A 2022 study from political scientists in the University of California system found that a majority of Americans do not believe that increasing the supply of housing makes it more affordable. And this perception was not unique to homeowners but also prevailed among renters who bear the brunt of America’s housing shortage.
New Construction – Rising Rents?
This widespread confusion is understandable. If you see a lot of new housing being built in your area, you wouldn’t necessarily be wrong to prepare for a rent hike. Developers build new housing in response to rising demand.
When a bunch of tech firms open up headquarters in a city, it creates lots of high-paying jobs there. Those workers will demand housing, and developers will respond by increasing construction. So long as high-paying jobs are being created in your city, high-income workers are going to move there. If there is no new “luxury” housing to absorb them, they will simply outbid less affluent residents for the housing units that already exist. Thus the less new housing that gets built, the faster rents will rise in a booming city.
If new construction sometimes augurs rent increases, however, it does not cause them.
Will New Housing Construction Push Down Rents?
Between 2020 and 2022, America witnessed a huge run-up in rental prices. This spike in housing prices was long in the making. Over the past decade, Americans formed 15.6 million new households but built only 11.9 million new housing units. But the pandemic exacerbated matters. The rise of remote work abruptly increased Americas’ demand for floorspace. Many workers decided they needed their own apartment.
But now, rent growth has returned to its pre-pandemic norm. Prices are advancing at an annual pace of between one and three percent. In June 2023, asking rents were just 1.3 percent higher than they had been 12 months before.
What Explains This Deceleration in Rental Prices?
As with any economic development, more than one factor is at play. But the biggest one is that developers responded to surging demand by building more housing. Where developers have built a lot of housing in recent years, rents have actually fallen. Where they have built little housing, rent growth has continued to accelerate.
Conclusion
We can’t fully resolve our housing crisis by unshackling the invisible hand. But widespread skepticism about the relevance of “supply and demand” to the housing market is making the crisis worse. You can’t make shoes cheaper by making them harder to produce. Hopefully, cities with restrictive zoning laws and persistently high rent growth will eventually realize the same is true of homes.
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