It’s a bedrock economic principle: Increase the supply of a product, and its price will decline. If San Francisco wants to drive down its rents and home prices — still some of the costliest in the nation, despite our economic woes — the city must build more housing.
Nevertheless, one camp in the housing debate has long persisted that supply and demand doesn’t apply; George Mason University researcher Salim Furth calls these critics “housing supply truthers.”
Their skepticism is often rooted in variations of a gentrification theme, such as the “amenity effect” — new housing will attract rich buyers, who fuel higher-end businesses — and “induced demand,” in which expensive new homes only bring in wealthy owners and renters, providing little new housing for existing residents.
Other density opponents concede that more supply might push prices down, but once that happens, projects no longer “pencil out” and construction stalls. Developers who are happy to pursue the Golden Fleece might start to balk once they find out it’s a smaller fleece, only made of bronze.
Josh Switzky, the SF Planning Department’s acting director of policy, says this “catch-22” — the public wants housing prices to go down, but it blunts the incentive to build more — but also notes it’s a specific San Francisco problem.
If the city lowered costs involved with the permitting and building process costs, and shortened the years to navigate this system, then small bronze fleeces might be plenty enough to turn profits. “Processing adds to costs,” says Switzky. “Every dollar is still a dollar.”
San Francisco will always likely be an expensive place for housing because “buildable land is so very limited,” real estate analyst Patrick Carlisle tells The Frisc, and that’s all the more reason to streamline the notoriously long process: “It may make a significant difference if the process from application to completion takes, say, one year or so, instead of three or four years.”
Now that SF has pledged to build 82,000 new homes in coming years, there’s growing anticipation about what will happen to the city and various neighborhoods. To help remove much of the guesswork, we can turn to an expanding raft of research from around the country.
Reality check
Back in 2020, The Frisc did its first survey of research on the effects of new housing development; little data was available, and it was difficult to draw broad conclusions. Since then, however, new studies have emerged, and others have undergone review and reevaluation.
Last year, NYU researcher Vicki Been and colleagues followed up on their 2018 findings about “supply skepticism” with a research survey concluding that, broadly, “new construction in a variety of settings decreases, or slows increases in, rents, not only for the city as a whole but generally also for apartments located close to the new construction.”
They also found that as new market-rate housing ages, it helps replenish the supply of older, more affordable housing: “As households vacate the cheaper units they occupy to move into the new units, competition for the units they leave is reduced.” That is, housing trickles down.
A paper by quantitative analyst Liyi Liu and colleagues, last revised in 2021, says that the value of a home in most cities declines by about 1 percent each year that it’s occupied. But in San Francisco home prices are prone to increase annually, by about 0.7 percent.
SF and other cities with similar affordability issues (including San Jose) are almost always those with little “housing supply elasticity,” according to Liu and coauthors — the population increases but the housing stock doesn’t grow to match. Homes are more likely to “filter down” if we build, the numbers show, and more likely to remain static or even appreciate if we don’t.
This debate is not about whether new housing can reduce housing prices overall. At this point, that idea isn’t really in doubt.
In a study of a dozen cities including SF, the Upjohn Institute’s Evan Mast also concluded that more high-end housing decreases competition for previously existing homes, and thus “new market-rate housing construction can improve housing affordability for middle- and low-income households, even in the short run.”
Supply, meet demand.
A survey of housing studies from 2021 by UCLA policy researcher Shane Phillips and others goes so far as to state that “this debate is not about whether new housing can reduce housing prices overall,” as “at this point, that idea isn’t really in doubt.”
Phillips’ survey notes some counter-phenomena that density deniers cite is real. For example, “induced demand” — new market-rate housing attracting wealthier renters and buyers from abroad — happens sometimes. However, it’s not as pronounced or powerful as the forces that push prices down, so new housing’s net effect is to increase affordability.
As with nearly all academic issues, opinions are not uniform. In August, UCLA geographer Michael Storper came out in support of a lawsuit challenging state housing mandates. He argued, among other things, that “the share of very high-income households” — not supply — is the prime mover of an area’s home prices. Supply skeptics often cite Storper’s work as a source of their, well, skepticism.
But most recent research favors more density and looser zoning to address the housing crisis. “We consistently see that supply-friendly markets tend to control their housing appreciation successfully,” Igor Popov, chief economist at ApartmentList, tells The Frisc. While many cities have seen homes become less affordable in the past 15 years, “prices haven’t soared over the last 30 years in places that have been permitting lots of new housing units […] in the way that prices have soared in supply-constrained markets,” says Popov.
Vibes check
Even as most findings back the idea that building is better, density foes aren’t entirely shut out of the conversation. Much of this research adds starch to the typical anxieties about new construction.
Gentrification is a loaded term (not to mention overused). But there’s some evidence that new market-rate construction makes a neighborhood more upscale. Whether this leads to the displacement of lower-income and long-time residents, Been et al. say that findings vary across many studies.
UC Berkeley’s Karen Chapple and colleagues came up with ambiguous results when they studied this question in 2022. One data set showed that new construction slightly increased the chances low-income residents would move out of a neighborhood (1 percent to 2 percent). But a second set of numbers indicated no impact at all.
Two other studies from the same period, one in Minneapolis and the other in New York City, warned that new construction preceded rent hikes in the lowest-income buildings and that rents may rise slightly (1 percent to 1.8 percent) in nearby buildings during construction of market-rate homes. But they also found prices started to drop again after new homes were completed and went on the market.
In a 2021 paper, UC Berkeley economist Kate Pennington studied San Francisco parcels where fire destroyed old buildings and made way for new housing. She concluded that “building new market-rate housing actually benefits incumbent tenants by reducing rents, evictions, and the risk of moves to poorer zip codes” as long as the city produces sufficient affordable housing as well.
Will they build?
Perhaps the biggest caveat across many studies is this: Even with relaxed regulations around housing production, it’s hard to predict how quickly new homes will be built — especially in cities like SF where other factors, both procedural and economic, are holding down housing.
Broadly speaking, though, these findings seem to encourage policies that SF is leaning into these days: build more, preserve protections for vulnerable residents, and don’t treat every neighborhood and project as interchangeable.
As UCLA’s Phillips cautions in his survey, cities should be judicious and channel new homes into “higher-resource communities where the risk of displacement and other potential harms is lower,” while also supporting tenant protections and subsidized housing.
For decades, SF’s policies deliberately kept new homes — especially affordable ones — away from “higher-resource communities,” to use Phillips’ phrase. Now, the city’s new blueprint requires those neighborhoods to build their fair share.
As researchers keep digging into the growing body of housing data, future blueprints will evolve. In fact, SF’s current plan needs to be updated at the end of this decade. But if it produces results similar to other cities that have resolved to build more homes, San Francisco’s future could finally start to look more affordable.