Real estate is non-commoditized for a number of reasons. A big part is that people have wildly different needs when it comes to housing. They don’t just prioritize different things, they often care about completely different factors. In many cases a feature to one person is a bug to an other.
People have tried to build large housing blocks in the past with mixed success. It’s certainly better than being homeless. Particularly in areas where all the previous housing had been bombed to rubble, the prospect of any shelter is incredibly attractive.
The DDR economy isn’t exactly one we want to model here. Remember that the overall system was so bad that people risked getting shot just to get out. Yes, there were many factors to why their economy was terrible but part of it was a Soviet era belief that the government could make major economic policy decisions without having to think too hard about the individual level details.
I wouldn’t read too much into prices in a command economy. Energy was famously cheap because the USSR overproduced energy. It was so cheap that many public buildings didn’t have light switches, they just left them on. That was money that could have been spent on more productive things.
I also remember visiting the USSR during “Glasnost”. They were opening up but they still had the old price controls. Bread and Vodka prices were in single digit Kopecks. 100 Kopeck to the Ruble. The official exchange rate was something like 2 USD per Ruble. If you paid more than 1 USD for 5 Rubles on the street, you were getting ripped off. If you were savvy, 1 USD could get you up to 20 Rubles.
I do like your idea of the government building lots of housing. I’d just modify it a bit. The government builds houses all over the place. Each one is put up for auction with the minimum bid being break-even. If there’s every a time when those auctions don’t get bids, pause new construction in that area until it does.
That algorithm prevents over production of housing, allows for housing in the correct locations (as determined by the residents), automatically adjusts as demand increases, and allows for varied housing to meet the varied needs of a diverse set of residents. It’s also largely immune to speculation. If some hedge fund tries to buy all those houses, they’ll just be left holding the bag when the government pumps out cheaper alternatives.
It would crush real estate as an investment vehicle. Real estate won’t just stop going up in value, we’d be actively working to plateau or even reduce those values. I see that as a feature rather than a bug.
In the economy, every middleman eats a part of the gains. If you have private landlords buying up houses constructed by the city, that then rent them out to poor people, you make up completely unnecessary middlemen. cutting them out saves a lot of the cost, i predict. especially in cities, where people typically rent. maybe it wouldn’t work in rural areas.
I assume you’re responding specifically to my modified proposal.
Middle men do take a cut but they also provide a service. I own my home and it’s a huge PITA dealing with maintenance. It’s not just the cost, I need to do the research on regulations, incentives, materials, contractors. I also take on a ton of liquidity risk; when I rented I could leave on 1 months notice, there’s no way I could sell my house that fast unless I wanted to sell at a huge discount. Look at any homeowner forum and you’ll see that everyone is surprised at the extra work and costs that they never had to think about as renters.
Of course, there’s the question of if that cut is worth the benefit.
I proffer 2 claims:
If the government is willing to supply an indefinite stream of houses, at cost, consumers (residents) will never be forced to pay for a middle man unless they believe they’re getting their money worth. Ie it will be nearly impossible for middle men to “gouge” renters because it will be too easy for them to leave. (for some extra nerd flavor you can check out Akerlof’s “Market for Lemons”, it lays out the game theory for why consumers won’t overpay if they think they’re getting ripped off)
Given that they know they won’t be able to over charge, rational landlords will just avoid bidding on properties that they can’t profit from. Basic economic theory also says that the irrational ones will lose money and eventually go out of business and the government construction policy guarantees that consumers can wait out that market inefficiency period.
i think you’re giving too much credit to the efficiency of the free market.
essentially, once people rent their homes from private landlords, they’ll be comfortable and have a tendency to stay, even if they could get cheaper rates elsewhere. landlords use that fact to systematically overcharge.
My economics background is pretty formal and I’ve found that academic economists are very careful about how they use “efficiency” when it comes to markets.
Modern (in the last 100 years or so) economists don’t spend much time talking about Smith’s “invisible hand”. Instead they tend to use very precise definitions of efficiency and take great care to use them in the right place.
When economists say that “markets are efficient” they’re usually talking about the very specific case of “Pareto efficiency”, which is pretty far removed from non-economists think about when they hear “efficient”. Pareto efficient just means that we’re in a state where nobody’s situation could be improved without degrading at least one other persons situation. That’s trivially (trivial is academic speak for "it’s true but it’s so dumb it’s not really interesting) satisfied by giving all of society’s resources to a single person. Pareto efficiency specifically leaves out any concept of just how good the overall situation is. It makes no comment on how good an economy is for society overall.
Economists also have a concept called “market efficiency hypothesis”. It’s generally talked about in 3 forms; weak, semi-strong, and strong.
“Weak market efficiency hypothesis” states that all information from past stock prices is instantly reflected in current stock prices. The strongest evidence for that is that nobody has been able to create a stock picking algorithm based only on past prices that reliably makes money. If weak form weren’t true, everyone would make a killing and that’s not even possible.
“Semi-strong market efficiency hypothesis” states that all publicly available information is instantly incorporated into stock prices. The evidence for this one is shaky, at best and economists don’t pretend otherwise. If this is true, legitimate stock analysts wouldn’t be able to make money. We know that some of them do make (insane amounts of) money. The only experiments that test this suggest that those traders just got lucky.
“Strong market efficiency hypothesis” states that all private and public information is instantly incorporated into stock prices. Economists know this is false. If it were true, insider trading wouldn’t be possible and we know it happens.
So on to the more nuanced view of efficiency. People have some cost to switching houses; it’s a combination of easily measured costs like inspections, cleaning fees, moving expenses, etc as well as less easily measured costs, such as finding new friends, taking the time to learn the new neighborhood, etc. A landlord can certainly raise rent some amount over construction costs. If people have the option of moving to a place that is priced at construction cost, they will do so when the extra cost gets too annoying for them. That’s the beauty if this system, neither you, I, nor the landlord need to have a say in what the level is, the resident themselves gets to decide. We just need to make sure that they are actually able to make that decision freely and providing an indefinite stream of at-cost housing does exactly that.
