The puzzle of high home prices and vacant homes

One pattern that stands out in the property market is that although homes prices are at all-time highs, so too is the proportion of vacant dwellings. This is a puzzle. How can it be the case that when housing is in high demand it is also rational to keep more housing vacant?

Australian data shows that the number of residential dwellings has grown faster than the number of households for the past decade, indicating a substantial rise in the proportion of empty homes. This phenomenon has been a broad one, experienced in cities such as SydneyVancouver, and Toronto. Here are some of my previous thoughts on the topic.

The resolution to this puzzle is as follows. Housing is an asset, and in asset markets there is a trade-off between liquidity and returns. A vacant home is a more liquid asset than an occupied home. Timing a sale is easier, the sale is faster, and it is likely to result in a higher price when vacant. When capital gains are a large proportion of the total return, and capturing this return requires timing the market because of price variability, the value to liquidity from vacancy can be high.In short, when yields are low and prices high and variable, the benefits to vacancy are high.

Here’s an example. In Scenarios A and B the total asset return to housing is 10%. But in Scenario A the price is high and yields are low. Here, leaving the property vacant forgoes only a quarter of the total return from the asset. If prices are variable in this Scenario, then timing a sale becomes an important factor for earning the capital gains. Hence, the liquidity from vacancy has a large benefit.

Return Cap. gains Rent
Scenario A 10% 7.5% 2.5%
Scenario B 10% 2.5% 7.5%

In Scenario B the price is low, as the rental yield is 7.5% of the price. Capital gains are also low at 2.5%. In this low price, low capital gain, scenario, keeping the property vacant requires giving up three-quarters of the total return. The benefits from doing so are limited since capital gains are low, and hence less variable.

So there is an economic logic behind the puzzle of high prices and high vacancy, and it stems from the fact that housing is an asset as well as a consumption good. But there is also a criminal logic. Much of the vacant housing in Australia (and probably Canada and a few other locations) is due to money laundering. There are no checks on the source of finance for home purchases and no checks on who the ultimate beneficiaries are in the ownership structure. You can buy a home in a trust or company name, and the identity of the trustees and the company owners need not be disclosed. If you then also do not earn rental income, the corporate structure is protected from scrutiny by tax authorities. Housing is a great way to hide ill-gotten gains.

The criminal logic and economic logic are closely aligned. When most of the return to housing comes from capital gains it makes housing a more attractive place to hide money as three-quarters of the total return can still be had. But when most of the return comes from rent it is much less attractive — and it may require corporate disclosure due to local incomes warranting taxation.

Finally, some new data

On another note, new data from the Australian Bureau of Statistics came out recently, filling one of the holes in the housing data landscape — the share of lending to investors that is directed towards purchasing or building new homes.

This data helps to answer questions about the economic value of new credit in the economy, the real economic effects of monetary policy, and more. In standard economic thinking, low interest rates make borrowing to invest in new buildings and equipment more viable. Because standard economic models do not include secondary markets, the effect on the trade of existing assets is mostly ignored. Yet we can see that the majority of home purchases are simply trades of existing housing, and hence are a key mechanism through which low interest rates mostly cause higher prices without having much effect on new construction.

As you can see in those few months of investor data,  investor lending is not substantially more biased toward new housing than lending for owner-occupiers. For investors, 24% of loans have been for new housing in the past few months, just as 24% of loans to owner-occupiers have been.

The main difference seems to be that the typical existing home bought by owner-occupiers is more expensive than the typical new home, whereas for investors the mean value of lending to both is the same.


  1. apparently students in Vancouver don’t pay rent – they just move into empty houses owned by mysterious Chinese that never visited. There must be lot of Chinese being busted trying to smuggle money out and ended up as organ donors.

  2. – Quite simple.
    – House prices follow the amount of credit/money whereas rents follow income.
    – Puzzle solved.

  3. it’s actually expected to have rise in vacant homes during property bubbles
    house prices have very little to do with real demand (demand for homes to provide a shelter) and a lot to do with market demand (demand for houses as a speculative asset).
    so when credit is so loose and there is mentality of gambling there is never enough homes for gambling. Some developers provide rental guarantee even if place is empty (charge 20% more for a unit and than pay back 5% rental return for two years).

    Just look into Ireland, Spain, or parts of USA where bubbles popped in 2006/7.
    We have been building more homes than needed to provide shelter for decades and in last 20 years there have been only two or three years when that was not the case. We have been building more homes per 100k of new residents than Arizona, Florida or Nevada at the peak of their housing boom that left so many homes empty. And this comparison is favoured toward these locations because most of their population growth was driven by singe or two resident households (well off elderly people moving south) while in our case most of population growth is coming from students and poor migrants that tend to crowd. Group households are the fastest growing housing segment.

