DFG Research Project

Who Benefits from New Housing Supply?

In this research project, I investigate the impact of new housing supply on the distribution of rents. The project started in June 2019 and the anticipated duration is two years. It is funded by Deutsche Forschungsgemeinschaft.

Private markets contribute to the supply of affordable (rental) housing. The central theoretical mechanism is called „filtering“, a term referring to the fact that housing units „filter down“ the housing quality distribution as they age. The mirror-image view is that households move up the housing quality ladder when their income increases. Their previous housing unit can then be occupied by households with relatively lower incomes. Taken at face value, this suggests that it takes a long time until a newly supplied housing unit has reached a quality standard that is accessible to low-income households. However, this need not be true if households „jump“ up the housing quality ladder. For instance, a young, well-educated couple might move from a small two-bedroom apartment in a mediocre neighborhood to a new single-family home in an affluent suburb. This new single-family home would then have a direct effect on the effective supply of relatively cheap housing in the mediocre neighborhood.

The project’s main goal is to quantify this relationship. How strongly does the rent distribution of a city react to the supply of housing by private markets? The central methodological difficulty is to find a source of variation in new housing supply that is unrelated to the state of the local housing market. This is necessary because cities with strong and growing housing demand will likely also attract more housing developers. The pure correlation between (changes in) rents and new housing supply might thus even be positive. As a solution, I propose to use weather-induced delays during the construction phase. These delays lead to a smaller number of housing completions in a given year.

In a second step, I study the decision process of households. In most simple models of filtering, households do not face any moving costs. Consequently, in such models, it is possible for household to adjust housing quality whenever household income changes (presuming that households find it optimal to spend a particular share of their income on housing services). In that case, a new housing unit of rather high quality would be occupied by a household living in a housing unit that has a slightly lower quality. It seems likely in this setting that the impact on rents of lower-quality housing units would be delayed considerably, because it takes many such „small“ moves up the housing quality ladder to get from a low- to a high-quality unit. To the contrary, if moving costs are substantial, households will only move house if the improvement in housing quality is substantial. In that case, new supply of high quality housing units would lead to a quick expansion of effective housing supply also at lower quality levels.

In order to tackle the second question, I develop a quantitative dynamic discrete choice model. The model is then estimated by combining survey data from the German Socioeconomic Panel and data on rental housing units offered between 2011 and 2020.

After completion of the project in June 2021, I will make available the rental housing data via this website. Use will be restricted to academic research projects.