One of the most persistent claims in housing debates is that new market-rate construction doesn't help affordability for lower-income residents — or even hurts it by "gentrifying" an area. This claim is wrong on the empirics, and understanding why matters for housing policy.
Housing "filters" down over time. A luxury apartment built in 2024 becomes a middle-income apartment in 2044 and a lower-income apartment in 2064. The filtering rate depends on local market conditions, but in constrained cities the mechanism is well-documented. Restricting new supply doesn't prevent filtering — it prevents the creation of new units to filter.
Asquith, Mast, and Reed (2023) use the timing of building permits as an instrument in a difference-in-differences design and find that new market-rate construction reduces rents for nearby residents by 5-7% within half a mile, within three years. This is the vacancy chain effect: new units absorb high-income demand that would otherwise compete for existing stock.
Helsinki deregulated its inner city housing market in the 1990s. Relative to comparable Scandinavian cities, it had lower rent growth and better affordability outcomes. This isn't a perfect natural experiment, but the direction of effect is consistent with supply theory.
Supply in high-demand global cities faces a demand elasticity problem. Building 10,000 units in London or Sydney doesn't solve affordability if international investment absorbs them. This is an argument for demand-side interventions alongside supply increases, not for restricting supply.
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