    Also census stats became quite interesting when it comes to dwellings. It all started with 2011 census.
    If one looks into occupied and unoccupied household numbers:

    Dwelling count ————————-2016——-%———2011———%
    Occupied private dwellings——8,286,073—88.8 —7,760,314 —89.3
    Unoccupied private dwellings– 1,039,874—-11.2——934,471 —10.7

    according to ABS numbers are slowly rising and in 2016 just before the boom it was 11.2% (around 1m out of 9.3m dwellings were vacant)
    but if you scroll toward the top you’l find that total number of “All private dwellings” is higher than sum of occupied and unoccupied private dwellings 9.9m (much higher than the sum of 9.3m)
    So if we use all private dwellings and subtract number of occupied dwelling we get 1.6m unoccupied dwellings which turns to be over 16% or around 1 in 6 dwellings

    Census data prior to 2011 had unoccupied dwellings calculated as all minus occupied but something happened in 2011 and that changed.
    using the methodology prior to 2011 census unoccupied dwellings as percentage would have been

    9.07% in 2001
    9.24% in 2006
    14.9% in 2011
    16.2% in 2016

    I think what happened is that ABS discovered half a million extra empty homes when they changed methodology so they didn’t want to scare shit out of people so they continued publishing unoccupied data series using the old methodology while in reality there are and has been for a while way more empty homes.

    • All you’ve done is added this residual amount and assumed they’re unoccupied, despite the fact that the same table that you quoted has the explanation –> “Dwelling tables exclude visitor only and other non-classifiable households”. There’s no conspiracy bro. The unoccupied rate is the highest it has been for a generation, and it’s increasing. They ABS data shows that and it is definitely not trying to protect our feelings by attempting a cover up.

      • ABS changed methodology but didn’t disclose that clearly.
        there may not be conspiracy but to make our data comparable to other countries we cannot use ABS unoccupied dwelling data.

        in censuses prior to 2011 they were saying that number given as total is actual total number of dwellings, while in reality a lot of dwellings were not counted (these dwelling existed but were not counted into the total). Now, to align methodology with world standards they started counting them into a total but also continue to exclude some of those from unoccupied.

        In other words,
        ABS “all private dwellings” is equivalent to number of dwellings or housing units in other countries (USA, for example), ABS number of occupied dwellings (number of households) is the same as elsewhere but while others subtract these two to get unoccupied dwellings, ABS invents totally new number “unoccupied dwellings” that doesn’t exist anywhere else.

        So, if we are to compare our percentage of unoccupied dwellings (as many often do) we must use 16.1% number (last census) and compare it with 8.9% in USA (last census). Not to mention that we don’t have places where population is falling leaving unoccupied homes while in USA that’s significant across many areas and big cities. So we don”t have this locals shortages either.
        Clearly our “shortage” spruik is totally fake – we have way to many empty homes and we continue building way more than we need and shortage has nothing to do with house price growth

        • Jumping jack flash

          So true.

          Also known as “Debt fueled demand”. The demand that occurs when price becomes irrelevant and instead is a function of how much debt is able to be obtained.

          The limiting factor then becomes the deposit requirements and the time to save one. Keeping in mind that when debt is infinite – which is the goal, house prices also become infinite, as does the required deposit, and the time needed to save one. The solution to this conundrum is therefore to reduce deposit requirements or offer deposit subsidies.

          • deposit becomes irrelevant quickly as equity builds in the existing homes
            only initial repayments matter at the end and with rates down to nothing it’s the principal that starts dominate, so ultimately only length of the loan is what matters

  4. It’s well known that mainland Chinese don’t want to rent out properties to dirty locals, especially at low yields.
    They prefer to keep their Aussie investment bolthole in pristine condition.

      • WhatcouldgowrongMEMBER

        Often it’s just a concrete box, no nothing. They reckon it’s easier to sell because the new owners can renovate it into what they want.

  5. reusachtigeMEMBER

    It’s not really a puzzle. Australia is a great place to live even when you’re not living here!

  6. Jumping jack flash

    ” How can it be the case that when housing is in high demand it is also rational to keep more housing vacant?”

    Simple. The money lives there.
    You don’t want bogan renters trashing your investment and parking 15 car wrecks on the front lawn – then leaving them there when they finally leave.

    While the debt increases and is applied to properties all around, the capital gains created by the new debt are probably more of a return on investment than the potential rent if you were to let it out to a bogan couple and their 6 kids, all with ADHD.

    Because lets face it. In this environment of easy debt, the “good” renters have all taken the plunge and taken on a house-shaped pile of debt (to create those aforementioned capital gains, of course), only leaving the bogans to rent, each one replete with at least 3 massive attack dogs ready to break the fences and tear up the backyard.

  7. I think we need a public online register of all vacant houses owned by absent landlords. Then the homeless would have somewhere to sleep.

  8. kiwikarynMEMBER

    I have two of them that are sitting empty. I don’t want to rent them out. Laws favouring tenants are being brought in and soon once a tenant is in place it will be almost impossible to get them out (other than by either moving back in yourself or selling the place, and even then that is going to take months). There seems to be a consensus amongst landlords that modern tenants have gotten worse, they have no respect for the properties they inhabit, they do not take care of them, and the law protects tenants from having to pay for the damage they inflict (currently capped at 4 weeks rent). So to avoid large future capital costs in fixing a property, along with the stress, its easier to leave them empty, or shift them to the AirBnB market.