If you don’t build it, will they still come? Boston’s job market has been booming over the past year, with the unemployment rate falling below 3 percent and total employment having regained levels seen just prior to the onset of the pandemic, according to Bureau of Labor Statistics data.
Due in part to this positive economic news, rents are soaring to unprecedented heights, with the cost of leasing a one-bedroom apartment recently having surpassed San Francisco’s according to some estimates. Meanwhile, the city of Boston approved less than 3,000 residential units last year, the lowest number in many years, and the labor force in the city has failed to grow.
Although the city’s immediate response to this cost-of-living crisis has been to consider a proposal to cap annual rent increases, the evidence – both from scholarship and from the experience of cities across the United States and the world – is that improving broad-based affordability requires unleashing the power of the market to supply new housing in abundance.
New Units Moderates Rents
Increasing housing production is not only about housing costs, however. Growth in housing stock, rather than burdening municipal finances, enriches an entire metropolitan area by expanding the pool of labor and maximizing opportunities for those seeking employment best suited to their talents and interests.
A report released by the NYU Furman Center in 2018 confirmed through theoretical and empirical evidence that adding new homes moderates rent increases and improves housing affordability for households of all income levels. Housing supply restrictions, meanwhile, were shown to increase environmental cost through increased automobile use, reduce economic productivity, and may even exacerbate segregation by race and income. More specifically, a 2016 study out of the National Bureau of Economic Research estimates that for every 3 percent increase in housing supply, we can expect a 2 percent decrease in rents.
While skeptics often raise concerns about the effects of new residential development on rents within particular neighborhoods, a 2021 report by ULCA’s Lewis Center for Regional Policy Studies shows that the effect of new supply outweighs any increase in demand, resulting in falling rents.
Specifically, the authors noted that the opening of even the most expensive type of new residential construction – high-rise apartments in large metropolitan areas such as New York and San Francisco – is associated with declines in rents in the surrounding neighborhood of approximately 2 percent.
Perhaps counterintuitively, this added supply is also associated with significant reductions in both tenant evictions and involuntary moves due to rent increases.
In fact, preventing new housing from being built is what has increased demand for existing units and translated directly into rental increases for existing housing stock, placing economic pressure on the very households with the least ability to absorb these costs.
Seattle Shows Path
On the other side of the country, another high-demand coastal city of similar size to Boston has had notable success in moderating and even reversing the rise in urban rents.
Seattle, where the zoning and permitting regime has been somewhat more welcoming to new construction than in similar cities, saw new construction rise 19 percent in 2022 compared to 2021 in response to soaring rents. For the first half of 2022, the city of Seattle built 3,232 apartments in large buildings, good enough for the third-highest rate of production in the United States. And in 2021, the Seattle metropolitan area completed almost twice as many apartment units as the Boston metro area, over 15,000 compared to approximately 8,000.
The result of this burst of supply was good news, reported in January of this year: Seattle’s rents had declined the fastest of any major metropolitan area, falling 1 percent from November 2022 to December 2022 as compared to a national decline of only 0.3 percent.
This news is good not only for Seattle residents and those considering a move to Seattle, but for all cities and towns dealing with either recent or longstanding high housing costs. Unshackling market forces and allowing them to respond to demand pressures, particularly in areas where the infrastructure for growth already exists, carries with it a host of benefits, only one of which is moderating or reversing rental increases.
Gentrification Fears Overblown
Meanwhile, the fears of neighborhood activists that new construction is a harbinger of gentrification and displacement are, on closer examination, lacking in evidence, which should also come as welcome news to everyone concerned about the welfare of city residents.
Further afield, the immense Tokyo metropolitan area, home to over 38 million people, has kept home prices nearly steady since 1990 thanks to astounding levels of housing production. The city of Tokyo, home to approximately 13.5 million residents, built 145,000 residential units in 2018. The entire state of Massachusetts, by contrast, with 7 million residents, averaged only 12,000 housing permits per year during the decade from 2010 to 2020. These statistics are even more remarkable given that Tokyo is virtually built out, while Massachusetts continues to have abundant undeveloped land, as well as underutilized urban land, available for growth.
Advocates for housing production, whether involved in real estate development or in other fields, will benefit from familiarizing themselves with the latest housing supply news and findings. As researchers delve deeper into these vital questions, the case for housing abundance only grows stronger.
Charles Gardner is a research fellow at the Mercatus Center at George Mason University.