The debate over housing development and its impact on property values, rents, and housing affordability has raged on for years. On one side, there are the “Nimbys” (short for “Not In My Backyard”), who often oppose new housing construction, fearing that it will lower the value of their own properties. On the other side, we have advocates of “supply scepticism,” who argue against new market-rate housing developments, believing they may increase rents and property prices, thereby hindering their goal of making housing more affordable for low-income individuals and families. However, recent research challenges these beliefs and underscores the importance of building new homes to reduce housing costs for everyone.
Supply and Demand in Housing
Traditionally, the laws of economics dictate that an increase in the supply of a good or service leads to a decrease in its price. This principle holds true for most commodities and services, but when it comes to housing, things appear to be different. The supply sceptics argue that increasing housing supply will drive up prices and rents. However, a recent study conducted by social scientists in California revealed a significant divergence from this economic principle.
The study found that when Americans were asked about the impact of a 10 percent increase in regional housing supply, 40 percent believed that prices and rents would rise, while only a third thought they would fall. This discrepancy suggests a fundamental misunderstanding of the housing market’s dynamics.
Debunking the Myths
Myth 1: Only Affordable Housing Increases Affordability
One common argument made by supply sceptics is that only the construction of affordable housing can genuinely improve affordability. They contend that market-rate dwellings primarily benefit higher-income individuals, leaving lower earners without housing options. However, research from the US, Sweden, and Finland disproves this theory.
Studies show that when new, unsubsidized market-rate housing is built, it triggers a chain of moves within the housing market. While those initially moving into these homes may come from higher income brackets, their moves free up housing in the same cities for people with lower incomes. In the US, for example, building 100 new market-rate dwellings results in up to 70 people moving out of below-median income neighborhoods, with up to 40 moving out of the poorest fifth, regardless of the new housing’s pricing.
Myth 2: Market-Rate Housing Leads to Gentrification
Another concern raised by supply sceptics is the fear of gentrification when market-rate housing is constructed in lower-income areas. They worry that higher-income individuals moving into these neighborhoods will displace lower-income residents. However, recent research from Britain and the US challenges this assumption.
Studies indicate that there is typically little, if any, outward displacement of incumbents. In fact, it’s the incoming higher earners who have been displaced from wealthier areas due to supply constraints. Therefore, the solution is not to restrict market-rate housing but to build more of it to accommodate higher-income individuals and alleviate demand pressure in other areas.
Real-World Success Stories
Auckland, New Zealand
Recent policies aimed at increasing housing supply in major Western cities have yielded promising results. Auckland, New Zealand, provides a compelling example. In November 2016, large areas of the city were rezoned to allow for higher-density building. The outcome was a surge in the construction of multi-unit housing, primarily at market rates, and a stabilization of rents in the city.
Before the upzoning, median rents in Auckland were 25 percent higher than in the capital city, Wellington. Six years later, nominal rents had grown by an average of 3 percent per year in Auckland and 7 percent in Wellington, effectively erasing the rental premium Auckland once commanded. Adjusted for inflation, renting in Auckland became no more expensive than it was in 2016, compared to a 25 percent rise in Wellington.
Minneapolis, USA
Similar success can be seen in Minneapolis, located in the American Midwest. Minneapolis has consistently outpaced other large cities in the region in terms of housing construction, and it has abolished zoning restrictions that limited construction to single-family housing. As a result, average rents in the city have decreased by more than 20 percent since 2017 when adjusted for local earnings. This stands in stark contrast to the rising rents in five other similarly large and growing Midwestern cities.
Conclusion
In conclusion, the belief that new housing construction, particularly market-rate housing, exacerbates housing affordability issues is debunked by both economic theory and real-world examples. Building new homes not only alleviates pressure on housing markets but also leads to more affordable housing options for everyone. To address the housing affordability crisis, it is essential to prioritize increasing housing supply as a key solution. The evidence is clear: building new homes reduces housing costs for all, ultimately benefiting communities, economies, and individuals alike.