Does Building New Housing Cause Displacement?: The Supply and Demand Effects of Construction in San Francisco

Abstract

San Francisco is gentrifying rapidly as an influx of high-income newcomers drives up housing prices and displaces lower-income incumbent residents. In theory, increasing the supply of housing should mitigate increases in rents. However, new construction could also increase demand for nearby housing by improving neighborhood quality. The net impact on nearby rents depends on the relative sizes of these supply and demand effects. This paper identifies the causal impact of new construction on nearby rents, displacement, and gentrification by exploiting random variation in the location of new construction induced by serious building fires. I combine parcel-level data on fires and new construction with an original dataset of historic Craigslist rents and panel data on individual migration histories to test the impact of proximity to new construction. I find that rents fall by 2% for parcels within 100m of new construction. Renters’ risk of being displaced to a lower-income neighborhood falls by 17%. Both effects decay linearly to zero within 1.5km. Next, I show evidence of a hyperlocal demand effect, with building renovations and business turnover spiking and then returning to zero after 100m. Gentrification follows the pattern of this demand effect: parcels within 100m of new construction are 2.5 percentage points (29.5%) more likely to experience a net increase in richer residents. Affordable housing and endogenously located construction do not affect displacement or gentrification. These findings suggest that increasing the supply of market rate housing has beneficial spillover effects for incumbent residents, reducing rents and displacement pressures while improving neighborhood quality.