At Issue VA - New Housing Supply Fosters Affordability at All Income Levels

Date postedFebruary 29, 2024
At Issue,

People generally understand the relationship between supply and price across the economy for a wide variety of goods and services. As the supply of a good increases, its price typically decreases, and vice versa. 

We have seen this effect firsthand in the Washington metropolitan region as it relates to housing supply.  The region has seen a surge in apartment construction over the last four to five years.  Fueled by low interest rates and abundant financing, the region has kept pace with, and even exceeded, its housing supply goals.  We have seen the addition of approximately 15,000-16,000 units to the market each year since 2020, with another 41,485 units in the pipeline. The result has been a reprieve for a strained market in the form of tempered year-over-year rent growth.   

In spite of this evidence, significant segments of the public do not recognize the operation of the laws of supply and demand when it comes to housing, despite understanding how they apply generally. Two nationally representative surveys of urban and suburban residents conducted in 2022 show this split understanding. When asked what would happen to used car prices if supply chain problems limited the production of new cars, 85 percent of respondents anticipated prices to increase. This is exactly what happened to used car prices during the COVID-19 pandemic. Yet when asked how a 10 percent increase in a jurisdiction’s housing supply would affect rents, 60-70 percent of respondents believed that rents would stay the same or increase.   

Supply skeptics argue that new supply won’t lead to moderated or decreased rental rates for two reasons. First, that the amenity effect of new housing increases demand and pushes rents upward, leading to increased renter displacement and second, that most new supply is created with high-income households in mind and does little to alleviate affordability challenges in for lower-income renters. 

But new research by the faculty directors of New York University’s Furman Center directly rebuts these arguments. The research points to evidence from recent studies demonstrating the positive impacts of additional housing supply on the affordability of local housing markets. These studies show the benefits of new housing supply to include decreases in neighborhood and city-wide rents and the filtering of benefits produced down to lower-income households. They conclude that “current evidence gives little support to the claims of supply skeptics.” Below is a list of conclusions from the studies analyzed by the NYU authors:

New housing construction lowers rents both within the neighborhood where construction takes place and city-wide. This supply effect is larger than any amenity effect. 

  • Pennington (2021): "I find that rents fall by 2% for parcels within 100m of new construction. Renters’ risk of being displaced to a lower-income neighborhood falls by 17%. Both effects decay linearly to zero within 1.5km."
  • Asquith, Mast & Reed (2023): "New buildings decrease rents in nearby units by about 6 percent relative to units slightly farther away or near sites developed later, and they increase in-migration from low income areas." "If buildings improve nearby amenities, the effect is not large enough to increase rents."
  • Li (2022): "For every 10% increase in the housing stock, rents decrease 1% and sales prices also decrease within 500 feet. In addition, I show that new high-rises attract new restaurants, which is consistent with the hypothesis about amenity effects. However, I find that the supply effect is larger, causing net reductions in the rents and sales prices of nearby residential properties."
  • Mense (2023, p.2):  a “1 percent increase in yearly new housing supply causes the average rent level [in the local municipality] to fall by 0.2 percent.”

In a process called filtering, households vacate more affordable units for newly constructed ones, freeing up those lower-rent units for others. Sequences of moves filter down benefits to lower-income households.

  • Mast (2023): “reallocation resulting from new housing construction spans a diverse set of neighborhoods and is likely to loosen a wide spectrum of housing markets.”
  • Bratu et al. (2023): Over a two-year period, “for each 100 new, centrally located market-rate units, roughly 31 (66) units are created in the bottom-quintile (bottom half) of neighborhood income distribution through vacancies” (p.2). The authors conclude that “low-income individuals also benefit from new expensive housing through a moving chain process, even when new units are allocated to individuals higher up in the income distribution” (p. 7).
  • Mense (2023): “one newly supplied housing unit triggered about 4.75 moves in the rental market in the subsequent twelve months” (p. 24). “Restrictions to market-rate housing supply are harmful to low-income renters, as even the supply of single-family homes can lower this group’s cost burden” (p. 23).

New market-rate housing supply reduces displacement of existing renters.

  • Asquith Mast & Reed (2023): “net migration from low-income areas does not meaningfully change during the sample period.”
  • Pennington (2021): “On average, the risk of displacement falls by about 17 percent for households living within 100 meters of an additional new project.”

Upzoning generally results in increased supply and density over time.

  • Freemark (2023, p. 2): Surveyed the literature early in 2023 and concluded that the research “shows that upzoned areas may or may not experience increased housing construction over the short-term but likely experience small increases over the long-term, compared to areas without such changes.”
  • Anagol et al. (2023): “Six years after Sao Paulo instituted the change, the researchers found that total housing units for sale increased by 10 percent on blocks in which [maximum allowable built-area-ratio] was increased, as well as in aggregations of the blocks that represent larger neighborhoods. As for the city as a whole, the authors estimated that the policy change would result in a 1.9 percent increase in the overall housing stock over the subsequent ten-year period. 
  • Greenway-McGreavy and Phillips (2023): “Using pre-trends in the control (nonupzoned) areas to construct a counterfactual to bound their estimates, they find significant evidence that the upzoning increased housing construction, and estimate that the upzoning generated almost 22,000 additional dwellings over the five years following the zoning reform, a number equal to 4.11 percent of Aucklands housing stock.”
  • Dong (2021, p. 11): Studied the effects of upzonings in Portland, OR and found that upzoning and higher density zoning “speed […] up housing developments and increase housing supply.”

It is important for policymakers to message the proven benefits of new housing supply on affordability given the entrenched supply skepticism within their constituencies and various advocacy organizations. As the mountain of evidence presented by recent studies shows, it’s time to put supply skepticism to bed. 

At Issue is compiled by the Apartment and Office Building Association (AOBA) of Metropolitan Washington, and is intended to help inform our elected decision makers regarding the issues and policies impacting the commercial and multifamily real estate industry.  
 
AOBA is a non-profit trade organization representing the owners and managers of approximately 185 million square feet of office space and over 400,000 apartment units in the Washington metropolitan area.  Of that portfolio, approximately 69 million square feet of commercial office space and 169,000 multifamily residential units are located in Northern Virginia.  Also represented by AOBA are over 200 companies who provide products and services to the real estate industry.  AOBA is the local federated chapter of the Building Owners and Managers Association (BOMA) International and the National Apartment Association.  
 
Along with input provided by AOBA member companies, the following data sources and references were used in compiling the attached report:  

AOBA strives to be an informational resource to our public sector partners.  We welcome your inquiries and feedback. For more information, please contact our Senior Vice President of Government Affairs Brian Gordon at bgordon@aoba-metro.org.

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