Bad Weather Proved It: New Housing Helps All Renters, German Study Shows
"A 1% increase in housing supply cuts rents by 0.19% — and the benefits reach far beyond luxury apartments
A new study in the Journal of Political Economy Macroeconomics ("The Impact of New Housing Supply on the Distribution of Rents" by Andreas Mense) shows how building new housing affects rental prices. The study uses weather-related construction delays in Germany as a natural experiment.
Why it matters: The study provides the first causal evidence that building market-rate housing helps reduce rents even for lower-income residents, challenging the notion that new construction only benefits wealthy renters.
The big picture: Mense found that when construction gets delayed by weather, it creates measurable impacts on housing supply and rents. This allowed him to trace how new housing triggers a cascade of moves that frees up units across different price points.
By the numbers:
A 1% increase in new housing supply reduces average rents by 0.19%
Each new housing unit triggers about 4 moves within the rental market
Only 5.2% of rental units are new construction, while 94.8% are "second-hand"
94.8% of moves are by renters
The effects translate to a short-run demand price elasticity of -0.025
New supply primarily affects single-family housing construction
Key findings:
Rent reductions occur across all quality levels of housing
Effects are equally strong in high-demand markets with strong employment and income growth
Single-family home construction helps reduce rents by freeing up rental units
The impact is relatively uniform across unit types and local markets
Lower-quality units see effects of -0.13 while higher-quality units see up to -0.28
How it works: The research identified several key mechanisms:
Renters often "jump up" the housing ladder when new units become available
Their vacated units become available to others, creating a beneficial chain reaction
This "second-hand supply" effect integrates different market segments
Moving costs play a key role by discouraging small, incremental moves
The effect spreads quickly across the entire local rental market
Methodology details:
The study used German data from 2010-2017
Examined how weather-related construction delays affected housing supply and rents
Built economic model analyzing household housing choices
Used panel data from the German Socio-Economic Panel
Analyzed impact on 94 planning regions over 8 years
Controlled for employment, unemployment, and student population
The market dynamics:
49% of new unsubsidized units go to renters becoming homeowners
32% become rental units
19% are bought by existing homeowners
Moving chains reached low-income areas 60-70% of the time
Policy implications:
Market-rate housing construction can effectively improve housing affordability
Supply-side interventions are effective policy tools
Restrictions on market-rate housing supply can harm low-income renters
Results hold even in markets experiencing strong demand growth
The bottom line: Building new housing, even at market rates, can be an effective tool for improving housing affordability across income levels. The study suggests policymakers should focus on removing barriers to new housing construction and creating tax incentives for optimal land use.
What's next: Future research should examine how other housing policies interact with these market dynamics, particularly studying:
Forward-looking nature of housing choices
Peculiarities of housing as a second-hand market
Distributional consequences of various policies