Your Humble Guest Writer Talks Real Estate Economics and New York City

By Nathan Tankus, a writer in New York City. You can follow him on twitter at @nathantankus

This week I spoke to Michal Rozworski, a Canadian political economy writer and researcher, on the political economy of New York City. I focused on why the simple supply and demand stories people tell about real estate don’t work. To summarize one key issue: A textbook supply and demand curve assumes not just one homogenous good, but a good that is unchanged by the process of supplying it. This assumption of course breaks down completely when talking about real estate. When you build a luxury high rise you aren’t just supplying new apartments. You’re supplying wealthy neighbors, more luxury services (as landlords raise commercial rents to the levels that high end retailers can afford) and a whole range of other things bundled up in what you pay for with your rent.

The second point I focused on here is that real estate developers care not just about their rental income but the value of their building, i.e. capital gains and losses. In a textbook it might make sense to accept the highest price bid you get for every apartment on the market but in reality renting out luxury apartments for cheap has all sorts of negative spillover effects. Wealthy classists (or racists…) leave or threaten to leave, people demand lower rents (since the guy in 4-A is getting a much lower rent) and it’s taken as a bad omen about future rental income which can lower the value of the building and negatively impact your access to credit. In short, what maximizes rental income in the short term can cause capital losses and negatively impact future rental income.

J.W. Mason also spoke to Rozworski about the ongoing controversy over the potential for economic growth in the United States. This is a followup to three pieces he wrote “Can Sanders Do It?”, “Plausibility”, and “Plausibility, Continued”. Naked Capitalism has also covered this topic extensively here, here, here and here.

You can listen to both interviews here.

Print Friendly, PDF & Email


  1. Steve H.

    “Local government exists for one reason and one reason only: to decide how land gets used. Everything, and I mean everything, that local government does deconstructs to a decision about which landowners will win, and which will lose.

    Who gets rich, and who doesn’t.”

    – Gregory Travis

    1. JTMcPhee

      …the narrow vision of the rentier…

      And neolib economists can protect their territory and framing by noting that, while a tad more complicated than what’s in the Samuelson Econ 101 text, all that stuff described in the post is reducible analytically to “price discovery…” While the world burns, and a Soylent meal is in all our futures…

  2. H

    Yabber Yabber ok so I agree with all that the writer says on NYC real estate economy. However the fact is this: do we only want to cater for creepy, greedy billionaires to the exclusion or most othher folk or do we want to built a world where, with a little nous, most people will be able to afford that most basic of human needs: a HOME. Bring on devaluation says I.

      1. HotFlash

        Nathan, possibly am insufficiently caffeinated, but where can I listen to this interview? I am a member of a newly-formed Land Trust in TO, am trying to learn more about how real estate works, and is worked.

        1. diptherio

          The link is at the end of the article. Take two cups of coffee and call me in the morning…

  3. agkaiser

    Gotta love the magic market, where perpetual motion of money creates wealth ex cathedra, ex nihilo. It tells us “Ex nihil, nihilo fit” is a quaint and obsolete notion. Will they be so sanguine when the bubble bursts.

  4. Seth A. Miller

    Actually, in my experience (as a tenant-side housing lawyer in NYC for nearly 30 years), property value is the only thing developers, and most landlords, care about. Rental buildings are generally valued according to the rent roll, and a vacant building with a high rent roll is worth a great deal more than a tenanted building full of regulated, or even market-rate, tenants. As long as refinancing is freely available, owners can sustain the business of buying and selling properties while actually decreasing the number of people they actually provide with shelter. The solution would be to prohibit, or tax heavily, any loan that is not based on the existing rent roll of living breathing tenants. I usually get a chuckle and an “if only” sigh when I say this to my colleagues in the tenant movement.

    1. Nathan Tankus

      definitely agreed on this point. but it seems to me this isn’t so much that they don’t care about rental income but that seeking rental income would make the short term capital gains they’re looking for more difficult to realize. This is an extreme case where expected short term capital gains is so high that leaving the building empty maximizes their expected income.

      1. susan the other

        so capital gains get punished if the building has been earning rents and taking depreciation – so much that it is more profitable to not rent the building at all. so i wonder how such a huge investment remins so valuable – because it just goes from one person looking for cap gains to the next and because the apartment supply is thus restricted rents keep going up making the building, ironically, worth more according to appraisal protocols. nutty. like apartments/buildings are a commodity posing as a business, an equity and an asset all at the same time. what’s a tax code to do?

      1. clinical wasteman

        Yes, thanks Seth, Susan and Nathan for the most succinct description of — among other things — the London rental no-protection racket that I can recall seeing, at least any decade lately. Also complete agreement with Seth about use and exchange value being the practical, not to say life-and-death, point here.
        Having lived for while in the rent-controlled Montréal of the 1990s and since then in London (not the one in Ontario) it’s hard to imagine the payoff that could make giving up the former arrangement rational or ‘worth it’, at least unless the same controls applied everywhere else in the same city. (Which, there/then, they did, so the rent controls didn’t lock anyone into unwanted conditions either.)

