<p>After 2 weeks and no answers, I think it's fair to say that the odds of a average prices rising as a result of replacing each lower priced dwelling unit with 2 higher priced ones is roughly equal to the odds of prices falling (equal enough that nobody is willing to stake their reputation on a prediction).</p>

CC BY-SA 4.0
2024-03-07T08:22:56.897Z
(-1) This is a bad answer. Unknown probabilities, e.g. that of someone riding into my living room on horseback, are not always 50-50%.
Giskard
CC BY-SA 4.0
2018-11-04T17:30:11.480Z
2018-11-04T17:30:11.480Z
snips-n-snails
<p>I am inclined to believe the deeper part of the answer you are seeking is given in the documentary film The Flaw (2011) beginning around time 16:40 by Professor Robert Frank of Cornell University and George Cooper, Fund Manager at Blue Crest Capital.  They describe the demand curve for assets as differing from simple consumer goods because investors demand &gt;more&lt; of an asset as its value increases.  Further, they can use equity in appreciated assets to borrow against in order to purchase additional quantities of assets, and they can also leverage their purchases with mortgage loans.  Frank and Cooper describe the situation as &quot;highly unstable.&quot;  Now, it would seem feasible to ask your first question, replacing single family homes with double the luxury condos or even high rises, but I am not sure you can remove dense housing and replace it with sparse housing, as there just isn't a practical way for that to take place over significant areas.  Where are you suggesting the people in those dense households to go?  So I will only consider the first scenario of replacing sparse housing with dense housing.   To throw a wrench in the reasoning behind your question, not only is housing different from a simple consumer good, the Supply-Demand Theory itself is only a theory and is not predictive.  It isn't a model and as a theory is only useful in providing an explanation to describe observations in hind sight.  There are cases where some goods are described as &quot;Giffen,&quot; for instance, if people want more of it at a higher price and at lower prices it loses its allure.  Not only is this the case that the theory is non-predictive, the assumptions are too far fetched to apply to real life particularly housing which is intertwined with so many other goods and services and locations and such, as well as being unique for the most part and not reproducible.  Clearly nothing in the housing economy relates to holding all other parameters constant.  The reality in the case you have described of doubling the housing units is that denser areas are much more costly, such as is seen in New York City.  The cost of living is far more relevant than the housing cost independently.  Wages tend to be higher in higher cost areas, and money would seem to be worth less.  Even in NYC developers want to build more and build denser, and buildings that seem too big even for NYC are being proposed, since developers want to build in high cost areas where returns will be higher.  The denser building recognizes the value of location location location over land availability and the economies of scale to the developer of building more connected units on one plot.  The diseconomies of scale are felt as externalities by the community and many of the infrastructure costs are born by the local people (higher energy and water bills, loss of parking or costly parking, crowding and long commutes, less recreational opportunities, etc.) rather than being paid by developers who would not build if they incurred these costs. In terms of the question, is it better to increase supply (even if its luxury housing), recognize that in the US housing has outpaced population for decades.  In some cases people are forced into buying more housing than they want, and more square footage, or more luxury features, in order to gain location or good schools or something a more economical choice would not provide at another address.  Again this is because housing is unique and not reproduceable exactly and this sometimes gives developers the upper hand rather than housing consumers.  The notion of supply-demand theory as a model to bring down housing cost by increasing supply should be regarded as nothing more than a hoax (in my own studied opinion but again, refer to the Frank and Cooper in the Flaw).  Mandating affordable housing is another ball of wax.  There are strange definitions of &quot;affordable&quot; when mandates arise, and we might chalk that up to politics.  The best solution I would propose would be to revitalize small towns across the US that already have an affordable cost of living and a stock of affordable quality homes sitting empty and needing a bit of updating.  Investors would be required to seek returns on industry that creates jobs and boosts the economy, rather than from rents, and the public would receive positive externalities rather than negative ones.  But getting back to affordable housing, there is always the option to build the appropriate types of housing in regions such as to accommodate the elderly who need elevators and accessibility rather than grounds, and so forth.  But housing in many parts of the US were affordable prior to bubbles and crashes such as the tech crash around 2000 and the great financial recession 2008-2009.  For this cause of housing spikes, refer to Michael Lewis &quot;Liar's Poker&quot; and &quot;The Big Short&quot; and the free YouTube documentary &quot;Inside Job&quot; as well as the more esoteric documentary The Warning about deregulation of derivatives (including mortgage backed securities) free on PBS.  Or histories like The Age of Greed in 330.973 / HC106.  To make housing more affordable, we would want to take back bank loans to consumers that are not sold into portfolios to be traded by investors, we would want to reduce debt on a national level, state and local debt, consumer debt, even mortgage loan debt and home equity loans.  We need to reduce the wealth gap and revitalize the middle class, so that the larger part of the population receives a higher portion of national earnings.  In reality, the wealth of the US has been increasing remarkably, yet its people are becoming poorer and part of the poverty is reflected by the building of lower quality housing like dense condos and high rises.  How is that for an answer!</p>

