Assume you have a city with extremely high housing costs, over 1 million as the median price.
How fast do home prices decline when supply goes up, and how much does supply need to go up to reduce prices? Or does it vary based on what good you are providing?
If there are 400,000 homes, and you build 40,000 more how much of an effect does that have on prices? What about 20,000 or 100,000?
Too many variables. Where are the new homes located? What are they priced at. The low end or the high end? Who is the target market. New homeowners or those looking to upgrade? What about investors? Are they allowed to buy?
So this would depend on market elasticity, right? In a highly inelastic market, you’d expect huge declines the moment supply exceeds demand, while an elastic market would be more gradual.
Medical care and fuel are examples of very inelastic markets, consumer goods are elastic. Part of the reason is because with medical care there are not short term alternatives (pay whatever or die!), similar to fuel (either buy gas or be stranded!) while if a chair from ikea is too expensive you have many alternatives, including just sitting on the floor.
With housing while you do need a place to live, you could share a house with others or live somewhere else, so it’s not a totally inelastic market. Where it gets crazy is where there are unique, extremely high end jobs (be a programmer for Google! Be a stock trader on Wall Street!) there is no alternative to that have lifelong ROIs. Then people wanting to work those jobs have few choices but to pay whatever the market rate is for housing, limited only by their after tax salaries.
Hawaii’s median home price was $810,000 in September 2018 with a low of $760,000 in March. Did that $50,000 difference make any impact on the market? Not really, because people are still in the can or can’t afford it situation.
If 40,000 new homes were to suddenly appear on the market, it would likely just result in the people who would previously leave, would stay, gobbling up the homes. In addition, if prices dropped dramatically to an affordable level, more people would move her, quickly driving the prices back up.
This is not true. It doesn’t pass the most basic test of reasoning. The number of people who can afford an 800k house are finite. In fact, because of the way income distribution is, where most economic gains don’t go to more than the top 1%, the number of people who can afford it doesn’t really increase year to year. (because making the rich richer doesn’t change anything, they can just afford expensive dwellings with more money left over the richer they get, but they have finite need/demand for additional homes)
But the number who can afford a 750k house is bigger. And so on for any number you name.
So yeah, if you added more units to the market, the new price would settle on a number that would be lower, due to the distribution histogram including more people.
How low can you go? Well, in Tokyo it settles around the price of a new compact home plus the price of the underlying land, or around 300k.
Want affordable housing? Then take inspiration from Tokyo and build more of it
Around here all the new construction is priced way above the local average.
Their market are mostly people with existing homes looking for an upgrade. It’s the houses they move out of that make most of the market for first time buyers.
For builders, making a few vastly overpriced homes vs. a lot of low margin homes is a no-brainer.
Note that the young folk just out of college, etc. are not so much interested in home buying as their parents. Even if they are lucky and could afford it.
Housing demand is driven by a great many factors and supply is only one. Cost, not the cost of the house directly, but the cost of borrowing the money to pay for it, is a huge influence. People who are house hunting do not think ‘what can I afford to pay for a house’; rather they think, ‘how much per month can I afford to pay on a mortgage and what will that buy me’.
This means that when interest rates are low, prices go up, and the converse also applies.
In order to know the answer, knowing supply is not enough, you have to know demand as well. Price elasticity in residential housing is thought to be very high but it varies according to each market.
Building more houses often has the opposite effect – makes the crisis worse.
Because it’s generally an affordable housing crisis – there isn’t enough housing that people can afford. Building new houses in a city* requires demolishing existing houses, and those existing houses were older & thus cheaper than the brand-new construction that replaces them. So you have removed more ‘affordable’ houses & replaced them with more expensive (less ‘affordable’) ones.
Replacing houses with multi-resident units (duplexes, apartments, condos) might help the housing crisis, but only if the rent on those is less than a mortgage payment on the previous house.
*This is in a city, as the OP said. If it were outer suburbs, where open land is being converted to housing, it may not apply. But even then, the need to add utilities, roads, etc. to that area will make the housing expensive.
In Seattle, politics related to single family home owners fighting against increased density actually resulted in almost all lower cost housing being replaced with much more expensive housing.
It is a direct example of how building more homes can actually make a location less affordable.
So in short there is no quantitative answer to the question without specifying a lot of other things. Except to say the price would go down under certain assumptions such as
And none of those things are necessarily true. Often what you see is construction to satisfy an inflow of new high income people so none of the three are true. It’s a growth in the population to the extent lower income people don’t move away, it’s new units created by renovating or replacing old ones, and new ones represent a greater investment on which builders demand a return or they would not make the investment.
There are various palliative local measures that can be taken, but basically to avoid a local ‘not enough affordable housing’ problem local authorities would do best to focus on removing obstacles to building (up, out, whatever) and a country as a whole would recognize the lack of common sense in the concept that everyone should be able to afford to live everywhere, under a basically capitalist system anyway. On various drives long road trips around the country I look at dwellings and later look them up on Zillow, small fractions of the going prices where I live in the NY area. Why shouldn’t public policy abridge property rights so all those people can afford to live right near NY? Again, not saying certain palliative policies (affordable set asides in new projects, perhaps a rational system of rent control but NY’s is not rational, it’s hugely wasteful and makes the problem worse) can’t or won’t happen in the real world. But it’s not a solvable problem that places like NY draw so many high income people, or not one you’d want to ‘solve’ by them not wanting to. And a lot, not all, people of lesser means live there just because they always have, not because they really need to, and it’s not like they’d have to move to a foreign country to leave NY.
To the two who claim that building increases prices : did you just sleep through math and economics? That’s simple bullshit.
