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 Apr 27 '17 at 17:57
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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. Apr 28 '17 at 14:45
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    Tokyo is the leading example. I'm make a proper post if I have time.
    – ohwilleke
    Aug 19 '21 at 2:36

This is both a 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 it 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 measures 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 a "well-off city", but it can be used as a reference to what lead to reasonable prices for rents and housing:

  • fewer 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 latecomers
  • much stricter mortgage regulation - higher advanced value, lower warranty values, lower accepted debt/income value and other regulations lead to lower loaning
  • less State interference - the 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 changed and the advance is more than 15% now, making loans 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. 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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    I think if the largest houses go to politicians, but everyone gets a house, that's still significantly better than the situation where (regardless of who the largest houses go to) not everyone gets a house.
    – user253751
    Aug 19 '21 at 10:26
  • Is there any evidence that lowering related taxes has ever lowered housing costs? Certainly every reduction in Stamp Duty in the UK has only increased housing costs as it adds fuel to the market. Equally reduction in interest rates and cheaper mortgage costs for landlords never seem to have a corresponding reduction in rents. So the Wikipedia sourced land tax idea seems a complete non-starter from my experience.
    – Jontia
    Aug 20 '21 at 8:43

In Paris at least, the question could be reframed slightly. There have been periods of “housing crisis” (especially after the second World War) but not a continuous long-term increase in real estate prices (relative to everything else).

Specifically, between the 1960s and the early 2000s, prices (corrected for inflation) went up and down and never really got wildly out of sync with income. Growth and unemployment also had ups and downs but Paris was already a rich city with a flourishing economy. At the end of the 1990s, it was still conceivable that someone could buy real estate in Paris itself with income derived from an (upper) middle-class job (it was by no means open to everybody but still a perspective for many without being independently wealthy).

By contrast, since 2000, real estate prices have increased almost three-fold in Paris proper, two-fold in the broader Paris region relative to income. In fact they have also increased quite a bit in France in general (i.e. the increase is felt in large provincial cities too) but not as much. At the same time, the proportion of wealth that's inherited has also increased a lot, bringing France back to levels last seen in the 1930s (around 55%), after several decades where it was down to 20-30%.

All this suggests the complaints do not result only from the dynamics of the real estate market in a narrow sense but also from broader changes in the economy and the feeling that even a good job is not enough to own your own home or build up some wealth.

  • Excellent points, didn’t know about the inherited wealth thing. Aug 19 '21 at 14:19
  • What is the cost of real estate in Paris, vs the cost in other parts of France?
    – jamesqf
    Aug 19 '21 at 22:48
  • @jamesqf It's twice as expensive (per square meter, units tend to be smaller and older in Paris) as the next most expensive large city (Lyon), almost three times as expensive as even some fairly attractive cities like Nantes or Toulouse and 5 times as expensive as real estate in smaller or declining towns. Note that I am referring to the prices for Paris proper, which is tiny compared to many cities but the towns just next to it are almost as expensive.
    – Relaxed
    Aug 20 '21 at 8:29
  • If you follow the link, the red curve is Paris, pink is the broader Paris region, blue is everything outside of the Paris region, and the thin green curve is Lyon (but it's indexed on the prices in 2000 so not a good way to compare absolute prices).
    – Relaxed
    Aug 20 '21 at 8:31
  • @Relaxed: Then I can't help but wonder why people want to live in Paris, especially if salary differentials don't compensate for real estate price differences. Especially these days, when many jobs can be done remotely.
    – jamesqf
    Aug 20 '21 at 16:37

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