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In many parts of the world, people buy a house expecting its value to increase over time.

But if is widely believed that the building's value will increase, what incentive is there for the developer to sell the property? Why not hold onto the property, and sell it later at a higher price?

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  • $\begingroup$ Long-run returns on stocks are higher than those on houses. So if the developers really wanted to speculate, they would be better off selling their houses and buying stocks. $\endgroup$ – Ubiquitous Jul 4 '18 at 7:03
  • $\begingroup$ Hoarding is bad for real world economy, well, unless the country is run by oligarchy monopoly. Some country city councils may even slap tax tariff over vacant property, as it cost the city maintenance of the facilities and hamper the local economy. $\endgroup$ – mootmoot Jul 5 '18 at 11:54
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They are different businesses.

Developers make more money developing than landlording. Some do both. But they are different businesses entirely. Also, there is a limited supply of capital and carrying that capital has a cost.

For example. Let's say Bob the Builder borrows $10M to develop a project. The bank lends on the development. Not the completed project. That requires a different type of loan structure, depending on the use: residential vs. commercial, owner occupied residential vs. residential rental, etc.

After the project is completed, Bob will usually look to sell. If he holds the property as a rental or a commercial, he then switches hats and becomes a landlord. And the asset will require refinancing, as above described. Some builders choose this route. But most do not. As their skills, expertise, equipment, personnel, interests, etc. are all used best and most profitably building and developing.

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The simple answer is that if it is widely expected that the value of an asset will increase in the future, then the value should rise today as people bid up the price of the asset by trying to get the higher return it can provide. In other words, if an asset is trading at a specific price, the average investor (a term I won't make precise here) should think this is the right price for the asset. Individual house producers can of course choose to take a position in the housing market one way or another (and can have an opinion on the value of the asset which is different from the average investor's opinion), but a scenario where everyone expects risk-adjusted real estate returns to be high simply would not happen.

The reason this answer is a bit too simplistic is because there are trading frictions in the housing market - if you think real estate returns are going to be high and you want to buy some houses to get that extra return, it's not as easy as buying some shares of a mutual fund. To a first approximation, however, the simple answer should be good enough here.

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Why not hold onto the property, and sell it later at a higher price?

Here is a non-exhaustive list of why not:

  • Real estate bubbles going burst.
  • Depreciation and maintenance costs.
  • A location may become less attractive in the long term due to mass emigration, criminal activity going up, collapsed economy, business could relocate to somewhere with incentives.
  • In some countries, the government might seize vacant property for "welfare" reasons.
  • The growth in property prices might still not be worth holding the property for an extended period.
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  • $\begingroup$ Taxation is also a consideration in some countries. Where there is a tax on capital gains with certain exemptions, a developer holding many houses purely for financial gain is more likely to be taxed than an individual owning a house as a home. $\endgroup$ – Adam Bailey Jul 7 '18 at 11:04
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People buy houses because they want to live in them, and hope the real market price will appreciate. People who buy (or buy shares in) investment properties do so with the expectation to earn a rental income flow, and also hope to choose properties they believe will appreciate in real market price.

Developers make money from developing property on land. If they were to hold onto significant illiquid assets for longer than necessary, this would prevent them from accessing financial resources which would enable them to undertake further development activities.

In some cases, a developer would have rational interest to even sell at a loss. For example, if a second development project had high prospects for profit, and the sale would enable access to finance for the new project, or to pay back investors/creditors in the first project in order to access additional credit financing.

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