An Institutional Shortcoming of the US Housing Market

The New York Times of June 19 reports on the fate of so-called three decker homes in cities like Boston that are being foreclosed on at disproportionate rates, left to decay and even razed.

The Hague and Amsterdam are home to many similar late 19 century three level houses. Some have a double front door and are divided into two homes, a ground floor apartment with garden and an apartment occupying the first and second floor. Many were designed as single family houses though.

Since these houses are located in prime locations in recent years it has become popular to split them into three or more apartments, which are then put up for rent. The larger apartments at the best locations can cost up to 2,500 euro or more per month.

I don’t know the proportion of rental vs private property in these areas in Amsterdam and The Hague. According to Statistics Netherlands, the agency responsible for collecting and processing national statistics, in January 2006 54 percent of all houses in The Netherlands were owner-occupied and 43 percent were tenant-occupied. My hunch is that, in these neighbourhoods at least, there has been a shift from owner-occupied single family homes to tenant-occupied apartments.

I am unfamiliar with the particulars of the U.S. and Boston housing market. Perhaps there is no market for rental properties or perhaps building regulations and the architecture of these houses makes it difficult to transform them into separate units. Yet I am surprised that even in a city such as Boston, which is home to several top universities, these three level houses aren't being converted into luxury apartments. I'd imagine there is a market for apartments for young single urban professionals, post-docs, graduate students, professors with dual tenure etc.

The urban renaissance of inner city neighbourhoods in Amsterdam and The Hague only started in the mid 1990s. It's hard to believe today, but there once was a time when people moved out of the city. Now the canal area in Amsterdam is fashionable and very expensive. Investors who had the foresight to buy these three level houses and convert them into luxury apartments have subsequently earned very high returns.

With an investment window of 10 years surely some of the houses that are now being left to decay in Boston should be a good investment? Unless that is there are fiscal laws and other regulations that make renting less attractive than home ownership. In The Netherlands tenants are protected by law and cannot be expelled from their homes without sufficient prior notice. Home ownership is fiscally attractive because interest on mortgage loans is tax deductible. Hence my suspicion that I must be missing something and that there are some institutional factors at play in the New England housing market, which prevent these in my opinion nice houses from being converted into apartments.

In the picture: some art deco houses in The Hague. Hard to believe, but number 17 and 19 in the last picture used to be two houses, that have been converted into eight apartments each. The practical problem of the two letterboxes has been solved by an external mailbox for each apartment. In some houses the tenants have to sort out the mail themselves though.