Doubt Cast on Induced Demand for Housing

Pointing to an upcoming paper studying whether new luxury housing raises rents, Joe Cortright makes a case that induced demand theories for housing may be off-base. "The induced demand theory applied to housing," he writes, "is that building new housing somehow signals a big change in the neighborhood's amenities and livability and the new supply of housing triggers an even bigger increase in demand."

But while induced demand has been shown to apply to highway construction, a key difference between roads and housing is that road users pay a "zero price" to use the amenity. "Thus capacity (and willingness to tolerate delay) are the only things regulating demand, and when capacity is expanded, demand responds quickly," Cortright writes. The case is different for housing, which users pay a premium for. "When you actually price new capacity at even a fraction of its cost, demand evaporates."

Cortright discusses the paper's findings, which show depressed rents in buildings immediately surrounding new construction, drawing on data from 100 apartment buildings in 11 cities. The results appear to support the supply side theory and cast doubt on induced demand.