Factors affecting housing supply and prices

Published November 29, 2023. Revised November 30, 2023 for clarity and adding some links.

Here is a simple video Elasticity of Supply: Why Housing is Unaffordable from the Marginal Revolution University on a key factor affecting many housing markets. It is why some housing markets have more trouble with rapidly rising prices in the face of rising demand for housing, while others handle increases in demand with much less of an increase in price.

The key concept is tied to what economists call the elasticity of supply. If the housing supply is inelastic, then increasing demand results in sharp increases in housing prices, since much less of an increase in quantity supplied occurs per year. But if housing supply is elastic, much more supply can come to the market per year, meaning buyers do not need to compete as sharply, enabling price increases to be smaller.

### Technical notes ###
Es = (%Change in Quantity Supplied / %Change in Price)

If |Es| > 1, then supply is considered price elastic.
If |Es| < 1, then supply is considered price inelastic.        

Thus, policy action to make housing supply more elastic (responsive) to increases in demand is a key component to solving housing crises over the coming decades.

Various lobby groups, such as the various flavours of YIMBY (Yes in My Backyard) have been pushing for reforms that would improve the elasticity of supply. (e.g. What Is YIMBY? The ‘Yes In My Back Yard’ Movement, Explained).

Various thinkers like Jeff Speck have been working on these ideas for years, including in his book Walkable City. He also has a TED talk on the topic.

One of Winnipeg's important figures discussing issues of architecture, urbanism, walkability, and much more is Brent Bellamy. Brent Bellamy, Architect + Creative Director for Number Ten Architectural Group, has been writing a column for the Winnipeg Free Press (WPF) for many years, as well as engaging on social media.

Policy action to make housing supply more elastic (responsive) to increases in demand is a key component to solving housing crises over the coming decades.

Recent actions in Canada and other countries are aimed at breaking down unnecessary constraints on housing supply. For example, in 2023, the Canadian government is operating the Housing Accelerator Fund (HAF). This program is aimed at providing funding to cities to build more homes. The particulars differ somewhat from city to city.

The homes built by the HAF funds will be helpful in offering more housing supply, often at the cheaper end of the spectrum. But the gift that will keep on giving relates to the actions to make supply more elastic. Namely reforms to zoning: city-wide upzoning, [1] those favouring Transit Oriented Development, and other changes. This is aimed at enabling housing supply to be more responsive to increases in demand.

It will take time, money, and likely more changes before we get sufficiently elastic housing supply in cities around the world. [2]

Still, by enabling a more elastic housing supply, we can see a number of possible benefits:

• enable renters to find more rental units and unit types in areas they want to live. This will tend to keep rental prices down. [3]
• those buying will have more housing type options, and more units to choose from within those types, and in areas where they want to live. This will enable more to enter the market at a variety of price points.
• this will also enable moving chains [4] to activate as some households move out of starter units to larger ones for their growing families, and while empty nesters can downsize (with their kids moving out of the basement) and move to more appropriate housing options in their neighbourhood (if that is what they want).
• Granny suites, duplexes and quadplexes could enable multiple generations to live on the same plot of land as the various generations age. [5]
• we can see more (and more appropriate) housing being built closer to where jobs are. Thus employers and employees benefit.
• Shorter commutes will benefit the environment,
• The somewhat greater density in areas where it makes sense (Transit Oriented Development) will help support the coevolution of transit service (sometimes leading, other times following),
• Those who would like to form new households (but cannot due to unaffordability) will be able to get out there and launch their own little family.
• We will have fewer people at risk of homelessness even when they have a good job, or due to renovictions with no place to go,
• More of those currently homeless will come to have housing options to meet their needs as they exit homelessness. Housing first approaches are growing in popularity. [6]
• Our cities will have more tax dollars per acre, and presumably lower costs per acre, allowing for more sustainable city budgets - meaning less pressure to increase fees and taxes. [7]

Getting the implementation details right, and following through will be important to ensure ideas become housing.

End Notes:

[1] See Cheung, K. S., Monkkonen, P., & Yiu, C. Y. (2023). The heterogeneous impacts of widespread upzoning: Lessons from Auckland, New Zealand. Urban Studies, 0(0). https://doi.org/10.1177/00420980231190281

[2] Other actions can be taken. This includes, eliminating one-way streets, and eliminating parking minimums. See Jeff Speck's Walkable City book (2022 edition) for more examples. Some tools are more appropriate reasonably walkable urban areas, while not working well with areas that some call low-density stroads.

[3] Rental units are a substitute for owned homes, subject to borrowing constraints.

[4] See Cristina Bratu, Oskari Harjunen, Tuukka Saarimaa, JUE Insight: City-wide effects of new housing supply: Evidence from moving chains, Journal of Urban Economics, Volume 133, 2023, 103528, ISSN 0094-1190, https://doi.org/10.1016/j.jue.2022.103528

[5] Multiple units per lot offer some interesting opportunities not otherwise available. For some families, this would enable multi-generational housing, but without being under each others feet at all times. Other owners of all units would just rent to others, or all the units could be separately owned.

[6] The Houston Model is a variant of the Housing First Model. Finland also implemented a housing first model. See Eradicating homelessness in Finland: the Housing First programme.

[7] See Jeremy Mattson (2021) "Relationships between Density and per Capita Municipal Spending in the United States," Urban Sci. 2021, 5(3), 69; https://doi.org/10.3390/urbansci5030069.

This is a second article on the topic on urbanism. The first was written October 2022: Urbanism - What is it? | LinkedIn