The is my long form essay which won 3rd place in the Boyd Institute essay contest. Please enjoy, and I will get back to posting shorter form content in few days. Also, please do check out the Boyd Institute’s excellent substack.
Good article. Curious if developers/investors in other countries accept lower target returns in jurisdictions with friendlier regulatory regimes. Also a minor note: developers build to yield on cost, not cap rate. Not sure if you’re using cap rate for both to keep things simple, but they’re different concepts.
This essay is a masterclass in connecting real estate fundamentals with capital markets—so much insight for anyone trying to understand why housing costs are what they are.
I can’t wait to see your shorter-form posts too—your experience and data-driven perspective are pure gold for investors and policy enthusiasts alike.
Great article. If housing is to be considered an essential good, fundamental to a person being able to perform in a civilized society then governments are likely to be able to reduce expenditures on social services if they were to ensure that everyone is adequately housed, and the way to do that is to reduce the interest rates faced by developers, builders and mortgage holders. Am I correct? How will this impact the rate of inflation in house prices. Should a solid capital gains tax and perhaps death duties be part of the scheme so as to reduce the rate of price inflation?
After stewing over this, I don’t think this framework has the explanatory power it claims unless a binding physical housing shortage is doing most of the work.
I still think it’s an excellent analysis of the supply-side financing market and how development finance clears given prevailing prices. But IRRs, hurdle rates, and cap rates adjust to the price level rather than anchoring it. In my view, housing prices can be explained without assuming a quantity constraint at all, and credit and asset-pricing dynamics are sufficient. Without that scarcity premise, the analysis explains why some projects don’t pencil but not system-wide housing unaffordability.
I think where I get stuck is that builders don’t actually set prices. Their underwriting targets get overwritten by marginal bidders, who banks are happy to lend the regulated maximum to and then offload. In that setup, prices clear via credit competition, and post-build rents end up largely decoupled from home prices.
That's true for single family, although even there builders won't build below a certain profit margin. Builders are indeed price takers but they will only build if prices clear thresholds.
In multifamily, investors won't accept rates of return below what they could get in other assets adjusting for risk.
Good article. Curious if developers/investors in other countries accept lower target returns in jurisdictions with friendlier regulatory regimes. Also a minor note: developers build to yield on cost, not cap rate. Not sure if you’re using cap rate for both to keep things simple, but they’re different concepts.
Yes. Trying to keep the jargon to a minimum.
Wow—congratulations on 3rd place! 🏆
This essay is a masterclass in connecting real estate fundamentals with capital markets—so much insight for anyone trying to understand why housing costs are what they are.
I can’t wait to see your shorter-form posts too—your experience and data-driven perspective are pure gold for investors and policy enthusiasts alike.
Great article. If housing is to be considered an essential good, fundamental to a person being able to perform in a civilized society then governments are likely to be able to reduce expenditures on social services if they were to ensure that everyone is adequately housed, and the way to do that is to reduce the interest rates faced by developers, builders and mortgage holders. Am I correct? How will this impact the rate of inflation in house prices. Should a solid capital gains tax and perhaps death duties be part of the scheme so as to reduce the rate of price inflation?
After stewing over this, I don’t think this framework has the explanatory power it claims unless a binding physical housing shortage is doing most of the work.
I still think it’s an excellent analysis of the supply-side financing market and how development finance clears given prevailing prices. But IRRs, hurdle rates, and cap rates adjust to the price level rather than anchoring it. In my view, housing prices can be explained without assuming a quantity constraint at all, and credit and asset-pricing dynamics are sufficient. Without that scarcity premise, the analysis explains why some projects don’t pencil but not system-wide housing unaffordability.
But if housing could be constructed at lower rates of return, the asset market could clear even if rents were lower.
I think where I get stuck is that builders don’t actually set prices. Their underwriting targets get overwritten by marginal bidders, who banks are happy to lend the regulated maximum to and then offload. In that setup, prices clear via credit competition, and post-build rents end up largely decoupled from home prices.
That's true for single family, although even there builders won't build below a certain profit margin. Builders are indeed price takers but they will only build if prices clear thresholds.
In multifamily, investors won't accept rates of return below what they could get in other assets adjusting for risk.
I would say that the capital/financing pushes up rents. It's more that you really can't clear hurdle rates without rising rents.