When has housing supply ever kept rents down?

Credit: Bill Dickinson on Flickr
Credit: Bill Dickinson on Flickr

A short Friday post. Mostly, I am eager to no longer have the word “Zirin” in my most recent headline here.

Anyway, something that people frequently ask when I (or others) talk about the beneficial effects of building more homes for housing affordability is: When has that ever worked?

This is sometimes an earnest question, and sometimes not, because the person assumes that if no examples immediately come to their mind, then it has never happened.

For a long time, I thought that maybe the best way to respond was to point to rigorous quantitative studies – by both market-friendly people like Ed Glaeser and people mainly known as academic warriors against racial and economic inequality – that are even better than a single example: they show that, nationwide, less building, and stricter zoning, is associated with higher housing prices and more segregation!

But people keep asking for examples.

So: okay! Here are a few.

1. Rich white landlord says he’s happy he owns buildings on the North Side of Chicago, where nothing’s being built, rather than downtown, where lots is being built, because he has “freedom to raise rents.”

Screen Shot 2015-02-20 at 6.44.21 PM

2. In Washington, a glut of apartments has led to zero or negative rent growth.

From the Washington Post
From the Washington Post

An unprecedented number of new apartment units (about 24,000) have arrived in the area in the past two years, increasing the total apartment inventory by roughly 5 percent.

That new supply wave cut rents for four- and five-star apartments even further, even as rents at three-start apartments continued to outperform. But the narrowing may be slowing as the wave of supply takes its toll on three-star rents as well, working in renters’ favor.

3. Austin sees growth in average rents fall almost to zero after massive building boom.

The 10,000 new units added last year in the region, which stretches from Georgetown to San Marcos, marked the largest increase Heimsath has recorded since he began tracking the numbers in 1991. The influx expands the region’s apartment inventory by 6 percent, to 180,280 units in all.

With all those new units entering the market, supply is catching up to demand. And that means apartment rents are stabilizing after rising rapidly — sometimes as much as 7 percent per year — from 2010 through 2013. The average rent in the metro area was $1,107 a month in December — an all-time high, but an increase of only $8 from the average rent for June, Heimsath said.

4. Average rents in Chicago fall, thanks in part to lots of construction.

Real estate data firm Zillow said Friday that rents have fallen 0.5 percent in the Chicago area over the past year.

“Chicago did a whole lot of overbuilding during the housing boom,” said Svenja Gudell, director of economic research at Zillow, noting that some select downtown neighborhoods in the Windy City still have prices rising at or above the national average.

Zillow said prices increased a seasonally-adjusted 3.3 percent in January compared with 12 months earlier. But some major cities are finding themselves with an excessive supply of apartments and houses, reducing price pressures for renters.

5. Rental-backed securities are losing fans because new housing supply means rents will stop rising so fast in cities around the country.

But in the last month, investors and analysts have cooled to the sector. REIT [real estate investment trusts] total returns are a negative-1.7% so far in February, with apartments stocks returning a negative-1.1%. A handful of analysts have downgraded the apartment sector on fears it is overvalued and won’t generate the growth in revenue it posted last year….

There is also talk of an oversupply of apartments in markets where there hasn’t been enough job growth to support demand. Washington, D.C., has seen a huge uptick in supply over the last three years, while in the Texas oil belt the falling price of oil has sparked fears that jobs will dry up….

Builders in the past six months have started construction on new multifamily apartments at an average pace of 357,000 units a year, 26% more than the 30-year average, according to Evercore ISI. The investment bank predicts negative demand, or a rise in vacancy rates, for apartments over the next year for Houston, Washington, Charlotte and Austin, Texas.

“Overbuilding concerns will remain a focal point for REIT investors over the next few years given the current pace of permit activity and new starts,” says Steve Sakwa, an Evercore REIT analyst.

As ever, none of this will be enough to fix the housing affordability problem on its own, for reasons that I’ve gone into before. (People don’t have enough money to afford even the cost of building maintenance; in places like Washington, or parts of Chicago, rents are so high that they’d have to do way more than stop growing to be affordable to lower-income people; etc.) We still need all the non-market housing we can get, particularly in very high-demand neighborhoods.

