Filtering – how additional Housing Supply always makes a Significant Impact on Price

Im here to bust a number of myths such as:

  1. The proportion of new builds to the overall housing supply is so low it wont make a significant impact on price.
  2. Luxury housing wont lower prices, what is needed is affordable housing instead.
  3. You would have to increase new housing land by a huge and undoable amount to lower prices so its not worthwhile.

All of these are demonstrably false.

All three are due to not seeing the housing market as a complex system of many households and products at multiple price points; and more generally doing what economists call a partial equilibrium analysis (one good ) rather (though I don’t like the term) many goods and many buyers – known as general equilibrium.

Lets take the first and third points. The turnover of new dwellings in a mature housing market is small – around 3% being new buyers. However in a mature housing market where supply matches demand this is matched by people buying in a market. Imagine a housing market with no household growth, where say 3% of the market dies or moves out and 3% form new households or move into the market. Price is set by the turnover of these two factors. The ratio to the total housing stock is irrelevant. As in a mature housing market this turnover is small it only takes a small increase in supply to put downwards pressure on prices. This is accelerated on fast growing new housing markets where the sheer volume of new construction, such as in a Garden Community, puts very considerable downwards pressure on price.

The second two issues concern what is known as filtering.

Filtering is the idea that, as new market-rate housing is built, higher-income people move into it, leaving behind older housing stock for lower-income people

There are several things going on here. The first is the ‘what if’ the new housing had not been built, then that household would have out bid a lower income household .

The second is more subtle. All capital goods depreciate. Houses are capital goods as they yield an income. Land is land and doesn’t depreciate. New houses havn’t begun depreciating yet. Existing housing has long depreciated and if it hasn’t had renovations will be cheaper making it affordable. One of the routes to affordability is to buy run down houses and do them up. Therefore one of the best ways to avoid ‘gentriciation’ is to build new houses as then older houses are not bid on in the market by high income households.

There is lots and lots of studies showing filtering is real.

Im not saying dont build affordable housing. No what im saying is building only affordable housing is no substitute for building more housing overall including affordable housing. If you dont you just push up land prices for affordbale housing and house prices overall due to shortage of sites for luxury housing.

One thought on “Filtering – how additional Housing Supply always makes a Significant Impact on Price

  1. Pingback: Does Upzoning Cause or Reduce Housing Affordability and Racial Inequality? | Decisions, Decisions, Decisions

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