New Research Challenges Conventional Views on Housing Affordability
Conventional economic and policy views often suggest increasing housing supply to improve affordability. However, recent research challenges this perspective, presenting new insights into the drivers of rising home prices.
A study led by UC Irvine PhD student Schuyler Louie, in collaboration with San Francisco Fed researchers John Mondragon, Rami Najjar, and Johannes Wieland, indicates a strong correlation between average income growth and house price growth.
The study found almost no connection between average income growth and the growth of housing supply. Instead, housing supply growth is strongly linked to population growth.
The researchers observed that most metropolitan areas experienced housing unit growth faster than their population, even in expensive markets such as Los Angeles and San Francisco. This finding questions common assumptions that factors like NIMBYism, regulatory hurdles, and rent control policies are primary drivers of the housing affordability crisis.
Income Growth, Not Supply, as the Key Factor
While California's housing markets are notably expensive, the research suggests supply was not the key determinant of their high prices. Drawing on data from the mid-1970s, the study noted that house prices and median income tracked closely until 2000, after which home price growth significantly exceeded income growth.
The research concludes that regulatory reforms may have limited impact on housing affordability and that differences in housing supply constraints are not the fundamental drivers of varying housing dynamics across metro areas.
From 1975 to 2024, average income growth was found to grow "essentially one-for-one with house prices." This suggests a deeper connection to economic shifts than to simple supply-demand dynamics of units.
Consequently, housing affordability may be primarily influenced by income growth disparities, specifically "differences in income growth at the top of the distribution relative to the middle," suggesting income inequality as a significant factor in home prices.
Disentangling Demand: Quality vs. Quantity
Between 2000 and 2020, no relationship was observed between incomes and housing supply. This may be because wealthier U.S. households tend to prioritize home renovations, relocation to desirable areas, or other housing quality improvements rather than acquiring additional homes. This kind of demand impacts price without necessarily increasing the number of units.
Instead, the arrival of new households in a city stimulates supply, with data showing a strong relationship between housing supply growth and population growth across almost all metro areas.
The study distinguishes two types of demand:
- Demand for improved housing quality: This type of demand increases home prices without significantly changing the number of housing units.
- Demand driven by population growth: With steady average incomes, this type of demand boosts both the number of units and prices, thereby stimulating supply.
Reimagining Solutions for Affordability
The researchers suggest that addressing the housing affordability crisis may be best approached by examining changes within the labor market. This includes particularly the relative distribution of economic growth across income levels and job sectors in different regions, rather than focusing predominantly on housing supply constraints.