Affordability impacts of new housing supply:

This note summaries the findings of recent economic research into the impacts on the affordability of new housing supply.

There is already evidence that increases in the supply of housing bear down on housing costs over the long term, but until recently there has been little evidence on the short-term and local impacts of new supply on affordability.

Several recently published economic papers attempt to identify these impacts using new data sources and new analytical techniques.

This research finds that in general, building new market-rate homes makes other housing more affordable. It does so by creating chains of vacancies and moves that can reach across an entire housing market area. These moving chains improve the availability and affordability of housing throughout the range of prices and rents, including for low-income households.

Building market-rate housing therefore indirectly increases the availability of homes affordable to low-income households, although not as directly as building social housing and other kinds of affordable housing.

The geographical distribution of market-rate housing supply matters. If it is focused only in low-income areas it can lead to localized increases in prices and rents in those areas (while still improving affordability elsewhere), if the impact on demand resulting from improvements in local amenities and services outweighs the impact on supply.

There is a broad consensus in the academic and policy literature that increases in the supply of new housing bear down on prices and rents over the long term and at the city or national level, but considerable uncertainty over the short-term and local effects. Some of this controversy is due to a lack of good evidence, given the difficulty of separating out cause and effect when new construction can seem to coincide with rising prices, and when a host of other factors can affect prices and rents. For example, there are concerns that adding high-priced new homes into an area drives up costs for those nearby, or at least does little to improve the prospects of lower-income households.

Recent academic research from around the world aims to overcome these challenges by employing new techniques and exploiting new data sources. This paper summarises the new literature and relates these findings to a range of existing evidence.

The paper focuses on evidence of the impacts of new supply, rather than on the effects of different policies aimed at increasing supply. One recent overview of evidence (predominantly from the US) on the impacts of ‘zoning’ changes on supply is provided by Freemark (2023).

A large body of economic research comparing long-term changes in the housing stock with changes in house prices and rents, and controlling for a range of other causal factors, shows that increases in housing supply tend to reduce housing costs when all else is equal. Some of this research focuses on one country, while other studies (such as Andrews 2010) involve cross-country comparisons. The UK government’s official estimates of housing supply impacts (summarised in MHCLG 2018) are based on this kind of analysis.

According to those estimates, a 1% increase in the housing stock leads to a 2% fall in house prices if nothing else changes. The impact on private rents is thought to be similar. In practice, the effect of supply is offset by factors that increase demand such as population and income growth, and can be (and in the UK usually is) swamped by them so that housing costs rise over time.

Another substantial strand of research analyses the extent to which homes that were originally built for inhabitants with above-average incomes tend to ‘filter’ down to less affluent segments of the market over time. Recent research (Liu et al 2022) has established that filtering rates vary substantially from place to place and that the process only operates as long as the new housing supply is reasonably responsive to changes in demand.

Where the new supply does not increase enough in response to demand, the filtering process can go into reverse, and homes that were previously occupied by low-income households are increasingly bought and rented by higher-income ones – a process that is often called ‘gentrification’. The vast majority of empirical research into filtering has focused on the US, with very little in the UK.