High-Income Earners Not Short Supply Boost Home Prices, Experts Suggest
It seems the conventional wisdom about the housing affordability crisis might be off the mark. Rather than a shortage of housing supply, the rise in home prices is strongly linked to average income growth, according to a recent study.
Interestingly, the study revealed almost no direct link between average income growth and growth in housing supply. Instead, housing supply growth is strongly tied to population growth. Even in high-priced housing markets, the number of housing units has typically grown faster than the population.
Common Misconceptions About Housing Affordability
This new research challenges some long-standing beliefs about housing affordability. For instance, it's often suggested that NIMBYism (an acronym for "Not In My Back Yard"), bureaucratic red tape, and politicians favoring rent controls over new construction are exacerbating the crisis. But these factors may not be as significant as previously thought.
California's expensive housing markets are often cited as a prime example of these trends, especially when compared to more affordable markets like those in Texas. While California certainly has a high cost of living that contributes to homelessness and encourages people to leave the state, this research suggests that supply constraints aren't the main issue.
The Role of Demand in Housing Prices
With supply ruled out as a significant factor, the researchers turned their attention to how differences in demand could be affecting home prices. They analyzed data from the past several decades and found that until the year 2000, house prices and median income were closely aligned. After 2000, home prices took off, outpacing income growth.
This suggests that regulatory reforms aimed at boosting housing supply might not have a major impact on affordability. Instead, the key factor appears to be differences in income growth, particularly among high earners. In other words, rising income inequality could be the main driver of rising home prices.
The Impact of Wealth and Population Growth
The researchers also noted an interesting trend when looking at the relationship between income and housing supply over the past two decades. As households become wealthier, they tend to invest in home improvements, move to more desirable locations, or find other ways to upgrade their living conditions rather than buying additional homes.
Thus, it's not higher incomes but the influx of new households that boosts supply. The study found that housing supply growth is strongly tied to population growth across virtually all metropolitan areas.
Different Types of Housing Demand
The researchers identified two distinct types of demand for housing. The first type is demand for better quality housing, which drives up home prices without significantly affecting the demand for more housing units. The second type is demand driven by population growth, which increases the demand for more units, thereby driving up both prices and supply.
This research indicates that to tackle the housing affordability crisis, we need to understand changes in the labor market and economic growth across different income levels and job sectors, rather than focusing solely on increasing the housing supply.