Supply Skepticism: Housing Supply and Affordability

Will building more housing lead to more affordable rents and lower home prices? Economics 101 says yes, but an increasingly vocal cohort of advocates and activists--supply skeptics--oppose new housing construction on the grounds that it will not enhance affordability in their communities and might, instead, increase prices and rents.

In an article in the journal Housing Policy Debate, Supply Skepticism: Housing Supply and Affordability, NYU Furman Center Directors Vicki Been, Ingrid Gould Ellen, and Katherine O’Regan review evidence on the relationship between housing supply and affordability in light of the supply skeptics’ worthy goal: establishing vibrant, economically and racially diverse cities.

The article explores the skeptics’ critiques:

• Because land in high-cost cities is a constrained good, it should be reserved for affordable housing because new market-rate housing will come at the direct expense of affordable housing.
• Adding high-end (i.e., luxury or high-cost) housing will do little or nothing to increase affordability in lower-price segments of a city’s housing market.
• The more a city builds, the more it instigates demand, attracting more wealthy renters and owners, which, the skeptics argue, leads to higher prices throughout the city.
• Though new housing construction may slow the rise of housing costs in a city, it will increase rents and trigger displacement in adjacent communities.

The article then reviews theory and empirical evidence to address each argument, concluding that, on balance, research strongly suggests that adding new homes moderates price increases and makes housing more affordable. The article acknowledges that the market will never supply adequate housing for low- and moderate-income households, meaning that local governments must fill the gap by subsidizing the construction and preservation of affordable housing.

The article also outlines research indicating that constraining housing supply may result in other damaging consequences for communities, namely:

• Imposing environmental and other costs arising from higher dependence on automobiles, because restrictions on housing supply often divert demand from higher-density urban areas to lower-density suburban and rural ones;
• Exacerbating income and racial segregation; and
• Reducing economic productivity and increasing inequality, because stubbornly high prices shrink a city’s workforce by making it more difficult for workers to move there.

The authors encourage cities to adopt a balanced approach to meeting their housing needs, particularly those of their lowest-income households. That type of approach could pair new market-rate housing with subsidies and other incentives, more affordable housing units, and inclusionary zoning requirements.

The authors conclude by identifying areas for further research. Cities and states should find ways to collect good data on rents to enable researchers and policymakers to analyze and understand the effects of increased housing supply on neighborhoods and regions. The authors join a growing chorus of those seeking more information on the local costs and benefits of new development, and of other changes within neighborhoods. The authors also recommend more rigorous research on the efficacy of the strategies states deploy to encourage housing supply and of their responses to concerns about balancing new development and the pressing need for more affordable housing.

Many of the issues discussed in Supply Skepticism have practical implications for policy makers, housing providers, developers, and affordable housing advocates. LocalHousingSolutions.org is a new resource from the NYU Furman Center and Abt Associates that seeks to contextualize the elements of a comprehensive and balanced housing strategy and the tradeoffs confronting localities as they create housing plans. For more information, visit LocalHousingStrategies.org.