If it was not already certain, we now know; housing affordability is the top issue driving the electorate. Derek Thompson described last week’s election results as a referendum on the “affordability theory of everything”. Zohran Mamdani comfortably won the mayoralty of the most significant city in the world on the back of an affordability-focused campaign.
Mamdani campaigned on an affirmative message of hope and possibility, motivating a broad swath of voters to believe again in the nation’s largest city. In the process, he made the problem of housing affordability a central issue, but in some ways dangled contradictory solutions. On the one hand, Mamdani insisted on rent freezes for stabilized apartments, satiating the left-leaning wing of the Democratic party. On the other, he emphasized the need to build more units, pledging to build 200,000 affordable homes with government support and also flirting with the Abundance coalition by embracing the importance of supply and offering fast-tracked planning review.
One cannot fault his strategy. Giving nods to both the left-leaning wing of the party and the more moderate Abundance and YIMBY crowds is good politics, if you can get away with it. However, in practice, it may be difficult to make both sweeping changes: bolstering the construction market and imposing severe restrictions. The recent cycle has shown that more functional, deregulated markets have produced enough housing to stave off pronounced rent growth, while well-intentioned but ultimately overly restrictive policies have exacerbated rent increases. The housing affordability conundrum has reached an apotheosis, and the choice may be quite simple: either embrace a broader housing market or focus exclusively on restrictive policy.
The reality is that most levels of income need a functional free market to thrive, and the lowest incomes need very targeted public intervention. These options could be looked at as playing “offense” and “defense”, respectively. Supporting a thriving construction market is forward-thinking and will reduce rents, or at least slow their growth, over the long term. Working to preserve the low-income rents that do exist is more defensive, trying to protect those at most risk. Doing both responsibly is possible, but it can be dangerous to sweep defensive policies across the entire market to foreclose out the possibility of offensive markets.
Places that Build
At this point, certain data cannot be denied. Coastal cities have suppressed their housing markets for years such that generating new supply is extremely difficult. Los Angeles and New York City both went through aggressive downzonings in the 1960s and repeatedly thereafter, limiting the number of new units that could be built. These cities, and others like them, have also implemented numerous well-intentioned but poorly implemented policies to otherwise protect the status quo. The results have been adverse. From 2022 – 2024, Los Angeles increased multifamily inventory by 3% and experienced a 12% aggregate rent increase. New York increased inventory by 1% and experienced a 17% rent increase.
Conversely, high-growth Sun Belt cities, many of whom are taking in outmigration from the coasts, allowed more building and saw rents grow at significantly slower rates. From 2022 – 2024, Denver increased multifamily inventory by 16% and experienced a 3% aggregate rent decrease. Austin increased inventory by 24% and similarly experienced an 8% rent decrease.
Functional housing markets (ideally paired with functional infrastructure and employment markets) tend to generate a virtuous cycle. Policy oriented towards growth brings with it investor and developer confidence, which begets housing production and availability for in-migration of residents and businesses, which increases the tax base and opportunities to invest in a place’s quality of life.
Large coastal cities have instead accepted the opposite, vicious cycle. Restrictive policies have driven away reliable investors and developers. The lack of housing production results in out-migration. Renters and prospective homeowners must put up with spiraling costs with few benefits and sometimes worsening conditions. These choices freeze out mobility and choice while limiting cities’ economic dynamism.
Short-Term Solutions with Long-Term Consequences
Other recent micro-experiments show potential market-destroying consequences of well-intentioned ideas.
Montgomery County, Maryland has in many ways been an exemplar of creative housing financing solutions, with the Housing Opportunities Commission showing a new path forward on social housing development[1]. However, the County passed a rent control law in 2023 that has put a halt to momentum, with county permits dropping to zero while other Maryland and Virginia counties continued to build. Developers were startled by the law change, and fear of even more restriction caused them to “redline” the county.
Portland enacted an inclusionary housing requirement in late 2016[2], an attempt to leverage red-hot market momentum to produce more affordable units. New apartment developments larger than 20 units were required to set aside a portion of units for low and moderate incomes, without any offsetting funding or subsidy. After previously permitted, grandfathered in building surged to avoid the mandate, apartment starts plummeted at a peak time in the construction cycle for other cities and even Portland’s own suburbs, which did not have the mandate. Multifamily permits in Multnomah County went from ~5,000 to ~2,000 from 2018 to 2022, while the suburbs went from ~2,000 to ~5,000.
