Does Building New Housing Reduce Overall Housing Costs?

February 25, 2021 by admin
Policy/Legislative

For the last few years, we’ve been hearing a lot about the housing affordability crisis in Utah, as well as in many other places around the country.  A big part of the problem, according to many observers, has been that the rate of building new residential units has not been keeping up with demand, and according to the economic law of supply and demand, the price for that good then goes up. There are other factors that are acknowledged as well, such as the price of land, the cost of building materials, the shortage of construction labor, and the cost of financing (low) which drives up demand. But it seems that everyone is focused on the lack of production.

So if not enough new dwelling units are being built, analysts ask, what is the cause?  The focus often settles on local regulation of land use.  Cities and counties have zoned land in such a way that it limits or even stymies the ability to build more housing, critics have argued, so things need to be loosened up.  This sentiment has resulted in an effort in many places around the country that has been going by the label of “zoning reform.”  This is a process where local land use regulations are modified, either by decree from the state level (California, Oregon, Massachusetts, etc.) or, in some instances, by the local elected officials themselves (Minneapolis, Seattle, Sacramento, etc.) to reduce areas that are zoned exclusively for single-family homes. Discussions about state and local legislative actions to address Utah’s rapidly rising housing costs have been underway now for a couple of years and have led to some (limited) state legislation with mandates for local governments.

The zoning reform effort has been underway for some time now, and some have begun to ask, does increasing the supply of housing actually reduce the cost of it?  Many are the stories of places where new housing and apartments are being built, and the cost is as high as it ever was, if not even higher.  Builders know a hot market when they see it, and they’re jumping in to capitalize on the high prices and even drive them higher. Is there any empirical evidence out there to show if things are working?

A new report just out from the UCLA Lewis Center for Regional Policy Studies gives some indications.  Spoiler alert, the results are somewhat mixed and incomplete, in that the studies focus mainly on the cost of rent rather than the sales price of housing units, and entail some different methodologies.  The report looks at several recent studies that tackle this question.  Here are some of the main conclusions.

“The supply effects described in these papers are not large, but the authors make a persuasive case that market-rate development causes rents in nearby buildings to fall rather than rise. Their findings conform with long-standing planning and economic theory about the relationship between housing supply and affordability, and the common sense notion that the problem of too few homes cannot be solved without building more homes. Theory, evidence, and common sense are all in agreement, so we should approach claims to the contrary with a healthy dose of skepticism.”

The report also infers that the studies suggest that building higher-cost housing in higher-cost areas, which builders prefer to do because their profit-margins are higher and public opposition is less, may also have benefits as it draws those with adequate incomes out of lower cost housing areas, thus opening up more opportunities in those lower-cost areas.

“Perhaps most important is that this whole discussion — of what happens when new development arrives in a neighborhood where many lower-income people live — could be largely avoided if we built new housing mostly in higher-income, higher-resourced communities. Development in more affluent places, where fewer residents are precariously housed, could allow more people access to opportunities and alleviate demand pressures elsewhere in a region. But such development rarely happens now, because zoning prevents it.”

But the report authors also note that these studies are about rents, not housing purchase price, which may operate under a different dynamic and may mean that housing affordability for those wanting to purchase housing may still see higher prices even with new housing being built.

“…sale prices are not rents. Sale prices capture both current and expected value in a way that rents do not. Sale prices are like Tesla stock, which is speculative, and based at least in part on expectations about Tesla’s future potential. Rents are like the price of a Tesla vehicle — based on how useful they are to customers right now. Sale prices still matter, but tell us little about rents.”

You can see the report here.

Wilf Sommerkorn is a retired planner. He is former Planning Director for Davis County, Salt Lake City, and Salt Lake County.  He currently works on projects with the Utah Land Use Institute, and continues to serve as co-chair of the APA Utah Legislative Committee.