Category Archives: property markets

19/2/20: Early effects of the 2020 Berlin rent controls changes

New research from Germany's ifo Institute and Immowelt looked at the effects of the new rent caps (rent controls) in Berlin. The findings are consistent with what we observe in other major cities with rent controls:

  • "In Berlin, the rent for almost all apartments advertised on real estate portal (96.7 percent) is above the rent cap."
  • "In 83.5 percent of cases, the rent exceeds the cap by over 20 percent."
  • "Rent on apartments covered by the law has risen considerably more slowly since the cap was announced".
  • But, "rent on apartments outside the scope of the cap is still rising strongly" (note: these are new construction units).
  • As the new rent controls come into effect later this year, the ifo study predicts that "a large number of these apartments to be withdrawn from the rental market when they become vacant and sold as condominiums".
  • Reduced supply of rental properties means that "people looking for accommodation in Berlin will be affected"
  • Rent caps introduce a bifurcated rental market: "Since July 2019, the rent prices for regulated apartments have increased more slowly than in the 13 other German cities... [but] for unregulated apartments (new buildings built since 2014) rose faster..."

"As a result [of the rent controls introduction], the divide in the Berlin real estate market is widening: new buildings, which are often found in preferred locations, are becoming increasingly expensive while prices for existing housing are developing less strongly. This  weakens the incentives to develop these buildings. ... Such a development cannot be good for an urban society and contradicts the very purpose of the law."

Ifo's preferred solution to reduce economic inefficiency of rent controls: "Instead of interfering with the ownership rights of mostly private landlords and hindering investment in housing, policy should focus on creating subsidized housing where needed.”

Full paper: “Economic Effects of the Berlin Rent Cap” (in German) by Mathias Dolls, Clemens Fuest, Carla Krolage, Florian Neumeier, and Daniel Stoehlker, in ifo Schnelldienst 3/2020:

19/12/19: Irish Planning Permissions 3Q 2019: Some Goods, Some Bads

The latest Irish data for Planning Permissions approvals is a mix of some good news, some bad news and some ugly trends. Here is the summary of them for 3Q 2019:

  1. Overall, planning permissions numbers for housing applications are up 4.02% y/y - this is the good news. Better news: cumulative 1Q-3Q 2019 numbers are up 7.12%  on the same period in 2018.
  2. New dwelling planning permissions are up 6.01% y/y - this too is the good news. Also exciting: cumulative 9 months permissions are up 6.33% y/y.
  3. Other new construction ex-dwellings permissions are up 6.29% - another bit of good news.
  4. Extensions and alterations-related planning permissions are up only 1.42%. But this is offset by the cumulative 9 months gain of 7.65% y/y. Which is a nice number.
  5. Bad news: private homes permissions are up only 1.13% y/y in 3Q 2019, and worse news: the same are down massive 5.57% y/y on a cumulative basis for the first 9 months of 2019.
  6. Great news: apartments permissions (for units, not aggregated over schemes) are up massive 80.15% in 3Q 2019 y/y and are cumulatively up 86.81% y/y for the first nine months of 2019.
  7. Average area of the houses for which new permissions are grated is up 0.82% in 3Q 2019 compared to 3Q 2018, but average area of the apartments with new permissions granted is down big time: down 14% y/y in 3Q 2019 and on average down 7.1% in the first 9 months of 2019.
So we are planning more apartments (good), not as significantly more homes (bad), but our apartments planned are getting smaller (bad). 

Now for some other bad news, or trends, rather. 

Given the demographic demand and the state of construction industry in the post-crisis period, we are continuing to under-supply new housing to the markets. Based on the assumed demand for 25,000 new homes annually, cumulative undersupply of new permissions to build residential units since 1Q 2010 currently stands at around 81,900 units and although this number is finally declining (since 4Q 2017), at the current rate of new planning permissions approvals (Q1-Q3 2019 figure), it would take almost 6.5 years to clear the backlog. That is, assuming in the mean time, there is no new recession to knock out the wind from the building and construction sector, and/or no significant inward / return migration to boost demand. Accounting for depreciation at ca 4100 units per annum ( extends this horizon to 10.3 years. 

11/4/18: Sand Castles of Local Government Regulations in U.S. Property Markets

A new paper, "Sand Castles Before the Tide? Affordable Housing in Expensive Cities" by Gabriel Metcalf in the Journal of Economic Perspectives (Volume 32, Number 1—Winter 2018—Pages 59–80, looks at evolution of house prices in the major urban areas of the U.S. where "the demand for housing is growing at a much faster rate than the supply. These so-called “superstars” include New York City, Boston, Washington, DC, San Francisco, Los Angeles, Seattle, and Denver (Gyourko, Mayer, and Sinai 2013)."