CC BY-SA 4.0
2024-04-09T03:12:10.683Z
"denser areas are much more costly, such as is seen in New York City." That's a bad example because NYC has an unhealthily high ratio of jobs to housing. https://manhattan.institute/article/the-jobs-housing-mismatch-what-it-means-for-u-s-metropolitan-areas
snips-n-snails
CC BY-SA 4.0
2024-05-03T19:11:35.467Z
It's not a bad example, it's a brief one.  Cities very generally are going to have higher cost of living than in smaller towns, aside from towns which are remote.  There are of course anomalies  to the general case.  The logistics and scale of moving goods into cities drives up the cost of living.  Cities have to offer higher wages.  Further, in economics, one does not always encounter economies of scale, there are also diseconomies of scale.  It's common knowledge by cost of living calculators you will get higher costs in major cities.  That should be basic common sense.  Chicago, Miami, LA.
Gwendolyn Anderson
CC BY-SA 4.0
2024-03-07T05:47:15.513Z
2024-03-07T05:47:15.513Z
Gwendolyn Anderson
<p>If every middle class single-family detached home in a sprawling metropolitan area like Los Angeles were each replaced with two luxury condos over a short period, would average real estate prices rise or fall? Would they go in one direction first and then the other direction later?</p>

<p>Or the opposite, if every two luxury homes were replaced by a single middle-class home occupying both parcels, would prices rise or fall?</p>

<p>I'm asking this because I'm wondering whether density or luxuriousness has the greatest effect on real estate prices. Knowing the answer to this would help to answer the question, <em>"To solve the housing crisis, is it better to increase supply (even if it's luxury housing) or mandate affordable housing?"</em></p>

CC BY-SA 4.0
2018-10-17T12:29:20.503Z
Welcome to the site.   I don't think your question can be answered unless you specify what you are assuming about demand for different types of homes (which could be something simple like "given the current pattern of demand").  Market prices depend on both supply and demand.
Adam Bailey
CC BY-SA 4.0
2018-10-17T15:31:18.160Z
I don't want to assume anything. In the real world, is it equally likely that demand in this scenario could rise for each type of home as that it could fall? And that average home prices could rise as that they could fall? If that is the consensus of this Q&A community, then please post that as an answer and I will accept it. Thanks!
snips-n-snails
<supply-and-demand><price>
Flooding the real estate market with luxury homes: will average prices rise or fall?
snips-n-snails
# Flooding the real estate market with luxury homes: will average prices rise or fall?

(Asked by: username_0 on 2018-10-17)

If every middle class single-family detached home in a sprawling metropolitan area like Los Angeles were each replaced with two luxury condos over a short period, would average real estate prices rise or fall? Would they go in one direction first and then the other direction later?

Or the opposite, if every two luxury homes were replaced by a single middle-class home occupying both parcels, would prices rise or fall?

I'm asking this because I'm wondering whether density or luxuriousness has the greatest effect on real estate prices. Knowing the answer to this would help to answer the question, *"To solve the housing crisis, is it better to increase supply (even if it's luxury housing) or mandate affordable housing?"*

**Tags:** supply-and-demand, price

> **Comments:**
> **username_1**: Welcome to the site.   I don't think your question can be answered unless you specify what you are assuming about demand for different types of homes (which could be something simple like "given the current pattern of demand").  Market prices depend on both supply and demand.  
> **username_0**: I don't want to assume anything. In the real world, is it equally likely that demand in this scenario could rise for each type of home as that it could fall? And that average home prices could rise as that they could fall? If that is the consensus of this Q&A community, then please post that as an answer and I will accept it. Thanks!  

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## 2 answers

### Answer by username_0 on 2018-11-04. Score: -2 | Accepted answer

After 2 weeks and no answers, I think it's fair to say that the odds of a average prices rising as a result of replacing each lower priced dwelling unit with 2 higher priced ones is roughly equal to the odds of prices falling (equal enough that nobody is willing to stake their reputation on a prediction).

> **Comments:**
> **username_2**: (-1) This is a bad answer. Unknown probabilities, e.g. that of someone riding into my living room on horseback, are not always 50-50%.  

