Building more housing – it's widely viewed – is the solution to address housing affordability.

But, what if that answer is misleading?

A March 2025 research working paper from the National Bureau of Economic Research challenges the almost universal belief that supply and demand determine housing prices. Instead, the paper's authors argue that income growth plays a more significant role in predicting changes in house prices, housing quantity, and population, regardless of a city's housing supply flexibility.  

Our findings challenge the consensus that relaxing regulatory constraints would substantially lower housing prices and meaningfully expand housing quantities,” the researchers concluded in Supply Constraints Do Not Explain House Price and Quantity Growth Across U.S. Cities.

While the level of supply constraints does predict house price growth, the study found that supply constraints do not affect the relationship between income and house price growth. The study also questioned the effectiveness of policies focused solely on relaxing housing regulations in addressing housing affordability challenges.  

This is some rigorous empirical backing for my contention along the same lines: inequality of access to housing is not about supply constraints, it's about income inequality,” real estate economist and advisor Aziz Sunderji wrote in a LinkedIn post about the study.

Testing Out the Theory

As a decade-long housing shortage ran into the millions nationally, the argument took on new urgency as the COVID-19 pandemic and its aftermath sent housing prices soaring. Domestic and international migration to Sun Belt cities spawned building booms in for-sale and rental housing.

Developers and affordable housing advocates argue for zoning changes that will narrow the supply-demand gap as a prescriptive to easing price pressures and enlarging the box of attainable ownership and rental access to more households vs. fewer.  

Housing economics conventional wisdom states that cities with zoning that makes increasing housing supply difficult will experience significantly higher house price increases and more limited supply growth when demand increases. If there are limited restraints, the housing supply will grow, dampening price increases or trickling down to make older stock more affordable.

Enter a contrarian take with decades of evidence to support an argument bound to ruffle feathers. It contradicts the assumption that more — more new supply, period — will solve for price elasticity, bending downward the cost curve.

Its data shows that the relationship between income growth and housing market outcomes was not substantially different across cities with varying degrees of supply elasticity.

From 2000 to 2020, the study found that higher income growth predicted similar growth in house prices, housing quantity, and population across cities, regardless of housing supply constraints. Results remained consistent when the researchers broadened the period from 1980 to 2020.

The researchers compared San Francisco and Houston to test their hypothesis. San Francisco has strict zoning that limits new construction. Houston, however, is known for having no zoning and few restrictions on building.

Under the traditional view, the difficulty in building new supply would predict much higher price increases in San Francisco. However, the study found that both cities experienced comparable price growth driven by income increases, although the mix of price and quantity adjustments differed.

Pandemic Shock

Housing prices rose significantly during the pandemic in Sun Belt and Northwest cities. People who could work remotely ventured off to lower-cost places, pushing up housing prices because, as the convention wisdom dictated, the migration overwhelmed the local housing supply. Cities scrambled to address affordability challenges as a result.

NBER researchers used this pandemic-induced demand shock to test whether cities with stricter housing regulations responded differently to the work-from-home-driven demand surge than cities with more flexible regulations. They found that, even with shock, supply constraints did not significantly impact price or quantity changes.

It's important to note that the study doesn't say supply constraints don't matter. Instead, it emphasizes that income growth appears to be a more powerful predictor of changes in house prices and housing quantity.