  5. human

    How about removing owner supplied property valuations of untenanted property for property tax deduction valuations and instituting some socially responsible value.

  6. steelhead23

    I find it interesting that value is much more strongly affected by perceptions (low rent = poor quality) rather than maximizing one’s marginal utility. Where have I heard that before?

  7. Randy Weinstein

    Hi Nathan —

    Did a summary listen to the piece and will listen again tonight when I can give it my full attention. Have been enjoying your recent pieces here at NC.

    I was particularly interested in your discussion of how landowners may find it in their best interest to leave properties vacant for extended periods of time in speculative anticipation of eventual occupancy by those willing to pay prices in no way justified by supply status.

    I am an 18-year resident of the West Village and am curious what your take is on the enormous number of commercial vacancies on 7th ave. between 14th St. and Houston. It’s starting to look like a ghost town but I don’t think the realtors are going broke. Also, do you think all those fashion clothing stores on Bleecker St. are able to pay their rent based on retail business? This is anecdotal of course but I walk down that street quite a bit as I live just west of Hudson and I rarely see customers in any of them. How can they pay those exorbitant rents without apparently selling anything? Mail order… floating crap games?

    1. Randy Weinstein

      Editing myself here.

      Seth Miller’s comment above and your response provided some useful insight. My remaining question is how are all those fashion stores able to pay the rent if they aren’t generating any retail business?

      1. Lucan

        Have you gone into the fashion stores? High-end fashion stores can survive easily in a market like NYC with very few sales thanks to the exorbitant markups. Even if no customers show up to the store, most stores participate in some sort of online store and deliver the clothes so customers in the physical location are unnecessary. And if on top of that it’s a national chain or franchise the HQ will probably subsidize their highly visible flagship in NYC.

    2. cnchal

      . . . How can they pay those exorbitant rents without apparently selling anything? . . .

      Money laundromats.

    1. Seth A. Miller

      The lease holder should see a lawyer. In most neighborhoods in NYC today (and I imagine the same holds for rent regulated places in DC and California), the kind of price a buyout can command will not get the tenant enough money to buy equivalent housing. Conceptualizing it is something straight out of Karl Marx: the tenant wants use value, but the transaction only happens at its exchange value. There are plenty of occasions, though, when the money is right: in buildings facing demolition and redevelopment, or buildings facing a drastic upgrade and condo conversion, or in those few neighborhoods where prices remain low, or where the tenant is happy to move (and the landlord doesn’t know it and can’t figure it out), or where the tenant is facing an unacceptable risk of eviction.

  8. RUKidding

    Interesting. Thanks. This might explain somewhat similar situations in Sacramento CA. To whit, we have had some billionaires pay off our crooked Mayor, Kevin Johnson, to ensure that a new basketball arena is paid for by taxpayers. All accompanied by how said arena is going to bring jobs galore for everyone, while signifying a vast great renaissance of jobs and money for Sac-town.

    To me, it all looks like bs.

    Anyhoo, there’s lots of downtrodden downtown properties that have been snapped up recently, and lots and lots of building going on (in addition to the arena). Many high rise apt/condos going with many of them featuring very very expensive condos, of $750k and up. This is very high for Sacramento (may be cheap elsewhere, like Bay Area, but not here).

    I’ve always wondered who will have the money to buy these properties. I mean, after all, there’s only so many TechBros in Silicon Valley (and they don’t want to ruin their eyesight with all the homeless in Sac-town).

    But I guess, if these properties can sit vacant while touting these luxury units… and make money doing so even if units sit vacant… well, that ‘splains it, I think.

    Great. And of course, all it does is drive up rental rates for those places that actually, you know, rent out units to humans.

    Sheesh. Screwed again. No surprise. Thanks for the info.

    1. polecat

      I grew up in Sacramento. Up until about 1980 it was a sleepy stepchild of the bay area….known for state government, cows, and the Pig Bowl……and it wasn’t a bad place to live, up to that point in time….. Left just a little over a decade ago…glad I did! It’s become a congested, sprawling, increasingly unafordable gang infested shithole!

  9. downunderer

    Apologies for a sidetrack, but this item deals mostly with financial games involving new or renovated property, which reminds me . . . .

    Have I missed any discussion of the fallout from the sudden de-linking of the chain of title maintained by local County Recorder offices some years ago, when many/most courts seemed to start treating fraudulent or MERS-based claims for mortgage entitlements as valid? I don’t even know what terms to google.

    Is there now a value difference between a property with a broken chain of title and one that has not changed hands since before the legal fiascos that followed MERS?

    1. Lucan

      AFAIK, that’s not something that appraisers take into account when preparing their valuations.

      Of course, it’s probably too soon to answer this question. The crapstorm of broken chain of title still hasn’t been properly digested by the courts, so we won’t know for a few more years.

Comments are closed.