment.) Sure, Chicago is sort a Boston-Detroit hybrid. No doubt the social dysfunction of the south and west sides helps keep prices down. But, even in the vast swath of the safe, gentrified yuppie Downtown and Northside world class urban living is far cheaper than Bos.

Even DC, another small land constrained city has been more aggressive in building over the past 5-year and has been able to keep rental prices in check through lots and lots of 10-story rental apartments.

So it's not like the choice is just SF vs. Atlanta.

 

[fattony]

Yes, I do know. You want a city with all of the amenities and attributes of a Boston or San Francisco without investors around driving up prices. Would you like a pet unicorn too?

There is demand from normal human beings and demand from foreign investors. One feeds off the other, but not the other way around.

The urban fabric and economic engine of a Boston or SF is what makes it desirable to people. To some extent any location will be a "victim of its own success." If your city is a great place to do business then more people show up and do business. That is an increase in demand which will drive up prices. Business is going well, so there is more money to spread around and people are willing to spend more. Again, upward pressure on prices.

If no measures are taken to alleviate that upward pressure on prices, then the real estate investors/speculators show up. However, increasing the housing supply to stabilize prices doesn't need to undercut the fundamental urban fabric and/or economic engine that lead to price appreciation in the first place.

If Boston and SF has been densifying over the last 20 years instead of doing almost nothing at all, then they would still be spectacular cities, perhaps more so, but without the runaway home prices and pied-a-terre speculation towers.

Pied-a-terre towers are a symptom, not a cause. Failing to build 8-12 story buildings along every major avenue and rationally expand transit service in the urbanized core is the cause of pied-a-terre towers.

 

[fattony]

At some point these last 10-15 posts will be split of on to a more appropriate thread, but in lieu of actual project news:

In fairness, Chicago and Toronto are world class city that has managed to keep prices affordable through high density development. Toronto condo prices are out of sorts right now and the city appears to be on the verge a major housing price correction. But, rents in prime Toronto locations are much better than in SF or Bos.

Sure, Chicago is sort a Boston-Detroit hybrid. No doubt the social dysfunction of the south and west sides helps keep prices down. But, even in the vast swaths of the safe, gentrified yuppie Downtown and Northside world class urban living is far cheaper than Bos.

Even DC, another small land constrained city has been more aggressive in building over the past 5-year and has been able to keep rental prices in check through lots and lots of 10-story rental apartments.

So it's not like the choice is just SF vs. Atlanta.

Excellent counterexamples, thank you.

 

[Tombstoner]

Even DC, another small land constrained city has been more aggressive in building over the past 5-year and has been able to keep rental prices in check through lots and lots of 10-story rental apartments.

Prime DC rentals are easily on par with prime Boston rentals. The difference is that there are more micro-climates of desirability in DC than in Boston, so that there are pockets of "primeness" in larger less-prime neighborhoods and vice-versa. Boston is more homogeneous in terms of neighborhoods.

 

[bigeman312]

At some point these last 10-15 posts will be split of on to a more appropriate thread, but in lieu of actual project news:

In fairness, Chicago and Toronto are world class city that have managed to keep prices affordable through high density development. Toronto condo prices are out of sorts right now and the city appears on the verge a major housing price correction. But, rents in prime Toronto locations are much better than in SF or Bos. (Rents are less susceptible to bubbles since nobody views their rent as an investment.) Sure, Chicago is sort a Boston-Detroit hybrid. No doubt the social dysfunction of the south and west sides helps keep prices down. But, even in the vast swath of the safe, gentrified yuppie Downtown and Northside world class urban living is far cheaper than Bos.

Even DC, another small land constrained city has been more aggressive in building over the past 5-year and has been able to keep rental prices in check through lots and lots of 10-story rental apartments.

So it's not like the choice is just SF vs. Atlanta.

You have hit the nail on the head and continue to eloquently say what I believe.

One nit-pick, though, and it is the distinction between Toronto and Chicago's relatively affordable housing prices. Toronto's is being driven by an increase in supply ("through high density development," as you say). Chicago's is being driven by a decrease in demand. Sure, there has been some high density development, but one can not ignore the fact that Chicago lost 200,000 (!) people between 2000 and 2010. That is second only to Detroit. I can assure you that if Boston lost 200,000 people in ten years (or even an equivalent percentage of the total population), housing prices would no longer be one of the highest in the nation.