A recent headline in the Forbes blog screams: “Additional Housing Won’t Make City More Affordable, Says Fed Study.” This blog post cites a Federal Reserve Study showing that adding 5 percent more housing in the most desirable urban neighborhoods would lower rents by only 0.5 percent.
But if you read the study more carefully, it doesn’t stand for what the headline says it stands for. First of all, it refers only to increasing housing supply in the most expensive neighborhoods. But housing markets are citywide- so of course if you increase housing supply in just one or two neighborhoods, you are not going to get significant rent reductions. If you raised housing supply by 5 percent everywhere, presumably you would get more than a 0.5 percent rent reduction.
The study itself states: ” The papers that find large effects of regulation on house prices are not necessarily at odds with our findings in this paper, because regulations can have very large effects on the housing stock. For example, Jackson (2016) finds that an additional regulation reduces residential permits by 4 to 8 percent per year. Glaeser and Ward (2009) estimate even larger effects on supply. These effects on construction can accumulate into very large changes to the housing stock, especially when these regulations are in place for many years, as is often the case.” (p. 5) In other words, the study admits that supply-limiting regulations do affect housing costs: precisely the opposite of what a careless reader might think from reading the Forbes headline.
Second of all, 5 percent is not exactly a huge increase. Even the author of the Forbes blog post concedes that more aggressive supply increases might lead to more aggressive rent reductions.
Third, the study assumes a zero vacancy rate (p. 13) which seems to be an assumption that would obviously be untrue in the real world.
Fourth, the study states: “In areas of the city where rents are
closer to construction costs, housing supply is likely to be more elastic due to more available land and fewer or less binding regulations in such areas ” (p. 7) In other words, even if housing supply doesn’t affect rents much in the most desirable neighborhoods, it affects housing supply elsewhere.
So the study doesn’t really support supply-and-demand denialism.
