By David M. Greenwald
It turns out there is evidence that housing supply can in fact reduce rent. Perhaps one of the most surprising features of the housing debate has been the reluctance of some to acknowledge the impact of supply on cost.
An article on Monday in the Wall Street Journal (warning: paywall), illustrated this point.
“Apartment rents fell in every major metropolitan area over the past six months through January, a trend that is poised to continue as the biggest delivery of new apartments in nearly four decades is slated for this year,” the article noted.
While there is some indication that part of the decline signals that many tenants “may be maxed out on how much income they can devote to rent” – there is a bigger factors.
The article notes: “The softening rental market follows an unprecedented run for the apartment and home-rental industry put into motion by the pandemic. Pent-up demand for housing exploded in the months after the introduction of Covid-19 vaccines in late 2020 and a surge in people searching for apartments lifted rents 25% over two years.”
While they acknowledge that there is a “seasonal stalling in rents” in typical years, the bigger factor: “, the market faces a significant headwind in the biggest delivery of new supply since 1986.”
“Nearly half a million new apartments are coming on line this year,” it continues.
It explains, “But where housing inventory remains unusually low—to the benefit of home sellers—the crush of new apartment supply will give renters more choices, making it more difficult for landlords to raise rents at rates seen early in 2022, when rent growth was at a near-20% annual clip.”
“The new supply may already be having an impact. The share of apartment tenants who renewed leases declined in January to 52%, the lowest level for that month since 2018, according to property-management software company RealPage. The data suggests some tenants are finding better deals at other buildings,” the article continues.
“Renters facing lease renewals suddenly have a lot more options,” RealPage economist Jay Parsons said in a report. “Landlords are likely to start dropping their renewal rents to prevent tenants from leaving,” he added.
The article further explained that while shelter costs continued to move up – nearly 8 percent over last year at this time, “the impact of rent declines tends to lag behind what is expressed in the CPI. Many renters are in the middle of leases signed before recent price drops. That is one reason why the rising cost of rent reflected in the CPI shows annual price growth that is still higher than market measures, which track new leases.
“Measured annually, rent growth remains positive, according to most data sources. But the pace of growth is decelerating, and if it continues to slow beyond winter, it would help pull down headline inflation figures, of which housing costs are a major component.”
The decline has been across the board “in every major US metro area” and “none of the 52-largest metro areas tracked by Apartment List experienced positive rent growth over the period.”
All of this is good news and it also demonstrates the need for additional supply to start slowing down rental growth. It took a massive influx – 500,000 new units across all markets to finally succeed to bringing down rents.
Assemblymember Matt Haney, who represents San Francisco, tweeted on Monday, “Of course we also need tenant protections, huge investment in social housing, affordable housing–the market alone will not provide affordable housing for everyone.”
But he said, “building more housing at all levels does impact rent & affordability, it’s common sense, let’s do more.”
He added, “This is overall rent–it doesn’t mean that every unit or every tenant is seeing their rent go down, especially current tenants. But increasing supply helps increase affordability, and we need a lot more. Our country & especially CA has under built housing.”
He said, “Even with this increase in building, our state has drastically under built housing. If we built more, we’d see a larger impact on rents.”
Haney later said, “Rents have decreased over the last year in Sacramento based on these reports. It doesn’t mean it’s enough, we need rent to go down by more, and we also need to build a lot more housing.”
As we know this is an ongoing battle, we have seen local communities pushing back against new housing regulations and the HCD. We have also seen CEQA lawsuits stall student and other housing projects.
But overall this demonstrates the basic principle – building more apartments will eventually reduce rental costs.