New Market-Rate Housing Reduces Rents in the Neighborhood

November 19, 2020

A new working paper from UC Berkeley Department of Agricultural and Resource Economics PhD candidate Kate Pennington offers compelling evidence that new market-rate housing in San Francisco reduced rents for existing residents while providing more amenities in the neighborhood. The results are preliminary and have yet to be peer reviewed, but provide another data point in our understanding of the relationship between new housing supply and current neighborhood conditions, rents, and economic development.

The key takeaways:

  1. Within 100 meters of randomly located new construction in San Francisco, rents fell by 2% on average; the risk of displacement for current renters fell by 17%.
  2. At the same time, parcels of land within 100 meters of new construction are 29.5% more likely to experience an increase in higher-income residents. Home renovations and business turnover also increase within this zone.

While a classical economic model concludes that “more housing supply lowers rents,” in the real world, the interplay of housing supply and demand is noisy and imperfect. New homes are unlikely to be built unless builders see an area of rising demand, which can be identified by rising prices for buyers and renters alike. This dynamic makes it difficult to measure the effect new construction has on rents, independent of broader market dynamics.

To capture a causal effect other than the positive correlation between prices and development, researchers need a source of random variation in the location of new construction that can approximate an experiment. Pennington uses serious building fires as a natural experiment in where new housing gets built. “The combination of strict regulation and geography mean that San Francisco cannot grow up or out,” Pennington writes. “As a result, most new construction requires removing an existing building. Serious fires increase the probability of construction on a burned parcel relative to its unburned neighbors by lowering construction costs.”

The second problem is measuring displacement vis-a-vis gentrification. A major challenge to research on displacement and gentrification is the inability to measure them separately. Displacement refers to involuntary mobility, while gentrification refers to the replacement of lower-income residents with higher-income residents.

Pennington distinguishes between displacement and gentrification by using a database of the address histories of over one million people living in San Francisco from 2003-2017. To define displacement, Pennington focuses on moves to lower-income zip codes, since the need for more affordable housing is the primary factor causing people to move involuntarily. Since not all moves to low-income zip codes are caused by displacement, Pennington also uses eviction notices as an alternative measure — and obtained similar results. For gentrification, Pennington measured the net increase in people moving to a given building from wealthier zip codes.

When combining these measures of displacement and gentrification, Pennington found that, while new housing may have demand “spillover” effects by attracting wealthier residents and new businesses to the neighborhood, for existing residents, rents fall and displacement risk is reduced in the immediate vicinity of new market-rate construction.

Specifically, Penington says, within 500 meters of a new housing development, “I find that monthly rents fall by $22.77 – $43.18, roughly 1.2 to 2.3 percent.” Within the same area, “an additional housing project reduces displacement risk by 17.14 percent” on average — and critically, landlords are 31.09 percent less likely to file for eviction of current residents.

While spillover effects also include an increase in building owners who are likely to engage in renovations, or turnover from long-standing local businesses to newer businesses near new construction, the likelihood of properties changing hands does not increase.

Penington’s findings strongly suggest that new housing reduces housing insecurity in the neighborhoods where it is built, by bringing down rents nearby, protecting tenants from displacement, and reducing incidence of eviction. There’s no tradeoff: New housing benefits both new residents and existing renters.