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Research shows that expanding housing supply reduces the price of housing

I’ve written before that prices are not problems, they are signals of problems. In the case of high housing prices, they are signalling that demand is high relative to supply or, the same thing, supply is low relative to demand. Trying to solve the problem by treating the signal is like trying to slow down your car by fiddling with the speedometer. It will do nothing whatsoever to address the underlying problem. The answer is to expand supply (or restrict demand, but good luck with that).

A new paper by Brian J. Asquith, Evan Mast, and Davin Reed studying “the local effects of new market-rate housing in low-income areas” shows how this might work. They find that:

New buildings decrease nearby rents by 5 to 7 percent relative to locations slightly farther away or developed later, and they increase in-migration from low-income areas. 

Interestingly, they find that:

Results are driven by a large supply effect—we show that new buildings absorb many high income households...Contrary to common concerns, new buildings slow local rent increases rather than initiate or accelerate them.

In other words, these new builds, which may be relatively unaffordable for many, pull in people who can afford them. This stops them bidding up the prices of other housing which, in turn, makes them more affordable. The bottom line is that expanding the supply of housing leads to a reduced price of housing, just as economic theory would suggest.

Rent controls treat the symptom, not the illness. To really get a handle on affordable housing, the only real solution is to expand supply.

John Phelan is an economist at the Center of the American Experiment. 




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