As a general rule, road pricing isn’t popular. But that’s not because it doesn’t work. The problem is that it works too well, and people don’t like the idea of driving less and paying for roads (that currently have a zero marginal cost).

Here’s a recent study by Robert Bain and Deny Sullivan that looked at just how well it can work. In it, they examine 76 data points from 16 countries, including roads, bridges, tunnels, and cordons (areas).

The question: What happens to demand once the marginal cost of using a road goes from $0 to some cost greater than zero? (As part of this, they also looked at whether the road or bridge in question has viable alternatives.)

The results:

The median traffic reduction was 25%. But the interquartile range was -17% to -44%. This is all very significant. Said differently, the traffic impact in nearly a quarter of the examples was -45% or more. So almost a halving of traffic congestion.

These reductions are obviously a function of the cost of using each road, but regardless, the overarching takeaway remains the same: You may not like or want road pricing, but it totally works.

Here is a study by three researchers out of California that asked Americans to predict the impact of a supply shock on various things, such as durable goods, commodities, labor, trade, and yes, housing.

For basically all of these items, people tended to answer correctly. Usually by a factor of at least two to one. In other words, when asked what reducing the supply of new cars would do to the prices of used cars, the majority of people responded saying that it would lead to an increase in prices.

However, when asked about the impact of a 10% increase in housing supply, about 40% said that it would cause prices and rents to rise. Only about a third believed they would fall (the correct answer). This is fascinating because it shows that housing seems to be an outlier. Most people don't have the same intuitive sense.

Why is this? Well, one commonly held belief is that building market-rate housing leads to gentrification, and that this ultimately leads to the displacement of existing residents. This might have been why some people responded saying that new housing will cause an increase in prices and rents. It'll lead to all housing going up.

However, there's research to support that this isn't the case. The problem isn't outward displacement following new market-rate housing. The greatest driver of gentrification is actually "exclusionary displacement", which is the inability of people to move into areas because of a lack of housing. (This study was based on 2010-2014 housing data from the UK.)

The thing about housing supply is that it relieves pressure across the entire market. Instead of a high-income person buying an old home to renovate (and causing outward displacement), they can instead choose to buy a new home (and not cause any outward displacement).

By doing this, they also leave behind a home that can then be absorbed by lower earners. One US study found that for every 100 new market-rate homes that are built, somewhere between 45 and 70 people move out of a below-median income neighborhood.

It is for reasons like these that, time and time again, increased housing supply has been shown to moderate home prices and rents (see above regarding Minneapolis and the Midwest as a whole). So if you're worried about the cost of housing, the answer is to build more. And if you're worried about gentrification, the answer is also to build more.

Our intuitions are telling us that this is true for most things. But for whatever reason, housing feels different. It's not, though.

Source: The charts and studies in this post are from this great FT article by John Burn-Murdoch.

Here is a housing study that looked at housing supply -- in the US from 2000 to 2020 -- relative to median housing values. And here is the key takeaway:

What this chart is saying is that new housing is rarely added in cities with the lowest-value homes. The bar on the left represents municipalities whose median housing values are less than 50% of the metropolitan average. And this makes sense. If values are low there is likely little to no incentive to build. The math just doesn't work.

However, as home values increase, the incentive to build and the ability to finance new projects also increases, and that is what we see in the above chart. This also makes sense.

But something interesting happens in the highest-value cities -- housing supply once again starts to fall off. And it turns out that there is a bit of a sweet spot. Municipalities whose relative housing values are 110 to 130% of the metropolitan average actually produce the most overall housing. Any higher than that and things start to decline.

Why is that? The answer likely has to do with restrictive land-use regulations. The highest-value cities (and wealthiest suburbs) often have a lot of large single-family lots, as well as policies to ensure that this kind of built form doesn't change. This has the effect of both limiting supply and enshrining values.

So when it comes to housing supply, what you don't want are low-cost areas. But you also don't want the highest-value areas. What you want are areas that are doing well, but no so well that they start really restricting new entrants. This is what our industry often refers to as exclusionary zoning.

Now, one of the most common ways to respond to this problem is to develop an opposing policy, namely inclusionary zoning. But usually what this policy doesn't do is direct more supply to these high-value and low-density areas. Instead what it typically does is force the segment that is producing the most housing -- let's call it the 110 to 130% band -- to deliver more affordable housing.

It's a neat trick that sounds pretty cool, but it is not at no cost.