Not in real estate economics. Housing isn't a commodity market. There are firm price tiers, different methods of construction, different fixed costs for those methods, and drastically different markets for individual neighborhoods. Real estate isn't fungible and it's isn't particularly liquid. Basically none of the requirements of Econ-101-style supply and demand are met in the world of real estate. Building skyscrapers is nothing like creating an assembly line for widgets.
So yes, "construction" has some small aggregate effect on the price of a rental in the city, but that effect is meaningless to you if your affordable building was knocked down to make room for a luxury skyscraper.
Moreover, if you do happen to overbuild housing in a market, the price sags. Developers then almost immediately stop building, because the costs of new construction don't decline with scale. Thus, price controls enabled by construction happen on the order of decades, not years. Neighborhoods gentrify much more quickly.
In practice, a low-density neighborhood gentrifies, land values go up, and developers start to replace cheaper, low-density construction with expensive, high-density construction that can only be justified because of the higher land values. Existing residents are displaced. Ideally, those residents then move to a cheaper neighborhood. If no such neighborhood exists (because, say, you're in a small land-locked city with more millionaires per capita than anywhere on earth, and no remaining "undesirable" land), then those residents are, indeed, completely displaced. The fact that luxury apartments are theoretically $30 a month cheaper in some other neighborhood is thin gruel.
"None of this dismisses the fact that displacement from specific homes happens when low-income housing is literally knocked down to build high-end towers. A good amount of new supply in cities, though, can rise on under-utilized land (former industrial plots, surface parking lots, abandoned properties, etc.). And the cumulative effect of all that new supply can hold down rents across neighborhoods and cities, including for the poor."
Nobody thinks that new housing is bad - in the long term. Where economists start to disagree is how to prioritize low-income housing and market-rate construction in the near-term:
"To be sure, more supply is needed, but unless it is targeted to those who need it most, it will only help wealthier residents."
"'Filtering,' where older housing units trickle down to lower-income families as they age, can happen in the broader metropolitan context. But it can take decades for filtering do deliver truly affordable units to lower-income households. As apartments age, the rent of a typical unit – not in a hot area - declines an average of 0.31 percent per year so even after 30 years, the rent will have fallen by only 9 percent."
"In gentrifying neighborhoods, filtering does not work at all, because land values and rents rise as the neighborhoods become more desirable and developers bid up land values. So lower-income households must look in other neighborhoods where services and schools are likely to be much weaker. Hence the gentrification process can reconstruct economic segregation."
The first article, headlined The poor are better off when we build more housing for the rich literally makes my argument.
The second article lets various people give their reaction to the first one. The non professionals say what they usually say. But the Berkeley professor of economics answers my question very clearly:
Economic research on this topic is unanimous. There is no question that on net, adding more units tends to lower rents. All existing peer-reviewed academic studies — including work done at Harvard University, the Wharton School at the University of Pennsylvania and by me at UC Berkeley — find that more housing supply results in lower rents and house prices, everything else being constant.
If you're simply replacing cheap housing with an equal number of expensive units, yeah, that's not doing much good. The idea is to add to the total number of units.
But just because the best time to build more was 30 years ago doesn't mean now isn't a good time to start.
Also: if you are adding expensive housing it takes some pressure off of the cheaper housing that would otherwise be the 2nd choice of those going into the expensive housing.
Ok....there is clearly more housing in San Francisco today than there was 50 years ago. Why does housing in San Francisco cost more today than it did 50 years ago?
Congratulations on recognising that your glib generalization above was wrong! Now see if you can imagine any way in which development of a neighbourhood can ever increase demand. An idea to get you started: there exist people who would like to live in a nice apartment but who would not be interested in an old rooming house. There exist people who only want to live somewhere that already has residents at their (higher) income level. There exist services that are only offered in areas that have people with x disposable income. And there exist people that will only move somewhere that said services exist.
Here a scenario that can illuminate the unavoidable fact of supply and demand.
- A building owner doubles his rents from $3000/month to $6000/month. What happens? Everyone moves out. The high price eliminated Demand for that building.
ANALYSIS: When the owner tried to jack up his rents too high, it created an excess supply of $6000/month units and not enough demand. What will happen to that owner? ANSWER: go out of business or increase Demand by lowering his asking rent. CRUX: owners only have 'pricing power' matching the strength of demand, they cannot just start 'greedily' raising rents.
Now assume Zynga opens up shop in the neighborhood. Does demand increase for apartments? YES. There are hundreds of new renters.
Building owners see they get 20 applications now for a vacancy instead of 5. They raise their asking rents to $3100 and people pay it due to lack of Supply of units.
The owners cannot raise the rent unless Demand increases. But in San Francisco, which has become much more of a Tech hub over the past 20 years, Demand for apartments has increased. Supply hasn't kept up.
INCREASE IN DEMAND = more applications for a vacant unit = HIGHER RENT because lack of supply means renters have few choices.
Okay, now assume Zynga goes out of business.
Does demand DEcrease for apartments in the neighborhood? YES. There are hundreds of fewer renters.
Building owners see they get 5 applications now for a vacancy instead of 20. If they keep the rents at $3100 there is now an excess supply of expensive units. They must lower their asking rents or wait longer to fill a vacancy and lose money on an unrented unit.
I own/operate rental properties. Supply and Demand is alive and well in the apartments realm on the Peninsula.
During the worst parts of the recsssion we had 20% vacancy (normally it's between 3% to 5%).
Demand for apartments dropped precipitously. Did we lower our rents? We had to. We entered a 'race to the bottom' competition with other rental property owners.
THERE WAS AN EXCESS SUPPLY OF APARTMENTS in the 2008-09 recession. Rents dropped.
Right now there is a lack of supply of units because Demand rose as the job market got healthy.
Rents are higher.
When Demand drops in the next few years in the next recession (due to layoffs, tech firms folding, etc.), will my firm have to lower our asking rents?
OH BABY. Yes indeed. It hurts too.
The argument 'Supply and Demand don't apply to housing' is patently false.
During a recession, there's lower Demand for units (fewer people working; living in parent's basement or leave the area). RENTS DROP.
During a healthy job market, there's higher demand for apartments (more people working -- move out of parent's basement; and new people get hired locally and move to the area). RENTS INCREASE.
The argument that 'everyone must have an apartment in San Francisco, regardless, if they want one' is BOGUS. If you cannot afford to live there, that's YOUR FAULT. Not the city's fault. Not Zynga's fault. YOUR FAULT.
This is such a stupid myth. On par with "vaccinations cause autism" or Bigfoot.
Science has studied how price depends on supply and demand very thoroughly. Increased supply always leads to lower prices.