The Effect of New Luxury Housing on Regional Housing Affordability

Published: 2019 | Evan Mast | The Captured Economy

Abstract

I study the short-run effect of new housing construction on housing affordability using individual address history data. Because most new construction is expensive, its effect on the market for more affordable housing is unclear, since these could be effectively separate submarkets. I first show that new construction and low-income neighborhoods are connected by a short series of common moves individuals frequently move to a census tract two to four income deciles higher than their origin. I then identify residents of new luxury multifamily buildings in large central cities, their previous address, the current residents of those previous addresses, and so on for six rounds. This sequence of previous addresses steadily adds more diverse neighborhoods, suggesting strong connections between new construction and affordable neighborhoods. Lastly, I quantify these descriptive patterns with a simple simulation model. Building 100 new luxury units leads 65 and 34 people to move out of below-median and bottom-quintile income neighborhoods, respectively, reducing demand and loosening the housing market in such areas. These results suggest that increasing housing supply improves housing affordability in the short run.