Without new construction, where will people live? – 02/02/2024 – Deborah Bizarria

In the last year, rental prices increased by an average of 16% according to the FipeZAP index, an index around three times higher than general inflation (IPCA). Large urban centers offer more opportunities for work and professional growth, but at the same time the cost of housing has grown and the current status of urban regulations makes new construction difficult.

In modernizing these rules, we are faced with difficulties: people do not believe that more housing would mean lower prices.

In economics, we understand that the greater the supply of a good or service, all things being equal, the lower its price tends to be. Even the most lay people understand this mechanism well… Except when it comes to housing.

Starting from the hypothesis that many people do not believe that building more housing would reduce prices and rents and therefore would be against reducing restrictions on land use, Clayton Nall and other researchers analyzed 4,200 interviews from Americans on the topic.

The results reveal that only around 30–40% of respondents believe that a 10% increase in housing supply would reduce prices and rents, while approximately 20–30% believe it would increase. This disparity persists across different demographic, ideological and geographic groups, indicating that supply skepticism is robust.

The article employs two main methods to measure skepticism towards the offer and its effects. The first involves a vignette experiment, presenting interviewees with hypothetical scenarios of increased supply and asking about their expected impacts. In the second experiment, interviewees evaluate different housing policy proposals.

The results point to the persistence of skepticism regarding supply, regardless of the wording of the question, the counterfactual assumptions or the cause of the increase in the number of homes. The impact of this skepticism is reflected in political support for housing proposals. Skeptical tenants are less likely to support proposals that facilitate construction, while some skeptical landlords are more in favor, possibly aiming to increase the value of their properties, based on the assumption that new construction would increase rents.

One intriguing aspect is the gap between respondents’ stated preferences for lower prices and rents and their actual support for policies that could achieve them. Skepticism regarding supply is pointed out as a factor, but the lack of trust in governments, concerns about side effects of construction and the lack of information about housing policies also stand out.

In practice, disbelief in a market mechanism that is known to work generally in the economy has concrete impacts in supporting the maintenance of measures that make new construction more difficult and consequently lower prices, or prices that rise more slowly.

Skeptics will argue that as construction companies only seek profit (and they do), they end up only building expensive units focused on a high-income public, always increasing the prices of rent and services in the location. But they seem to ignore the following: what happens to the old space of someone who bought a new apartment?

Using data from the United States, economist Evan Mast concluded that the construction of 100 new homes at market prices leads up to 70 people to leave neighborhoods with income below the median and up to 40 to leave the poorest fifth. This means that new homes free up cheaper space, generating a cascade effect, and also increase supply in the market as a whole. These effects are similar in other countries around the world, as data journalist John Burn-Murdoch argues in his column for the Financial Times. To improve the availability and accessibility of housing for everyone, new construction will always help, especially if it makes good use of the land.

If we want to have more affordable rents, or at least slower adjustments, we need urban planning that is friendly to new and good construction. Without this, the biggest losers will not be the construction companies, but all of us who live on rent in big cities.

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