The lack of affordable housing plagues communities and economies across the globe. Elected officials and municipal leaders everywhere know they have the problem. Research to assess the problem can provide some insight and inform policy. Solving the problem requires building more housing units to increase the supply of housing. More people require more housing units in which to live.
In most places, the future rental revenue will either not cover the construction costs or the housing units will not be affordable to most people, due to the high cost of construction. Solving the problem requires building housing units in such a way that future rental revenue will cover construction costs.
An Econometrics Approach
Three perspectives are adopted to project future rental rates. The demand side considers demographics by counting households by size and income to quantify the number of renter households that would be appropriate size for these units and be able to afford them. The supply side looks at the existing inventory by size and ownership status. Price analysis looks at past and current pricing by unit size.
Demand
The number of households residing in a community represents the total, current demand for housing. Total demand is distributed by size and income. Knowing how demand is distributed is necessary for comparison to supply. Historic rates of demand growth by category provide insight for estimating future demand. Additional factors may increase or decrease the level of demand. For example, the closure of a mine will reduce demand if workers must move away from the community to find new jobs. The recent trend of remote workers moving to mountain communities is increasing demand for housing.
Supply
The current inventory of housing units in a community is the supply, which is distributed by size, age, and tenure among other variables. Assessor and other data sources quantify the housing supply in great detail. Supply tends to change slowly relative to demand. Building permit, annual changes in assessor counts, and other data sources can be used to measure annual rate of supply growth. While total supply mostly increases, specific categories of supply can decrease. The conversion of long-term rental units to short-term rentals is an example.
Price
The intersection of supply and demand is the equilibrium price. Mountain and resort communities are experience rapid housing price increases of both for-sale and rental properties. However, supply-demand imbalances often vary across unit types. In other words, the level of price appreciation is often not the same for each unit type. Price growth trends will be determined by each community’s unique circumstances and socioeconomic evolution.
Affordable Housing Solutions
By adopting an econometric approach to measuring and modeling housing price trends, local officials, policy makers, and private developers can make informed decisions to address the severe shortages of affordable housing in their respective communities. Proforma forecasts of future revenue streams should be modeled with construction costs to design financially sustainable housing developments.
