One common argument against new urban housing runs as follows: “If we build new housing, it will all be bought up by rich investors who will sit on it. So new supply doesn’t restrain housing costs.” This argument (at least as I have phrased it) strikes me as absurd. Here’s why: for the argument to justify restraining supply, the argument presupposes that if you build 100 new condos/houses/apartments, every single one of them will be bought by an investor, and every single investor will irrationally choose to sit on the unit rather than renting it out. I can’t prove this is wrong, but it seems really hard to believe.*

Even leaving aside the logical weirdness of the argument, it seems to have a questionable factual basis.

If there was really a wave of nonresident investors in expensive cities, we might find (1) that the most expensive markets had the highest housing vacancy rates and (2) that these vacancy rates have been rising as housing costs rose. But Census data suggests otherwise.

Here’s some data: (all for central cities, not metros)

Expensive 2010 2015 Manhattan 12.7% 13% San Francisco 9.8 7.9 Los Angeles 6.7 6.5 San Diego 7.8 7.1 Boston 9.1 8.0 Not so Expensive 2010 2015 Dallas 12.8% 10.6% Houston 14.0 12.1 Philadelphia 14.1 13.3 Chicago 13.8 13.2

By and large, the expensive cities have lower vacancy rates- exactly what you would expect in a free market. The only exception is Manhattan. But it seems to me that if pied-a-terres led to higher rents, Manhattan’s empty-house rate would have climbed as rents did- which does not seem to have been the case.

The only way to save the “empty house” theory is to suggest that expensive cities’ empty houses are different from everyone else’s – that is, they are especially likely to be prime properties held by investors, while Chicago’s empty houses are more likely to be rotting-out houses in tough neighborhoods. But I do not know of any way of proving or disproving such a theory.

*I note, however, that there is a much more reasonable version of the argument- that even though new supply does some good because some people buy the housing units and live in them, the supply would do even more good if cities did something to discourage investment by nonresidents. This argument would not justify restraining supply, but might justify policies to discourage investment by nonresidents. I am not going to address such policies in this blog post.