To be sure, believing that new housing construction can trigger rent increases is not as irrational as thinking that evacuations cause hurricanes. There is a coherent theory of how the former could occur: Shiny condo towers attract higher-income people into a neighborhood, which leads to the opening of stores that cater to upscale tastes, which attracts more high-income people into the neighborhood, which pushes up demand for housing there and, thus, rents. In practice, though, there are a good number of studies showing that this “induced demand” phenomenon does not actually happen, even at the hyperlocal level.
At the level of a city as a whole, meanwhile, there is no ambiguity in the empirical literature: More housing leads to more affordability. People will not move to a new city just because they heard that there’s a condo tower there with a sick roof deck. It is plausible that, in some circumstances, affluent people already living in a city might move to a new neighborhood because its housing stock has become more desirable. But to the extent that this happens, it would have the effect of reducing demand for housing in other parts of the city. As a result, there is overwhelming empirical evidence that expansions in housing supply slows rent growth at the municipal and regional levels.
In fact, Americans are seeing the power of new housing construction to push down rents right now.
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. As the millennial generation aged out of living with roommates (or parents), demand for housing was always poised to surge far past supply in the early years of this decade.
But the pandemic exacerbated matters. The rise of remote work abruptly increased Americans’ demand for floorspace. Many laptop workers who’d previously been comfortable living with roommates decided they needed their own one-bedroom apartment; many of those in one-bedrooms decided they needed a two-bedroom apartment to accommodate a home office; many with a two-bedroom decided they needed a house, etc. Meanwhile, as remote workers trickled out of urban centers into suburbs, beach towns, and other amenity-rich (but previously somewhat job-poor) areas, rents in those places suddenly surged.
But now, rent growth has returned to its pre-pandemic norm with prices advancing at an annual pace of between one and 3 percent, according to real-estate data firm CoStar Group. In June 2023, asking rents were just 1.1 percent higher than they had been 12 months before. Given that wages grew at a far faster clip over that same period, a rental home was more affordable for the typical worker this June than it had been a year earlier.
To be sure, believing that new housing construction can trigger rent increases is not as irrational as thinking that evacuations cause hurricanes. There is a coherent theory of how the former could occur: Shiny condo towers attract higher-income people into a neighborhood, which leads to the opening of stores that cater to upscale tastes, which attracts more high-income people into the neighborhood, which pushes up demand for housing there and, thus, rents. In practice, though, there are a good number of studies showing that this “induced demand” phenomenon does not actually happen, even at the hyperlocal level.
At the level of a city as a whole, meanwhile, there is no ambiguity in the empirical literature: More housing leads to more affordability. People will not move to a new city just because they heard that there’s a condo tower there with a sick roof deck. It is plausible that, in some circumstances, affluent people already living in a city might move to a new neighborhood because its housing stock has become more desirable. But to the extent that this happens, it would have the effect of reducing demand for housing in other parts of the city. As a result, there is overwhelming empirical evidence that expansions in housing supply slows rent growth at the municipal and regional levels.
In fact, Americans are seeing the power of new housing construction to push down rents right now.
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. As the millennial generation aged out of living with roommates (or parents), demand for housing was always poised to surge far past supply in the early years of this decade.
But the pandemic exacerbated matters. The rise of remote work abruptly increased Americans’ demand for floorspace. Many laptop workers who’d previously been comfortable living with roommates decided they needed their own one-bedroom apartment; many of those in one-bedrooms decided they needed a two-bedroom apartment to accommodate a home office; many with a two-bedroom decided they needed a house, etc. Meanwhile, as remote workers trickled out of urban centers into suburbs, beach towns, and other amenity-rich (but previously somewhat job-poor) areas, rents in those places suddenly surged.
But now, rent growth has returned to its pre-pandemic norm with prices advancing at an annual pace of between one and 3 percent, according to real-estate data firm CoStar Group. In June 2023, asking rents were just 1.1 percent higher than they had been 12 months before. Given that wages grew at a far faster clip over that same period, a rental home was more affordable for the typical worker this June than it had been a year earlier.