At every turn, there is another story about shortages in affordable housing. Part of that is a story about inflation, but part of it is a story about bad policy. Like any rational investor, we have looked into affordable housing because we generally love exploiting mismatches in supply and demand. We’ll never say never, but there are two problems with investing in “affordable” housing: 1. The real money in real estate comes from rent growth. The problem with affordable housing is that if rent grows, it is no longer affordable to those who need it most. 2. Government officials want to make sure that they are protecting renters and that makes new investment unappealing.
There is not an easy solution to the problems of affordable housing. The problem is most acute in the most expensive cities where huge amounts of commerce drive a need for workers whose wages are not high enough to afford living there. But this is where the jobs are. With this in mind, the movement of rents during the pandemic were somewhat unusual. Early on, there were moratoriums on eviction, renegotiated terms and substantial pricing concessions offered by many landlords. What that set off was a reflexive interest in raising rents back to where they were and in some cases to new highs as demand crept higher. Naturally that was an unfavorable situation for renters who couldn’t afford increases and government officials all over the country started asking themselves if rent control was a reasonable solution. While the idea sounds good for renters in the short term, rent control has a long history of slowing new construction in already challenged markets. Every economist knows it’s a bad idea, and many politicians will campaign on it anyway. As mentioned earlier, we love a good supply imbalance, but sometimes the best investment is knowing when to let someone else be the capital.