IT’S A QUESTION that looms large over the effort to promote more development in housing-starved Massachusetts: Does increasing the supply of housing, even if it’s mainly higher-cost, market-priced units, temper the run-up in costs that has so many residents straining to make ends meet?
The idea follows the basic economic principle of supply and demand – when more of something is made available, its price falls. But there are plenty of “supply skeptics” who aren’t convinced that simply opening the housing production spigot will lower costs, and argue instead that it often just drives up prices by promoting gentrification.
In a recent report, only 30 to 40 percent of those polled in a national survey of urban and suburban residents believed a 10 percent increase in housing production would result in lower home prices and rents. Against that backdrop, however, a research team at New York University issued a report last month arguing that there is clear evidence that boosting supply is the key to lowering or moderating housing costs.
“All the evidence shows that it does reduce housing costs,” said Vicki Been, director of the NYU Furman Center for Real Estate and Urban Policy. The report by Been and two NYU colleagues attempts to look at all the evidence available from studies of the question.
“In sum,” they write, “significant new evidence shows that new construction in a variety of settings decreases, or slows increases in, rents, not only for the city as a whole, but generally also for apartments located close to the new construction.”
With Massachusetts needing to add roughly 200,000 new housing units to catch up with rising demand and population growth, state officials say housing construction is the overarching answer to the housing shortage and affordability crunch. “I think it is in many ways a supply-demand issue,” said Ed Augustus, Gov. Maura Healey’s housing secretary. “If you’re a renter or a buyer of a home, you’ve got very little power in this market. All the power goes to the person who has what’s in very short supply.”
The build-more mantra doesn’t have everyone convinced.
Judith Liben, an attorney at the Massachusetts Law Reform Institute, said the idea that increasing supply will temper costs doesn’t seem evident in many Massachusetts communities.
“Over and over, supporters say, the more market-rate housing you build, the more chance we’ll have for moderating rents that are already too high,” she said. “If you think about cities like Malden and Quincy and Worcester, and now even Fall River and Lowell, we see article after article about the boom in market-rate housing. The next day there is article after article saying, nobody can live here anymore. What has been the actual effect in cities that have seen a boom in market-rate housing? As far as I know, rents in those cities continue to rise, and displacement remains an enormous fear.”
Kathy Brown, executive director of the Boston Tenants Coalition, echoed that skepticism of the supply theory. “I don’t buy it,” she said. “It just feels like the experience in Boston does not show this. We’ve had all this crazy development and rents have not gone down, they’ve gone up.”
While the NYU researchers say the bulk of available studies point strongly to the opposite effect, they note there are reports from some cities that show rents going up near new development.
Trying to gauge the “spillover” effects of development in the immediate area has been a particularly challenging question for researchers, because development tends to happen in areas that are already undergoing change or becoming more desirable. “This makes it hard to disentangle changes in rents that are caused by pre-existing growth in demand from changes caused by the new supply,” write Been and her co-authors.
In an interview, Been said new housing development tends to have two effects, pulling in opposite directions. Increasing the supply of housing tends to lower its cost or slow the rate of cost increase, but new development often also brings new amenities to a neighborhood – restaurants, shops, better maintained parks – that push prices upward.
“Which of those two things is going to predominate is the critical question,” she said. “Under what circumstances would the amenity effect swamp the supply effect?”
It can differ depending on the particular circumstances, she said, while adding that across the breadth of studies that have been conducted, “the supply effect seems to be predominating.”
Because housing growth tends to come in places experiencing high demand and upward pressure on prices, Been said it’s not unusual to see rent increases in an area along with a development boom.
“You don’t know what the counterfactual is,” she said, referring to what would have happened to rents in the area had the development not taken place. One study cited in her report found that the average new apartment building lowers nearby rents by 5 percent to 7 percent “relative to the trend rent growth otherwise would have followed,” a change that the authors said translated to savings of $100 to $159 per month.
The report also argues that boosting the supply of higher-cost housing can have positive ripple effects on housing availability at lower price-points. The report concludes that new housing construction triggers “chains of mobility,” with those occupying newly-built units freeing up slightly less costly units where they previously lived, lessening the competition for those places. That process, the report says, works its way down the income ladder, with one study from Helsinki showing that by the fourth such round, half the units being vacated are then occupied by tenants from the lower half of the national income distribution.
New Bedford officials are talking up exactly that effect as they promote construction of new market-rate housing as well as income-restricted units. “More units on the market give people more choices,” Josh Amaral, who runs the city’s Office of Housing and Community Development, told the New Bedford Light. “It has this cascading effect throughout the market.”
One thing the report authors, state housing officials, and supply skeptics agree on is that building more housing alone will not solve the housing crisis facing people at low incomes.
Increasing the supply of housing is necessary, said Been, but “it’s not sufficient because there will always be people who do not make enough money or can’t work for whatever reason and don’t have enough income to pay for housing.” She and her co-authors said robust housing subsidy programs are crucial for those households.
In Boston, “rents are so far out of reach,” said Brown, the tenants coalition director, that more housing subsidies and income-restricted units are crucial “to reach really low and even moderate income people.”