These cities have "a seemingly permanent crisis of affordable housing," despite the fact that "...policymakers expend great amounts of energy trying to bring down housing costs with subsidies for affordable housing and sometimes with rent control. But these efforts are undermined by planning decisions that make housing for most people vastly more expensive than it has to be by restricting the supply of new units even in the face of growing demand."

The author provides an interesting data summary for these cities. Table 2 in the paper reports the proportion of housing units that are price-controlled or subsidised:

Of all cities areas covered, only one - Dallas - has unregulated rental market share of >50% of the total supply. Put differently, in all but one cities, subsidised and/or rent-controlled housing accounts for more than 50% of the total rental market. Only four out of 11 cities have owner-occupied housing share of the overall property market in excess of 50%.

The rest of the paper proceeds to tell us all the possible reasons as to why this capture of the property markets by price fixing and state ownership is just not enough.  Some of these reasons and arguments are not bad. Some are simply the dogmatic rehashing of the traditional Government-will-solve-everything mantra. That said, the section on the effects of poor regulation (not in quantity, but quality) of the housing markets is spot on and worth reading.

The author first tackles the issue of zoning regulations, arguing (correctly, imo) that zoning regulations both restrict supply and distort types of supply away from what is needed in addressing affordable housing shortages. The section is very brief.

The same applies to the housing approval process, that, according to the author, can result in "more uncertainty and greater risk" which result "a higher cost of capital. Longer approval processes translate into higher carrying costs for the land... Perhaps the greatest negative impact of an uncertain and hyperpoliticized entitlement process is that it functions as a barrier to entry for developers and investors into a market. The net effect is to reduce competition among developers."

"The fourth type of local regulation on housing development is financial: fees and exactions... if the rules are inherently unpredictable and changeable, it is nearly impossible to bid rationally on land, which inevitably drives up the cost of capital, and results in inefficient outcomes. ...the market price for housing has to remain high enough to cover the cost of the fees and exactions, so these function as a price floor that keeps housing more expensive than it otherwise would be."

In summary, and I find myself in agreement with author on this, "For the country as a whole, the restrictive housing policies of the cities in expensive metro areas leads to the segregation of the wealthy into zoned enclave communities; a reduced ability of lower-income people to move to areas of higher opportunity; a diversion of enormous wealth into rent-seeking behavior by landowners; and a decrease in economic productivity for the country as a whole, because labor is not able to be allocated to the most productive economic clusters".

The article provides a good summary and some good insights into potential solutions to the problems summarised above and to the phenomenon of the failure in collective action that occurs between city-level Government policies and those of the wider (commutable) metropolitan areas.

One thing that is, however, clear that housing affordability in major cities has not been meaningfully supported by the already extensive regulatory, price control and subsidy-providing systems. The idea that rent controls can offset bad regulatory and permissioning, as well as financial charging policies is simply not supported by the evidence provided for the largest and growing cities in the U.S.

20/11/17: Wait till rates normalization hits the property markets

In the context of the ongoing Chinese debt bubble crisis (yet to explode into a full crisis, but the timer is ticking ominously), the ZeroHedge presented the following chart:

The dire state of the global economy post-QE waves of 2008-2017 is reflected in the vast asset bubbles building up across the main markets, with Canada, China, Australia leading the surge, while the U.S. residential property prices are now also at historical peak (previous peak reading was at 184.62 against current at 195.05):


New Zealand is not far off from its neighbour, Australia:


In short, things are getting beyond the pre-2007 bubble levels and the risks of a blowout in global property markets are rising. All we need is a catalyst for breach, which is likely to be either a ramp up in credit costs in the advanced economies or a tightening of credit in China, or both.

15/5/15: Monetary Titanic & Bubbles Troubles

Food for thought this morning - two links:

Note, first link above cites low worker productivity. Here's a slide from my recent (this week) presentation on same: 

And here is my view on the Irish property bubble (in development, but not yet fully manifested):

What is interesting about the Irish property markets is that whilst price and activity levels are not yet at concern points, the rates of increases in commercial rents and declines in yields, and rates of rises in residential property prices in Dublin are clearly fuelling a massive hype by real estate agents and the media. This is hardly consistent with a 'healthy' market.

I will be speaking about the financial valuations bubbles, focusing on M&As and strategy for avoiding these, next week at so stay tuned for slides on that next week.