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Those of us in the yes-in-my-backyard camp like to point out that increased housing supply is good for the overall health of a market because it moderates price and rental growth. And to point out just one example, there's evidence of this happening right now in Austin.
But one of the common objections to this mental model is that the new housing getting built is simply not affordable. It's high-income housing. So how is that helpful to someone who maybe can't afford the rents? And to be fair, this is generally true (unless there are subsidies involved that are allowing the homes to be offered at below-market pricing).
The reason this is true is because development "happens on the margin." Meaning, virtually every new project just barely makes economic sense to build. Developers have to be very precise about their costs and often have to embed some degree of optimism into their revenue assumptions in order to arrive at feasibility. This means that new home prices and rents are almost always at the very top end of what's achievable in a market.
But this market reality doesn't just benefit the people who can afford high-income housing. For one thing, brand new expensive housing eventually becomes older and more affordable housing (this is referred to as filtering). But even in the immediate term, new supply serves the important function of relieving some of the pressures on a city's existing housing stock.
Think of this way: If you're a high-income household that could afford new housing — if only it were being built and available — well then you're just going to seek out the next best thing. And because you're a high-income household, you have the ability to outbid middle-income households for whatever housing happens to be available on the next rung of the ladder.
This is what the research shows. In a recent study by Pew, it was found that building more housing — both across a metro area and in specific neighborhoods — tempers rents across all classes of buildings. Importantly, though, it was found to decrease rents the most for older, more affordable housing:
Looking at more than 41,000 large apartment buildings in 223 metro areas, there was a clear trend: Class C rents decreased more, relative to those for units in Class A buildings. In high-supply metro areas (those that increased their housing stock by at least 10% from 2017 to 2023), rent growth was slower than in average markets. Crucially, rent growth slowed most for Class C units, demonstrating that the additional supply was especially helpful to people living in lower-cost apartments.
It's understandably easy to look at new housing and say, "that's too expensive and therefore useless to me." Market dynamics usually make this a prerequisite for construction. But there are still direct benefits and that's what you're seeing in the above data.
Cover photo by Marc Kleen on Unsplash
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Brandon Donnelly
Enjoyed the sidebar notes.
New housing supply tempers rents — particularly in low-income neighborhoods https://brandondonnelly.com/new-housing-supply-tempers-rents-—-particularly-in-low-income-neighborhoods
The average price per buildable SF for high-density land across the GTA last quarter was $52. This is the lowest on record since Bullpen and Batory started tracking sales in 2017.