Los Angeles residents approved Measure ULA in 2022[3], with a plan to tax luxury housing deals and use the funds to generate affordable housing. Although marketed as a ‘Mansion Tax’, the 4-5.5% real estate transfer tax also applied to the majority of non-luxury, non-mansion apartment buildings due to their sale prices. As examined in this UCLA paper, the extra tax has resulted in a dramatic chill in the market for new apartment construction and transactions, scaring off key local investors and developers and limiting new housing production. The lack of transactions, compounded by Prop 13, another policy with unintended consequences which relies on transactions to mark property taxes up, means less tax revenue to fund city services like affordable housing.
The public sector can be an important driver of housing production, in other formats, but has rarely proven sufficient. Even the Low Income Housing Tax Credit (LIHTC), a successful federal program that leverages private sector partners, has only accounted for less than 10% of units built in Los Angeles since 2000. The other ~90% needs an efficient private market. And that ~10% is so full of added regulation and complexity that new LIHTC units in Los Angeles are typically 75-100% more expensive to build than comparable private market housing construction.
While the overall merits of policies like rent control, inclusionary zoning, and certain taxes – and the optimal way to implement them – can be debated, the poorly-applied versions have often scared away developers and investors. An overemphasis on the “defense” of preserving and generating low-income affordability, and doing it the wrong way, can have the unintended consequence of systematically destroying the “offense” of having a functional market, especially when regulations are sweeping and market-wide.
Dispelling Housing Myths
Intuitive experience suggests to many that new housing increases nearby rents. A resident of older, unrenovated, affordable stock sees a new Class A tower come up across the street, with a trendy coffee shop and an influx of new residents. Their landlord sees an opportunity to either raise their rents significantly or look to displace them to renovate to a higher-quality, higher-rent standard.
This experience is likely true to reality in micro cases, but the data does not bear it out at the neighborhood or market level. In fact, some studies suggest markets have seen new construction slow rent growth most in older, more affordable stock[4], referred to as “filtering”. The theory contends that newer units free up older ones, as some older units may be occupied by those able to move up to a higher quality. Pew observed that ZIP codes with 10%+ supply growth from 2017 – 2023 experience 5% lower rent growth than those without that growth. UCLA also observed that the “supply effect” of new availability often outweighed the “demand effect” of new amenities and a neighborhood’s increased desirability[5].
Where We Go from Here
In a 2024 study, Yonah Freemark demonstrated the importance of looking at the overall, median-focused housing market and the extremely low-income housing market as distinct problems. He drew a stark contrast between Houston and Boston. Houston is known for having a wide-open, unrestricted development market with the least restrictive zoning in the country. Boston behaves more like New York and Los Angeles, with more restrictive zoning and lower construction rates.
When looking at the median, Houston’s market is significantly more functional. Houston’s median home was valued at 3.2 times the median income, while Boston’s was valued at 5.3 times. Houston better serves its typical middle-income family.
Boston, however, has more of a public sector focus on affordability and ends up better serving its extremely low-income renters, though even as a top exemplar it is far from a functional place for the most challenged renters. In Boston, 64% of extremely low-income renters pay over 50% of their income in rent; in Houston, that number is 83%.
Freemark’s work demonstrates the importance of a dual focus. An optimized market would pair Houston’s free market zoning with Boston’s public subsidy for the lowest-income. However, rules meant to protect the extremely low-income cannot come at the cost of a thriving median market, as they have in Montgomery County, Portland, and Los Angeles. Sweeping rent controls and restrictions on building will backfire, rather than just protecting the most vulnerable. Instead, cities need to make the simple affordability choice: allow a thriving construction market to serve the vast majority of residents and publicly subsidize the lowest income households among us where possible.
Mamdani will have to strike the right balance between the policies that encourage significant new construction of housing units across incomes in New York with the market’s help, and those designed to provide housing stability to a beleaguered, rent-burdened populace. New Yorkers can only hope he balances these correctly.
Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University.
Michael Saadine is Managing Partner at Invisible Group, an interdisciplinary built environment investment platform.
Josh Humphries is Senior Advisor at the California Community Foundation and co-founder of Propvizer, a public land property development firm.