International investment and local rules push prices up faster than supply

The study by Caitlin Gorback, an assistant professor of finance at the McCombs School of Business, found that foreign investment in US housing increased after 2011, following Singapore's introduction of a tax on foreign homebuyers. This influx of foreign money drove up housing costs in areas with high concentrations of international purchasers. For instance, areas with more foreign-born residents saw housing prices average 6.7% higher than other neighborhoods in the same city, while housing supply grew only 1% in those areas. The research also showed that for every 1% increase in housing prices nationwide, housing supply increased only 0.26%.

The findings have broader implications for affordability, as even in markets where foreign investors were scarce, prices rose much faster than supply did from 2009 to 2018. Cities like San Francisco, where it's difficult to create new housing, experience rapid price increases, whereas cities like Charlotte, North Carolina, with easier development processes, see increased demand met with more supply. This disparity highlights the importance of municipal control over housing, with cities like Baltimore demonstrating high supply elasticity after revising its permitting process in the mid-2010s.

The research underscores the significance of local regulations and zoning laws in determining housing supply and prices. As people move back into urban areas, cities must find ways to promote affordable housing. The study's results suggest that municipalities have considerable control over their supply sensitivity, and changes to zoning and permitting processes can have a substantial impact on housing affordability. The findings of Gorback's research, published in the Review of Financial Studies, emphasize the need for cities to take proactive measures to address the issue of housing affordability.