Does Luxury Housing Construction Increase Nearby Rents?

Published: 2019 | Evan Mast | Upjohn Institute for Employment Research

Abstract

A major obstacle to new housing construction in gentrifying neighborhoods is the fear that new units will induce additional housing demand, increasing local rents and fueling further gentrification. Although this is counterintuitive, there are many plausible mechanisms by which an increased concentration of wealthy households could make a neighborhood more attractive to other wealthy households. However, there is little to no empirical evidence on this topic. We study induced demand near new apartment complexes in gentrifying areas using listing-level data on rental prices from Zillow and exact household migration data from Infutor. Preliminary results using a spatial difference-in-differences approach suggest that any induced demand effects are overwhelmed by the effect of increased supply. In neighborhoods where new apartment complexes were completed between 2014-2016, rents in existing units near the new apartments declined relative to neighborhoods that did not see new construction until 2018. Changes in in-migration appear to drive this result. Although the total number of migrants from high-income neighborhoods to the new construction neighborhoods increases after the new units are completed, the number of high-income arrivals to previously existing units actually decreases, as the new units absorb a substantial portion of these households. On the whole, our results suggest that—on average and in the short-run—new construction lowers rents in gentrifying neighborhoods.