Now if you replace at the same density, sure. Or if the building rate is low it might SEEM like supply and demand isn’t functioning because new units command a price premium, they are new. It’s the older units on the market that go down in price if the building rate is faster than the rate new residents are entering. But if you mass build, at high density, adding units faster than the city population grows, the average price of rent will decrease for a city. There are thousands of examples of this happening and I predict you cannot find a counter example, this is how markets work.
I’m not convinced your third condition is necessary. It seems to me that adding to the supply of housing (a net increase in excess of demand), whether the additional supply is big and nice or small and squalid, will have the same effect of reducing prices across the board.
Kind of funny anyone would doubt this. I can look across the river now and see a number of very tall buildings which have changed the Manhattan skyline, super expensive condo buildings, usually one unit per floor, for millions/10’s mils each. It’s well known that in just the last couple of years they’d have more trouble selling all the units in those buildings because that particular segment of the market is now overbuilt relative to demand. But obviously those places don’t have the same effect on overall prices as the same number of (relative) low cost units. Those super high end units actually do increase average prices in NY.
The reason that doesn’t defy Economics 101 is the false implicit assumption you must be making that there’s a fixed pool of buyers who generate the demand curve. Not the case. Those units are mainly intended for super wealthy, often foreign, people who haven’t but now want to own a residence in NY.
And this isn’t a weird exception. It’s true as you go down the price curve to merely expensive places, and in the boroughs not only Manhattan. Builders build nice apartments and landlords renovate older apartments in NY to serve a clientele able and willing to pay more to get more. They don’t always make the right investment decisions, but they’d have to all be stupid to keep investing in higher end new/renovated units if the effect on prices was the same no matter how much they spent building. IOW the assumption it’s a fixed pool of buyers is not a small technical issue, it’s looking past the big reason why prices keep going up in the first place: more high income/wealth people who want to newly move to or acquire residences in NY.
Now wait a second here. So there are these super wealthy people. And they have tons of money. And they want to live in NYC. And they won’t move in until the new buildings are built because…?
Can’t they just outbid upper middle class people for their apartments, thus driving the market prices up? Wouldn’t it make more sense that these wealthy people would be moving out of their lavish renovated upper-middle apartments when these high rises are built? This would cause a clear increase in supply.
You’re gonna need to produce a shit-ton more evidence to convince me the laws of economics just stop existing in this situation. I mean, I know there are clear exceptions to economics, but generally they happen because of things like the party doing the paying not being the party benefiting, or there is a small pool or just 1 source of supply in the market, that kind of thing.
And real estate does have some pathological feedback loops. Like rent control, limits on tax assessments, or the one where a city has real estate prices increasing fast because of a lack of supply, so wealthy foreign investors buy units and leave them empty, an action which makes the prices rise even faster, causing more investors to come along, and then…
If you don’t do that, what happens is that the wealthier people buy up the “affordable” houses and fix them up to make them even less affordable than the new homes would have been. And then even fewer people can afford to live in the city. (And then the very same NIMBY activists who blocked the new homes will cry and stamp their feet about how gentrification is ruining the city.)
The problems NY has are even worse in London. Multi-million-pound mansions being bought up by foreigners (Russians mainly) as an investment – a safe place to park their i̶l̶l̶-̶g̶o̶t̶t̶e̶n̶ ̶g̶a̶i̶n̶s̶ profits.
This pushes out the moderately wealthy millionaires, who have to slum it in smaller mansions, and so on down the housing ladder. Now anyone on an average wage, even the higher London average, has no chance of buying a house, so they move out to anywhere they can commute from and afford a deposit on a house. This makes for jammed roads and crowded commuter trains.
The increased desire of higher income to extremely wealthy people to live in NY has changed the demand curve, that’s the point. That’s the reason it’s not a matter of ‘the laws of economics stop applying’. And it’s also not a matter of whether it would hypothetically ‘make sense’ if most of those people had had residences in the city all along. The basic reason real estate prices have increased so much in NY is people newly coming in who want and can afford very expensive places. The construction of new very expensive places doesn’t prevent the inflow of high income to extremely wealthy people from also pushing up the prices of existing places, that’s happening too. But if there were a sealed dome around the city not letting anyone else in, which seems to be part of your and the previous poster’s idea of ‘the laws of economics’ as it applies to NY real estate, then it wouldn’t be happening to anything like the same extent it is.
Which is why I gave the example of those tall thin up to 1000’+ foot super expensive condo buildings you now see in the Manhattan skyline, because it’s so simple to see there. That’s new supply increasing the average price of all homes, obviously, no need for further ‘shit tons of evidence’. But it doesn’t violate any economic law. Back to my original three conditions, if the mix of buyers and mix of types of housing were constant, you could predict that uniform supply increase outrunning the uniform increase in number of buyers would lower the arithmetic mean of prices. But if the new demand also represents a shift in demand from new buyers toward bigger, nicer places, then the average price can rise even if that new demand is oversupplied (as in the trouble in filling all those super buildings last couple of years, but they are still increasing the average unit price city-wide). And again this is not a technicality but a core reason NY and other world ‘magnet’ cities RE prices’ have increased so much: a change in the mix of buyers, not just supply/demand assuming a constant mix of buyers and unit types.
Well, DC has added 22,000 apartments in the past five years, probably mostly focused on higher income earners.
Over that same period of time, vacancy rates have ticked up by like half a percent, and average rents have been nearly identical. I don’t know for sure, but I wouldn’t be surprised if the rental market is just becoming more stratified.
You’ve correctly identified and called out my unstated assumption that we’re talking about a fixed pool of potential buyers (by fixed here, I mean independent of the supply). In other words I was assuming that a newly-built dwelling will normally be bought by someone who was in the market to buy in that city and would otherwise have bought a similar property. Clearly, based on your description and bob++'s, that is not the case for high-end developments in New York or London. But I doubt that New York and London are typical in that respect.