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Almost a year ago, an aging duplex on the kitten corner of my (also aging) apartment in Los Angeles was razed to make way for a new four-story apartment building.
I am in favor of increasing the supply of housing in my city. Los Angeles urgently needs more affordable housing. But I admit I still felt worried. Current rents in my neighborhood are 16% lower than the Los Angeles average, which is still about $ 1,000 above the national average in August. Could this new development, which can even be considered a “luxury†apartment building, encourage my landlord to increase the rent?
I am far from being the only tenant to fear this. Many people believe that new construction aimed at middle and upper income residents in areas with older buildings is an indicator of gentrification. And low-income communities, which are often disproportionately made up of people of color, are facing the displacement of this type of real estate development in many large metropolitan areas.
But after digging into a report by researchers at UCLA’s Lewis Center for Regional Policy Studies, I’m less worried. Studies suggest that the new development, by increasing the supply of housing around me, will help moderate price increases, not speed them up.
The supply effect vs the demand effect
In their report, the authors review several working papers that examine the impacts of new developments in market rates on neighborhoods – and in one case, city-wide – rents. They describe market-priced homes as “unsubsidized homes whose price often places them beyond the reach of low- and middle-income households.”
This is a more granular approach than what has generally been explored in the past. At this point, the authors note, it is clear that an increased supply of housing can lead to lower prices in an area. But what happens to rents at the neighborhood level? In my case, what happens when you can see the new building from your bedroom window?
According to the authors, most housing advocates assume that further development at market rates will a) increase the supply of housing and thereby relieve pressure on the nearby housing stock, thereby reducing (or tempering the increase) rents – known as the “supply effect” “- or b) attract high net worth tenants, bring in new amenities and encourage area landlords to increase existing rents – known as the” supply effect ” asks â€and a stereotypical explanation of gentrification.
These two views may seem incompatible, but looking at the data sets, the UCLA researchers found that reality is a mixture of the two. So, they set out to determine which effect is stronger. In other words, what is the bottom line?
Trigger a “migratory chain”
In five of the six working papers reviewed by the UCLA researchers, rents in neighborhoods with new developments at market rates have become more affordable over time – that is, any effect of Rent increase, if any, turned out to be less than any rent reduction. effects. (The sixth article found mixed results, which the researchers said could be attributed to the market segment studied and the fact that the research did not adjust rents for inflation.)
An article, published in 2019, found that changing market rates often lead to lower rents in that immediate area, as it triggers a ‘chain of migration’. Basically, people with above average incomes tend to move into newer accommodation, freeing up their old accommodation for people with slightly lower incomes, etc. After several moves, new housing in a popular district becomes available. When this happens on a large scale, it “creates slack in the low-end housing market.”
Another article, from 2021, looked at housing production in San Francisco. He found that within 100 meters of a development site at market rate, rents drop by 2%. In addition, the risk of moving a low-income tenant from the neighborhood decreases by approximately 17%. There is also a 31% drop in eviction notices for stabilized rental housing, possibly because landlords have less incentive to evict tenants when unstabilized housing prices slow or stagnate.
Exclusion zoning hinders new developments
Of course, the construction of new unsubsidized apartment buildings is not a panacea to the housing affordability crisis, the UCLA authors note, especially when the only development that occurs is concentrated in housing estates. low income neighborhoods. New developments must also be welcomed in wealthy communities. And yet we’re at a standstill in Los Angeles because new development has been stranded in many wealthier, largely white, neighborhoods that take a tough Not in My Backyard (NIMBY) stance. This exclusionary zoning exacerbates the squeeze on affordability in low- and middle-income areas.
The researchers say that as long as there is a demand for affordable housing, there should be new developments. As a precaution, they cite data from Echo Park, a neighborhood in central Los Angeles that is considered “an example of gentrification and the painful dislocations that come with it.”
From 1970 to 2018, the supply of housing in Echo Park only increased by about 10%, but the population of Los Angeles exploded. Many existing houses were renovated or demolished and rebuilt, but new developments were rare. During the same period, rents nearly tripled and the region’s median income nearly doubled. “Preventing development did not prevent change,” write the authors.
Here’s the result: Building new rental housing at market rates can be a valuable tool in stabilizing or even slowing rents in a neighborhood or city in general. But development by non-government companies works best when accompanied by public measures such as rent subsidies, tenant protection policies and, yes, residential zoning.
(Rate.com/research/news covers the worlds of personal finance and residential real estate.)
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