Yes, building more housing will drive down SF home prices—but there’s a catch

Those who push for more housing development in San Francisco—from politicians and developers to economists and academics—present a simple, time-tested argument: If you want to lower housing prices, then build more housing. It’s all about supply and demand, the simplest market principle, right?

Not so fast.

In the Bay Area, an oft-cited contra-hypothesis holds that you’ll never lower home prices by building more—at least not at market rates ($1.6 million for a median-priced house in SF in March).

SF simply can’t produce enough homes fast enough to keep up with monstrous demand, say these holdouts. And the city’s layout—surrounded by water on three sides—means there’s not enough room for everyone, even if we upzoned every inch of SF.

In fact, many new housing developments face allegations that building more could drive housing prices higher. Traditional economic thought dictates that these ideas are not only wrong, they’re irrational, like something out of a topsy-turvy Lewis Carroll fable.

But to a great number of Bay Area denizens, it doesn’t seem so absurd. In 2017, Sunnyvale City Councilperson Michael Goldman went so far as to tell Curbed SF, “You won’t hear any economist who has done anything in urban economics say building more makes prices go down.”

That turned out not to be true, for the record, as you’ll see from the sources cited further on. But according to housing researchers at some of America’s most prominent universities, Goldman’s probably not the only person who would say this.

In a 2018 paper titled “Supply Skepticism,” published by New York University, professor of law and public policy Vicki Been and her colleagues note the growing numbers of “community members questioning the premise that increasing the supply of market-rate housing will result in housing that is more affordable.” The study warns that it’s a mistake to ignore their protestations.

Been doesn’t believe that supply skeptics are right; she does however say many of the arguments that dissenters present can seem attractive to the public.

The NYU paper lays out basic tenets of supply skepticism, including the suggestion that “land in many high-cost cities is such a constrained good that it should be devoted to affordable housing,” and that high-end luxury housing will never reduce prices for older housing stock in a meaningful way.

Most critically, Been identifies fear of “induced demand” (a term borrowed from transit design), the idea that building expensive housing attracts expensive tenants and “the more you build, the more they’ll come,” a vicious cycle that could smother a neighborhood’s existing character under a horde of wealthy transplants.

These arguments play out verbatim in development fights across the Bay Area, like the years-long showdown over the “Monster in the Mission.” The NYU researchers even concede that some of these concerns have merit—for example, some new housing developments probably really will drive up prices nearby (more on that later), and the paper emphasizes that market-rate development alone won’t fix the housing crisis without the help government subsidized housing.

But Been and her colleagues still believe that “adding new homes moderates price increases and therefore makes housing more affordable”—period.

There is plenty of other research to support similar conclusions. Just last December, the Upjohn Institute, a Michigan-based employment research firm, published findings about the effect of new housing on housing prices in large U.S. cities and found that in almost all cases, rent prices around new buildings either stayed flat or declined over the next three years, although that study only singled out a few SF buildings.

Robert Ellickson, professor emeritus of property and urban law at Yale, said plainly in a 2019 paper, “the extreme escalation of Silicon Valley housing prices has stemmed in significant part from [efforts] to limit further densification” and development.

Writing in the Journal of Economic Perspectives in 2018, Harvard economist Edward Glaeser and Wharton University professor of finance and real estate Joseph Gyourko note that “binding land-use restrictions” drove up the cost of land in SF and resulted in a 109 percent increase in home prices between 1991 and 2016 due to the stifling effect on building.

Federal policy reflects these conclusions as well. President Barack Obama’s administration released a housing development policy guide in 2016 stating that “housing regulation that allow supply to respond elastically to demand helps [maintain] housing affordability.”

So if the educated opinions on the topic are so one-sided, why do most people in SF push back on it? Salim Furth, senior research fellow at George Mason University, tells Curbed SF that this response is a singular characteristic of California culture, which produces “housing supply truthers” in a way no other place does.

“There are a lot of things in economics that are deeply counterintuitive,” says Furth. “If people have only seen luxury building for 30 years, and they’ve also only seen prices go up for 30 years,” it can be hard to convince someone that coincidence is not causality.

To a degree, Furth concedes the supply skeptic argument that SF’s very limited supply of land makes it harder to build up to demand. “Natural constraints clearly matter,” he says, “[but] the question is, when we’re up against natural constraints, do we add to them or do we mitigate them?

“You can get away with bad zoning if there’s tons of land around you, but SF doesn’t have that,” he adds, alleging that issues like geography can exacerbate housing problems but are not the cause of them.

Maybe the reason NIMBY-flavored arguments remain so entrenched in the region is that, in a frustrating twist, sometimes NIMBYs are right.

While research shows that new housing lowers home prices on a macro level, when it comes to individual buildings, streets, or neighborhoods, certain new development can have a gentrifying effect.

As urban design consultant Rick Jacobus noted in 2016, this is the result of “the same mechanism working at different geographic scales.” New development in SoMa did help depress price inflation in the city overall, he says, but it also made the neighborhood a competitive destination for wealthier renters and condo buyers.

It’s sort of like dental work: In the long run, it’s critical for your overall health, but at the site of the drilling it’s probably going to hurt like hell.

This doesn’t happen with every new building—the Upjohn Institute paper found rent prices flat around the few SF developments it singled out.

But the fact that it can happen at all makes the question of where to build a fraught one. “That means you want to better target which areas you’re building housing in, and pay more attention to the mix of housing,” Albert Saiz, associate professor of urban economics at MIT, tells Curbed SF.

“Sometimes you’re going to say no at a micro level, at the specific neighborhood level of should it happen here or there—some neighborhoods are more fragile, that’s absolutely right,” he says.

But Saiz also calls the sentiment that housing prices are inflexible in the face of new construction a myth.

“SF is always going to be more expensive than Sacramento” no matter how much you build, due in part to unfixable constraints like geography—but that doesn’t mean SF can’t be less expensive than it is now by building more.

“We’re seeing almost a nihilism to the basic facts,” notes Saiz, saying that resistance to housing crosses almost all other political boundaries. “Marxists or libertarians, they all find ways to protest development.”

Framed this way, the Bay Area’s housing wars make perfect sense. Development boosters can say the only choice is to build more if we want to relieve the pressure on pricing, and they are correct.

However, neighborhood guardians can also present theoretically plausible arguments that specific projects will have a deleterious effect on their block. The yin and yang of these realities suggests a nuanced approach is needed—but nuance has rarely found a home anywhere in SF’s always-ongoing war of words about housing.

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