Does new market rate housing lower rents?

Below is a post by Todd Litman of the Victoria Transport Policy Institute on the pro-urb e-list. (Reprinted with permission.)

A great point made by Todd in this ongoing discussion is that as population increases, allowable density should increase as well.  Instead, it's kept at rates that are artificially low relative to demand, and accentuated by the reality that most neighborhoods are "already built out" in terms of allowable densities.

I am often frustrated by people who make ideological statements, such as, "increasing supply never reduces housing prices" or "allowing higher densities simply makes developers rich," and ignore any contrary evidence. Curiosity is the foundation for true problem solving.

There is robust evidence that increasing housing supply reduces prices and increases affordability (reduces prices for lower-income households). I've listed good examples of this research at the end of this posting.  These studies reflect a variety of research methods and geographic scales.

* Mast ("The Effect of New Luxury Housing on Regional Housing Affordability, W.E. Upjohn Institute for Employment Research," 2019, Upjohn Institute) tracked the previous residences of the occupants of 802 new multifamily developments in 12 North American cities, and the previous residences of the households that replaced them, through six cycles. It found that building market-price apartments causes a kind of housing musical chairs, as households move into new units. This analysis indicates that for every 100 new market-rate units built, approximately 65 units are freed up in existing buildings, accommodating up to 48 moderate- and low-income families.

Using real estate transactions throughout New York City, Li (2019) "Do New Housing Units in Your Backyard Raise Your Rents?" (NYU Furman Center) found that each 10% increase in multi-family housing stock reduces rents and sales prices within 500 feet by 1%.

* Myers and Park ("Filtering of Apartment Housing between 1980 and 2018," NMHC Research Foundation, 2020) studied U.S. apartment housing (rental units in structures with five or more units) supply and price between 1980 and 2018 in the 100 largest metropolitan areas. They found that new apartments, largely targeted to middle- and higher-income groups, created affordable housing opportunities for very low-income households (those earning no more than 50% of the area median income) through filtering. As the properties grow older, their relative quality declines as does the rents they command and the income of the occupants.

* Cole-Smith and Muhammad’s 2020 study, "The Impact of an Increasing Housing Supply on Housing Prices" evaluated the impacts of rental housing supply increases on average apartment rents in Washington DC between 2000 and 2018. They found that adding about 2,100 rental units annually, reduced average city apartment rents estimated 5.8% compared with what would have otherwise occurred, resulting in actual 2018 average rents of $3,030 compared with $3,207 if supply had not increased, and they predict that if planned future increases do not occur, average 2025 apartment rents will be $3,261 instead of $3,090 under the Initiative.


Why don't we see these effects? These studies demonstrated proof of concept, and they show that, had cities like New York and Washington DC added less supply in recent decades, rents would have risen even more than they did. To households struggling to paying $3,030 per month for an apartment it is not very reassuring to know that with less infill development they would have paid $3,261 per month - both seem unaffordable - but that does not disprove the concept, it simply shows the need to expand it. For example, Washington DC only added about 2,100 rental units per year during the last decade, if the city wants average rents below $3,030 it needs to build far more.

You are unclear how you measure affordability; it seems you are thinking of the price of new housing units. However, most moderate-income households rely on older rather than new housing stock, just as most lower-income motorists buy used cars. Filtering increases the supply and drives down the prices of existing homes as some households move up from lower-priced older units into the newly built units - which is explained nicely in Herriges' "The Connectedness of Our Housing Ecosystem."

One solution you mention, more urban expansion, helps some households but cannot provide true affordability because the lower housing prices are offset by higher transportation costs, as discussed in my report, "True Affordability. Critiquing the International Housing Affordability Survey"  Scott Bernstein, a frequent contributor to this list, is also an expert on this subject, having helped establish the Housing and Transportation (H+T) Affordability Index.

This all suggests that the best way to increase true affordability is to make it much easier for missing middle infill with unbundled parking in the many walkable urban neighborhoods that currently only allow low-rise development. Most of those neighborhoods are essentially stagnant, gaining less than 0.5% new units annually, raising that to 1-3% annual growth (so, for example, every few years a typical block has one single-family house replaced by a three to five townhouses, or two to four homes are replaced by ten to twenty apartment units) would deliver the moderate-priced housing needed to meet latent demand. As I mentioned, Montreal is a good success story for this approach.

More citations
HOUSING SUPPLY IMPACTS ON HOUSING PRICE RESEARCH
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Vicki Been, Ingrid Gould Ellen, and Katherine O’Regan (2019), “Supply Skepticism: Housing Supply and Affordability” Housing Policy Debate.

Brian J. Asquith, Evan Mast and Davin Reed (2019), "Supply Shock Versus Demand Shock: The Local Effects of New Housing in Low-Income Areas," Working Paper 19-316 W. E. Upjohn Institute for Employment Research.

Todd Litman (2019), "How Filtering Increases Housing Affordability," Planetizen.

Todd Litman (2019), “Don’t Miss the Middle,” Plantizen.

Todd Litman (2020), “Affordable-Accessible Housing in a Dynamic City. Why and How to Increase Affordable Housing in Accessible Neighborhoods," Victoria Transport Policy Institute.

Dowell Myers and Jung Ho Park (2019), “A Constant Quartile Mismatch Indicator of Changing Rental Affordability in U.S. Metropolitan Areas,” Cityscape. 

Stuart Rosenthal (2014), "Are Private Markets and Filtering a Viable Source of Low-Income Housing?," American Economic Review.

Miriam Zuk and Karen Chapple, "Housing Production, Filtering and Displacement: Untangling the Relationships," Berkeley Institute of Governmental Studies.