We may be looking at the housing affordability crisis all wrong. Higher earners are driving home prices, not lack of supply, researchers say

Economists, lawmakers, and Wall Street have long preached the need to increase housing supply to improve affordability, but it may not be that straightforward.

According to a recent note written by UC Irvine PhD student Schuyler Louie along with San Francisco Fed researchers John Mondragon, Rami Najjar, and Johannes Wieland, average income growth “relates strongly” to house price growth.

“However, there is almost no connection between average income growth and growth in housing supply,” they added. “Instead, housing supply growth has a strong positive relationship with population growth. In fact, almost all metro areas saw housing units grow faster than their population—even in expensive residential markets like Los Angeles or San Francisco.”

That challenges deeply ingrained notions that NIMBYism, red tape, and politicians who favor rent controls over new construction are worsening the housing affordability crisis.

Meanwhile, California’s pricey housing markets have been held up as a prime example of these trends and often contrasted with those in Texas, where homes are more affordable.

To be sure, California is expensive to live in, fueling homelessness and migration out of the state. But given that supply was not a factor, the researchers took a closer look at how differences in demand affect home prices.

Drawing on data going back to the mid-1970s, they pointed out that house prices and median income tracked each other closely until 2000. But after that, home price growth far surpassed incomes.

“This research indicates that regulatory reforms may have limited impact on housing affordability and that   differences in housing supply constraints are not the fundamental drivers of differences in housing dynamics across metro areas,” they said.

When looking at average income, the researchers found it grew “essentially one-for-one with house prices” from 1975 to 2024.

So rather than a lack of supply, housing affordability “may primarily be about differences in income growth at the top of the distribution relative to the middle.” In other words, income inequality drives home prices.

Meanwhile, when looking at incomes and housing supply from 2000 to 2020, there was no relationship. The reason may be that when U.S. households become wealthier, they prefer renovating homes, relocating to nicer locations, or finding some other way to improve their housing quality—rather than buying additional homes. 

Instead of higher incomes, the arrival of new households to a city boosts supply, and the data show that “housing supply growth is strongly related to population growth across essentially all metro areas.”

The researchers highlight two different types of demand. When demand grows for better housing quality, home prices rise while demand for the number of housing units stays relatively unchanged.

But when housing demand comes from population growth that keeps average incomes steady, demand for the number of units increases, driving up both prices and supply.

“This suggests that the housing affordability crisis may be best addressed by understanding changes to the labor market, especially the relative distribution of economic growth across income levels and jobs in different areas,” they concluded.

This story was originally featured on Fortune.com