Unfortunately it’s not a simple problem.
Real estate is non-commoditized for a number of reasons. A big part is that people have wildly different needs when it comes to housing. They don’t just prioritize different things, they often care about completely different factors. In many cases a feature to one person is a bug to an other.
People have tried to build large housing blocks in the past with mixed success. It’s certainly better than being homeless. Particularly in areas where all the previous housing had been bombed to rubble, the prospect of any shelter is incredibly attractive.
The DDR economy isn’t exactly one we want to model here. Remember that the overall system was so bad that people risked getting shot just to get out. Yes, there were many factors to why their economy was terrible but part of it was a Soviet era belief that the government could make major economic policy decisions without having to think too hard about the individual level details.
I wouldn’t read too much into prices in a command economy. Energy was famously cheap because the USSR overproduced energy. It was so cheap that many public buildings didn’t have light switches, they just left them on. That was money that could have been spent on more productive things. I also remember visiting the USSR during “Glasnost”. They were opening up but they still had the old price controls. Bread and Vodka prices were in single digit Kopecks. 100 Kopeck to the Ruble. The official exchange rate was something like 2 USD per Ruble. If you paid more than 1 USD for 5 Rubles on the street, you were getting ripped off. If you were savvy, 1 USD could get you up to 20 Rubles.
I do like your idea of the government building lots of housing. I’d just modify it a bit. The government builds houses all over the place. Each one is put up for auction with the minimum bid being break-even. If there’s every a time when those auctions don’t get bids, pause new construction in that area until it does.
That algorithm prevents over production of housing, allows for housing in the correct locations (as determined by the residents), automatically adjusts as demand increases, and allows for varied housing to meet the varied needs of a diverse set of residents. It’s also largely immune to speculation. If some hedge fund tries to buy all those houses, they’ll just be left holding the bag when the government pumps out cheaper alternatives.
It would crush real estate as an investment vehicle. Real estate won’t just stop going up in value, we’d be actively working to plateau or even reduce those values. I see that as a feature rather than a bug.
In the economy, every middleman eats a part of the gains. If you have private landlords buying up houses constructed by the city, that then rent them out to poor people, you make up completely unnecessary middlemen. cutting them out saves a lot of the cost, i predict. especially in cities, where people typically rent. maybe it wouldn’t work in rural areas.
I assume you’re responding specifically to my modified proposal.
Middle men do take a cut but they also provide a service. I own my home and it’s a huge PITA dealing with maintenance. It’s not just the cost, I need to do the research on regulations, incentives, materials, contractors. I also take on a ton of liquidity risk; when I rented I could leave on 1 months notice, there’s no way I could sell my house that fast unless I wanted to sell at a huge discount. Look at any homeowner forum and you’ll see that everyone is surprised at the extra work and costs that they never had to think about as renters.
Of course, there’s the question of if that cut is worth the benefit.
I proffer 2 claims:
i think you’re giving too much credit to the efficiency of the free market.
essentially, once people rent their homes from private landlords, they’ll be comfortable and have a tendency to stay, even if they could get cheaper rates elsewhere. landlords use that fact to systematically overcharge.
My economics background is pretty formal and I’ve found that academic economists are very careful about how they use “efficiency” when it comes to markets.
Modern (in the last 100 years or so) economists don’t spend much time talking about Smith’s “invisible hand”. Instead they tend to use very precise definitions of efficiency and take great care to use them in the right place.
When economists say that “markets are efficient” they’re usually talking about the very specific case of “Pareto efficiency”, which is pretty far removed from non-economists think about when they hear “efficient”. Pareto efficient just means that we’re in a state where nobody’s situation could be improved without degrading at least one other persons situation. That’s trivially (trivial is academic speak for "it’s true but it’s so dumb it’s not really interesting) satisfied by giving all of society’s resources to a single person. Pareto efficiency specifically leaves out any concept of just how good the overall situation is. It makes no comment on how good an economy is for society overall.
Economists also have a concept called “market efficiency hypothesis”. It’s generally talked about in 3 forms; weak, semi-strong, and strong.
“Weak market efficiency hypothesis” states that all information from past stock prices is instantly reflected in current stock prices. The strongest evidence for that is that nobody has been able to create a stock picking algorithm based only on past prices that reliably makes money. If weak form weren’t true, everyone would make a killing and that’s not even possible.
“Semi-strong market efficiency hypothesis” states that all publicly available information is instantly incorporated into stock prices. The evidence for this one is shaky, at best and economists don’t pretend otherwise. If this is true, legitimate stock analysts wouldn’t be able to make money. We know that some of them do make (insane amounts of) money. The only experiments that test this suggest that those traders just got lucky.
“Strong market efficiency hypothesis” states that all private and public information is instantly incorporated into stock prices. Economists know this is false. If it were true, insider trading wouldn’t be possible and we know it happens.
So on to the more nuanced view of efficiency. People have some cost to switching houses; it’s a combination of easily measured costs like inspections, cleaning fees, moving expenses, etc as well as less easily measured costs, such as finding new friends, taking the time to learn the new neighborhood, etc. A landlord can certainly raise rent some amount over construction costs. If people have the option of moving to a place that is priced at construction cost, they will do so when the extra cost gets too annoying for them. That’s the beauty if this system, neither you, I, nor the landlord need to have a say in what the level is, the resident themselves gets to decide. We just need to make sure that they are actually able to make that decision freely and providing an indefinite stream of at-cost housing does exactly that.