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Nimbys have long opposed housebuilding on the grounds that it lowers the value of their own properties. But lately they have found unexpected allies in the leftwing “supply scepticism” movement, whose advocates argue against new market-rate housing developments on the basis that they may increase rents and prices locally — hindering their aim of making housing more affordable for people on low incomes.
This position rests on a rewriting of one of the fundamental principles of economics. All other things being equal, if the supply of a good or service increases, its price will decrease. Unless that thing is housing.
It would be exasperating enough if that way of thinking were confined to the supply scepticism group — which has already contributed to delays and outright blocking of proposed developments around the US. But the affliction appears to be much more widespread, according to a recent paper by three social scientists in California.
The study found that when Americans were asked to predict the impact of a supply shock on prices for labour, commodities or consumer goods, the correct answers outnumbered the wrong ones by at least two to one. When asked about the impact of a 10 per cent increase in regional housing supply, however, 40 per cent say prices and rents would rise, while only a third say they would fall.
The supply sceptics have theories for why housing could be different, but they fall apart when confronted with the evidence, as set out in a comprehensive review of the latest research by James Gleeson, a housing analyst at the Greater London Authority.
One argument is that only by building affordable housing can you increase affordability. Market-rate dwellings will simply go to people on higher incomes, leaving lower earners high and dry. But recent studies from the US, Sweden and Finland all demonstrate that although most people who move directly into new unsubsidised housing may come from the top half of earners, the chain of moves triggered by their purchase frees up housing in the same cities for people on lower incomes.
The US study found that building 100 new market-rate dwellings ultimately leads to up to 70 people moving out of below-median income neighbourhoods, and up to 40 moving out of the poorest fifth. Those numbers don’t budge even if the new housing is priced towards the top end of the market.
Another argument is that building market-rate housing in a lower-income area leads to gentrification, with higher earners moving into a lower-income area and displacing the incumbents. But the latest research from Britain and the US shows that there is typically little, if any, outward displacement of incumbents. It is the incomers who have been displaced, priced out of wealthier areas by supply constraints.
In other words, even if you think it’s inherently bad if high earners move into poorer neighbourhoods, the answer is to build more market-rate housing for those higher earners.
Recent policies to increase housing supply in major western cities are compelling — as documented in recent analyses by Australian economist Matthew Maltman. In November 2016, large areas of New Zealand’s largest city, Auckland, were rezoned to allow for higher-density building. The results were twofold: a boom in construction of multi-unit housing — predominantly at market rates — and the flattening off of rents in the city in real terms.
On the eve of upzoning, median rents were 25 per cent higher in Auckland than the capital Wellington. Six years later, nominal rents had grown by an average of 3 per cent a year in the former and 7 in the latter, putting the two neck and neck. Adjusted for inflation, renting in Auckland is now no more expensive than it was in 2016, compared with a 25 per cent rise in Wellington.
It’s a similar story in the American Midwest, where Minneapolis has been building more housing than any other large city in the region for years, and has abolished zones that limited construction to single-family housing. Adjusted for local earnings, average rents in the city are down more than 20 per cent since 2017, while rising in the five other similarly large and growing cities.
If you want to improve housing availability and affordability for all, the good news is that any new housing will help.
