We’re All Supply-Siders Now

We’re All Supply-Siders Now

As intuitive as the fact that supply increases create a downward pressure on prices may seem, there are a number of holdouts who argue against this fact in the housing market. A paper from the Furman Center at NYU offers a direct response to the arguments employed by development skeptics that have gone under-addressed in much of the academic literature:

Growing numbers of affordable housing advocates and community members are questioning the premise that increasing the supply of market-rate housing will result in housing that is more affordable. Economists and other experts who favor increases in supply have failed to take these supply skeptics seriously. But left unanswered, supply skepticism is likely to continue to feed local opposition to housing construction, and further increase the prevalence and intensity of land-use regulations that limit construction. This article is meant to bridge the divide, addressing each of the key arguments supply skeptics make and reviewing what research has shown about housing supply and its effect on affordability. We ultimately conclude, from both theory and empirical evidence, that adding new homes moderates price increases and therefore makes housing more affordable to low- and moderate-income families. We argue further that there are additional reasons to be concerned about inadequate supply response and assess the evidence on those effects of limiting supply, including preventing workers from moving to areas with growing job opportunities. Finally, we conclude by emphasizing that new market-rate housing is necessary but not sufficient. Government intervention is critical to ensure that supply is added at prices affordable to a range of incomes.

There are four main arguments the authors set out to address.

First, while skeptics maintain that the scarcity of land makes it such that land otherwise used for affordable housing will instead go to higher-priced market rate housing, the authors argue that much land simply isn’t viable for affordable housing projects because it isn’t profitable enough to incentivize development.

Next, even though skeptics argue that new (and usually more expensive) housing construction increases the supply in the market for similar rentals, this does not materialize into more affordable housing. While this may be true in the short run, “downward filtering,” where once-posh homes and apartment buildings age and lose value, remains an important source of affordable housing, especially if wealthier residents decide to move into new tony apartments (what Noah Smith called “yuppie fishtanks”).

The third and fourth arguments, that an increase in supply will be offset by an increase in demand and that new construction will raise rents and displace residents through gentrification, are also suspect. While more housing will create “induced demand,” there is no evidence that it will translate into a 1:1 increase (i.e. demand is not perfectly elastic). Further, though the authors find little evidence either way of displacement due to new housing, one study in the Bay Area found that increased market-rate housing construction led to a lower probability of displacement.

While the authors have more faith in the market to address the problems posed by NIMBYish arguments, they do recognize a role for a demand-side approach in the form of housing subsidies. While these subsidies, like Kamala Harris’s proposed renter’s tax credit, are counterproductive in an artificially constrained housing market, they can be made to work in an area where supply is not throttled.

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By |2019-02-01T08:54:15-08:00February 1st, 2019|Blog, Land Use Regulation|