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If the government tightly limited the production of sneakers, thereby triggering a bidding war over scarce athletic footwear, few would question whether the state’s deliberate suppression of shoe manufacturing was implicated in rising sneaker prices. In the shoe market, people find it intuitive that limiting the supply of a widely sought good increases its price.
And this same intuition holds for most other markets. If a drought decimated wheat harvests, leading to a shortage of grain and rising bread prices, few would have trouble discerning that the latter was a consequence of the former.
But in housing, this comprehension of the relationship between supply and affordability breaks down. 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, who have a material interest in maintaining housing scarcity, but also prevailed among renters, who bear the brunt of America’s housing shortage. The researchers presented survey respondents with a wide array of different question wordings and arguments, and still only between 30 and 40 percent agreed that increasing the supply of housing units would improve affordability.
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. But the reason why new construction sometimes correlates with rising rents is not that housing is a good unlike any other, such that the more of it you create the more expensive it becomes.
Rather, the reason is that developers build new housing in response to rising demand. When a bunch of tech firms open up headquarters in Austin and create lots of high-paying jobs there, more high-skill workers will move into the city to take those jobs. Those workers will demand housing, and developers will respond by increasing construction.
But you can’t stop the yuppies from coming by blocking that 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.
And yet owing to the myriad restrictions on housing development in most U.S. cities, supply-chain bottlenecks, and other factors, new housing construction rarely ramps up fast enough in response to rising demand to reduce rents; rather, it merely slows the pace of rent increases. Therefore, if you see new housing being built in your neighborhood, you have some cause for expecting a rent hike when your lease is up.
If new construction sometimes augurs rent increases, however, it does not cause them. Evacuations often precede hurricanes. So if you live in a seaside town and see your neighbors all packing up their things and leaving at once, that’s a decent indication that a hurricane is coming. But it would not be rational to respond to this observation by imploring your neighbors to stay put lest they cause wind speeds to surge above 75 mph.