Cities like London, Paris or Tel Aviv experience frequent complaints about the cost of real estate. Some blame speculators, others blame rich oligarchs from abroad, others say not enough new buildings are being constructed, etc. There are numerous proposals on how to resolve the issue: rent controls, high taxes on vacant properties, allowing squatters to settle in empty buildings, removing restrictions on height - all of them with significant trade-offs and from what I see few end up reducing the pressure on the market.

Have any well-off cities managed to keep real estate prices on a reasonable level? If so, how did they achieve it?

  • Define reasonsble. – acpilot Apr 27 '17 at 17:54
  • @acpilot comparable to inflation levels – JonathanReez Apr 27 '17 at 17:57
  • No because when you have growth the most desirable locations become more desired and people are willing to pay more to get it. The prices go up because people are willing to pay those prices, If people refused to pay those prices then the prices would not be so high. – SoylentGray Apr 27 '17 at 19:45
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    Under communism those market forces wouldn't be as strong and central planning may have created housing surpluses sometimes. – user9389 Apr 27 '17 at 20:16
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    @JonathanReez - Yes tons of them get elected with those promises. They are incredibly successful... ohh you meant in actually doing something.. There have been several socialism experiments. None of them have been even close to successful though. – SoylentGray Apr 28 '17 at 14:45

This is both broad and interesting question. According to Property Price Index 2017, London is indeed one of the most expensive when it comes to property prices and the most expensive in Europe.

Unfortunately, high prices have several root causes, making hard to tackle this phenomenon (source):

  • Growing demand - [...] demand for housing has been rising at a faster rate than the supply.
  • Constraints on the building of houses - difficulty to find new land around greater London, preserving “greenbelt land”, existing homeowners have a vested interest in keeping the supply as low as possible in their area, lack of Social Housing
  • strong demand for home ownership
  • Speculation
  • Low Interest rates

There are several methods that can be used to cap the prices, most of them having some drawbacks (source):

  • higher interest rates - would have significant impact on reducing housing affordability, but might clash with controlling inflation and economic growth
  • mortgage regulation - limiting the availability of mortgages through regulation. However, mortgage lending is already quite scarce.

The same article emphasizes that none of these measure do not attack the actual problem: disequilibrium of supply and demand. This article dives into details about demand growing faster than supply.

Other methods that can be used are:

Apartment price control in Finland:

According to professors Niko Määttänen and Ari Hyytinen, price ceilings on Helsinki City Hitas apartments are economically highly inefficient. They cause queuing, and discriminate against the handicapped, single parents, elderly, and others not able to queue for days. They cause inefficient allocation, as apartments are not bought by those willing to pay the most for them—and those who get an apartment are unwilling to leave it, even when their family or work situation changes, since they can't sell it at what they feel the market price should be. These inefficiencies increase apartment shortage and raise the market price of other apartments.

Rent control in New York City

The government put in price controls, so soldiers and their families could pay the rent and keep their homes. However, this increased the quantity demanded for apartments and lowered the quantity supplied, meaning that available apartments were rapidly taken until none were left for late-comers. Price ceilings create shortages when producers are allowed to abdicate market share or go unsubsidized.

  • Land value tax should work for lowering the rent, according to Wikipedia:

At sufficiently high levels, land value tax would cause real estate prices to fall by removing land rents that would otherwise become 'capitalized" into the price of real estate

However, this kind of taxation is not very widespread:

Land value taxation is currently implemented throughout Denmark,7 Estonia, Lithuania,[8] Russia, Hong Kong, Singapore, and Taiwan; it has also been applied in subregions of Australia, Mexico (Mexicali), and the United States (e.g., Pennsylvania).

Keeping real estate prices at reasonable prices - e.g. Bucharest, Romania, place 48 in Europe's price to income ratio.

This is clearly not an "well-off city", but it can be used as a reference to what lead to reasonable prices for rents and housing:

  • less constraints on building houses - most of the constructors built with few restrictions. This was a benefit for the consumers, but this rendered town planning almost useless and also reduced the green space
  • already existing high home ownership - according to this article (Romanian), house ownership is more than 95% in Romania. So, supply should compensate only for the late comers
  • much stricter mortgage regulation - higher advanced value, lower warranty values, lower accepted debt/income value and other regulations lead lower loaning
  • less State interference - Romanian Government ran a program called The First House which allowed banks to have less risk and lower the advance to only 5%. The programs conditions changes and the advance is more than 15% now, making loaning harder to get.
  • context - due to high ownership as opposed to renting and the fact that most of the owners are private individuals, in most cases they do not afford to keep the houses empty (due to fixed costs), so they lower the price to get a client faster).

Note: one comment talks about "socialism experiments". Romania has been under the Iron Curtain and thus had a communist regime until the end of 1989. House construction and prices were centrally controlled and almost everyone had a place to stay. Some argue that this was a "success". However, they forget that the largest houses and flats went to politicians, State Security members and informers.

Anyway, this was possible because supply and demand were quite balanced.

Conclusion: I don't think there is a sustainable way to prevent rising prices for real estate, as long as supply does not follow the demand.

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    Perhaps you could also take decentralization into account? E.g. Germany doesn't really have a 'mega-capital', as both their government and their industry is quite spread out around the country. – JonathanReez Apr 30 '17 at 20:14
  • @JonathanReez - yes, that's an interesting aspect. I will try to improve the answer to include it. – Alexei Apr 30 '17 at 20:46
  • @JonathanReez - I am trying to find some good articles about how decentralization helped Germany to keep reasonable prices, but it seems that they are facing the same problems, as seen here or here. I will have to dig more. – Alexei Apr 30 '17 at 21:07

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