---

### Answer by username_3 on 2024-03-07. Score: -1

I am inclined to believe the deeper part of the answer you are seeking is given in the documentary film The Flaw (2011) beginning around time 16:40 by Professor Robert Frank of Cornell University and George Cooper, Fund Manager at Blue Crest Capital. They describe the demand curve for assets as differing from simple consumer goods because investors demand >more< of an asset as its value increases. Further, they can use equity in appreciated assets to borrow against in order to purchase additional quantities of assets, and they can also leverage their purchases with mortgage loans. Frank and Cooper describe the situation as "highly unstable." Now, it would seem feasible to ask your first question, replacing single family homes with double the luxury condos or even high rises, but I am not sure you can remove dense housing and replace it with sparse housing, as there just isn't a practical way for that to take place over significant areas. Where are you suggesting the people in those dense households to go? So I will only consider the first scenario of replacing sparse housing with dense housing. To throw a wrench in the reasoning behind your question, not only is housing different from a simple consumer good, the Supply-Demand Theory itself is only a theory and is not predictive. It isn't a model and as a theory is only useful in providing an explanation to describe observations in hind sight. There are cases where some goods are described as "Giffen," for instance, if people want more of it at a higher price and at lower prices it loses its allure. Not only is this the case that the theory is non-predictive, the assumptions are too far fetched to apply to real life particularly housing which is intertwined with so many other goods and services and locations and such, as well as being unique for the most part and not reproducible. Clearly nothing in the housing economy relates to holding all other parameters constant. The reality in the case you have described of doubling the housing units is that denser areas are much more costly, such as is seen in New York City. The cost of living is far more relevant than the housing cost independently. Wages tend to be higher in higher cost areas, and money would seem to be worth less. Even in NYC developers want to build more and build denser, and buildings that seem too big even for NYC are being proposed, since developers want to build in high cost areas where returns will be higher. The denser building recognizes the value of location location location over land availability and the economies of scale to the developer of building more connected units on one plot. The diseconomies of scale are felt as externalities by the community and many of the infrastructure costs are born by the local people (higher energy and water bills, loss of parking or costly parking, crowding and long commutes, less recreational opportunities, etc.) rather than being paid by developers who would not build if they incurred these costs. In terms of the question, is it better to increase supply (even if its luxury housing), recognize that in the US housing has outpaced population for decades. In some cases people are forced into buying more housing than they want, and more square footage, or more luxury features, in order to gain location or good schools or something a more economical choice would not provide at another address. Again this is because housing is unique and not reproduceable exactly and this sometimes gives developers the upper hand rather than housing consumers. The notion of supply-demand theory as a model to bring down housing cost by increasing supply should be regarded as nothing more than a hoax (in my own studied opinion but again, refer to the Frank and Cooper in the Flaw). Mandating affordable housing is another ball of wax. There are strange definitions of "affordable" when mandates arise, and we might chalk that up to politics. The best solution I would propose would be to revitalize small towns across the US that already have an affordable cost of living and a stock of affordable quality homes sitting empty and needing a bit of updating. Investors would be required to seek returns on industry that creates jobs and boosts the economy, rather than from rents, and the public would receive positive externalities rather than negative ones. But getting back to affordable housing, there is always the option to build the appropriate types of housing in regions such as to accommodate the elderly who need elevators and accessibility rather than grounds, and so forth. But housing in many parts of the US were affordable prior to bubbles and crashes such as the tech crash around 2000 and the great financial recession 2008-2009. For this cause of housing spikes, refer to Michael Lewis "Liar's Poker" and "The Big Short" and the free YouTube documentary "Inside Job" as well as the more esoteric documentary The Warning about deregulation of derivatives (including mortgage backed securities) free on PBS. Or histories like The Age of Greed in 330.973 / HC106. To make housing more affordable, we would want to take back bank loans to consumers that are not sold into portfolios to be traded by investors, we would want to reduce debt on a national level, state and local debt, consumer debt, even mortgage loan debt and home equity loans. We need to reduce the wealth gap and revitalize the middle class, so that the larger part of the population receives a higher portion of national earnings. In reality, the wealth of the US has been increasing remarkably, yet its people are becoming poorer and part of the poverty is reflected by the building of lower quality housing like dense condos and high rises. How is that for an answer!

> **Comments:**
> **username_0**: "denser areas are much more costly, such as is seen in New York City." That's a bad example because NYC has an unhealthily high ratio of jobs to housing. https://manhattan.institute/article/the-jobs-housing-mismatch-what-it-means-for-u-s-metropolitan-areas  
> **username_3**: It's not a bad example, it's a brief one.  Cities very generally are going to have higher cost of living than in smaller towns, aside from towns which are remote.  There are of course anomalies  to the general case.  The logistics and scale of moving goods into cities drives up the cost of living.  Cities have to offer higher wages.  Further, in economics, one does not always encounter economies of scale, there are also diseconomies of scale.  It's common knowledge by cost of living calculators you will get higher costs in major cities.  That should be basic common sense.  Chicago, Miami, LA.  

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