Whenever we discuss housing affordability, we usually hear two major opposing beliefs. Both are well-honed, clear arguments. And both are wrong — or at least, not completely right.
Some say that new development only provides high-end housing which doesn’t do anything to help those who really need it. Therefore, they oppose new market-rate development.
Others say the problem is we don’t have enough development. Regulations constrict supply and drive up costs. Get rid of regulations and the free market will build housing for everyone.
While residents of DC (and most US cities) are mostly Democrats, we can say that proponents of the first view are generally further to the left on the political spectrum, while proponents of the second are, if not conservative, further to the right.
This post will address what’s wrong with the left’s notion that supply and demand don’t apply. A follow-up post will critique the right’s free-market solution.
In a nutshell, the first proposition essentially denies that supply and demand matter. But it’s not to hard to demonstrate that if there’s not enough housing on the market to meet demand, higher-income people will bid up prices and out-compete lower-income people.
DC is growing rapidly and this strong demand to live in the city encourages people to build new housing. But it’s not enough. There’s so much competition for a limited supply of homes that even people who could normally afford to rent or buy a home can’t find one easily within their budget.
There’s clear evidence that this is happening in a 2014 study by the Urban Institute about affordable housing in the region. It shows that nearly half of the units that could be affordable to lower-income people are instead occupied by higher-income people:
Basically, the people who make up the green bars in the above chart could afford to be in a higher-priced unit. If there were more new construction units, many of them would live there. That would leave more lower-priced housing left for those who don’t earn as much.
Encouraging more new housing to be built and making it easier to build can help increase competition among builders and reduce competition among renters. This helps keep prices down both in among new, higher priced units and also in older buildings.
Recent reports suggest this is happening. The rapid increase in housing supply that has been pushing down rents in high end, newer units is also now shaving down prices across the market, even for older apartments.
While this decrease in prices might be difficult to discern, continuing to encourage more supply will help further push down costs and make it easier for a larger segment of households to find the right place to live.
Supply matters. The more the market can serve those who can to pay for more expensive housing, the better chance for moderate- and lower-income people to find lower-priced housing available.
Buildings are expensive to build, and absent a government subsidy or a program like Inclusionary Zoning, new units won’t be affordable to everyone. But it can be for many. Ignoring the importance of supply to keep up with demand means that we are only that much farther behind trying to address our housing needs for people at the bottom and middle of the housing market.
Encouraging supply to meet demand is a necessary condition for addressing housing affordability. However, it’s not a sufficient condition entirely on its own. Tomorrow, we’ll talk about why “let the market work” isn’t the whole answer either.
Read part 2: Why the right is wrong about affordable housing.
This post originally appeared in 2015, but we wanted to re-share it!