But the bottom line is that slow, zero, or negative cost-of-housing growth is better than fast cost-of-housing growth. (At least, that is, in high-cost neighborhoods/metropolitan areas.) The vast majority of low- and moderate-income people live, and will continue for the foreseeable future to live, in non-subsidized housing. Even in New York, which has held on to its public housing better than most other large expensive cities, it only makes up something like 7% of all units. That means that it’s exactly these kinds of market trends – consistently large rent hikes, year after year, in mid-ish market housing – that makes a neighborhood, or city, or metropolitan area, eventually unaffordable to working- and middle-class people.

And it turns out that construction booms arrest that sort of pattern, or prevent its continuation, all the time.

9 thoughts on “When has housing supply ever kept rents down?

  1. I unequivocally agree with your overall point, but some of these articles…

    #1 is speculative and anecdotal.
    #4 appears to be written by a broken computer (do you really think City of Chicago rents are falling? Do you think any City of Chicago rents are falling due to increased supply? Do you think any aggregate regional rent decrease has anything to do with increased supply? Really?)

    #5 REITs are an interesting topic and much more complex than the article suggests. If you’re Eugene Fama, you probably think decreasing REIT prices might mean increasing supply shifting the rents down and that new information being incorporated into prices. If you’re Robert Shiller, you probably think that decreasing REIT prices is the inevitable return to a normal P/E valuation that doesn’t incorporate psychologically driven investor speculation. The article clearly acknowledges that the tempered price is primarily the result of current valuations 10-15% over what the P/E ratio suggests. It also cites overexposure to Texas, which is not a supply issue but an oil issue. The commentary on supply is speculative and unsubstantiated. Personally, I’m not a market efficiency man, so I don’t see reduced returns indicating anything more than a return to rational pricing after exuberant speculative pricing. It’s complex though.

    #3 is solid.

    Overall, I think we can marshal better sources for the operation of supply and demand.

    1. Thanks for this! I agree that several of these are hardly airtight cases. And thanks for the bit of insight on REITs. Like I said, I think the best evidence for this isn’t the sort of anecdotal examples here – even where they pretty strongly suggest that supply is bringing down prices – but the more rigorous, large-sample studies that show a clear correlation between supply, restrictive zoning, and prices.

  2. The South Loop comes to mind. Not rents, but condo prices were down 30% from 2008 to 2012. You can blame the recession if you want, but Loop and Gold Coast units were both down about 10% over the same period.

    Case Study #2 coming up in 2016 on broader downtown market:
    Yet all the exuberance has fueled a development boom that will test the market over the next few years. Appraisal Research projects that developers will complete 3,119 apartments downtown in 2015 and 6,400 in 2016, both records for downtown Chicago.

    “The question is what’s going to happen in 2016,” said Appraisal Research Vice President Ron DeVries. “Clearly, there’s going to be an imbalance there.”

    DeVries avoids the term “glut,” but he does expect the increased competition from new buildings to have an impact on the market.

    Landlords want to maintain a certain occupancy level, “and the only way you’re going to achieve that is by dropping rents,” he said.

    1. More broadly, the entire 2008 financial crisis is one big national case study in house price decline, after several regional price declines (Brookings book PDF). It’s also the prime example of why house price declines are rare: housing is so highly leveraged, and so central to household wealth, that falling prices really hurt!

  3. Just answer with a counter-question: when has NOT building apartments kept rents down? How successful have highly restrictive cities like New York and San Francisco been at keeping rents down?

    1. The problem with that question is that many people (not myself, in most circumstances) feel that not building apartments avoids other negative impacts. So if the policy rationale for allowing lots of apartment construction is that it will drive down rents, one needs examples of that.

      The other question is how far down the housing market will new apartments have an effect. New York, and to a lesser extent San Francisco, is well known for building high price condominiums that are bought by non-residents. Those units don’t do a think to improve supply and cost, because they don’t take a local resident off the market, they just add somebody non-local. Basically what’s needed are relatively cheap new apartments, which are hard to come by.

      1. If the argument against building more units is because there will be more utilization of services, then pied a terre owners should be considered the most desirable: They pay the bills, but don’t use the services. They quite likely will also be landlords for medium-term rentals.

  4. “We still need all the non-market housing we can get, particularly in very high-demand neighborhoods.”


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