Seattle rents appeared to have flattened beginning late last year. Since then, as subsequent rent surveys strengthened the pattern, the consistent explanation has been the tremendous amount of new housing units built in Seattle. But the latest estimate of the city’s population complicates that story.

For advocates of supply-side housing policy, recent rent surveys are the overdue evidence that a building boom in market-rate apartments would reverse or, at least, substantially slow rent increases driven by rapid growth in population and incomes. After several falsestarts mistaking seasonal variation in rents for a long-term trend, rents really do appear to be leveling off following years of historic rent increases. Here’s how several media outlets covered the news, for example:

“Analysts have pointed to a wave of new apartments opening since 2014; a record number of new units opened last year in Seattle, and even more are expected this year.” Seattle Times, April 10, 2018

“‘Because we’ve seen such a substantial amount of new supply, it’s become remarkably competitive, far more competitive since before the recession,’ [Matthew Gardner, chief economist at Windermere] said.” Q13 Fox, June 25, 2018

“The slowdown comes as the number of new apartments opening across the area has hit record levels and has begun to significantly outpace the number of new renters.” Seattle Times, January 12, 2018

“As home prices continue to skyrocket, apartment rents are starting to level off after years of record-level construction.” GeekWire, May 29, 2018

The supply-side success story relies on two pieces of data: the 10,147 new units of housing that the Seattle permit office finalized for the year 2017 and the July 2017 Census population survey, which showed growth effectively unchanged from the year before at about 2.9%. The population figures aren’t always explicitly mentioned but they are implied: despite great demand, great supply is holding down rents.

It’s important to keep in mind that supply and demand are not independent forces. Supply responds to demand (technically, to price, which itself responds to demand). You can see this interaction in the chart below with construction latently responding to a population bust in 2010 before responding to the beginning of the population boom in 2011 but, hampered by the global credit crisis, two years later.

Sources: Census PEPANNRES, City of Seattle Permit Data Warehouse, PSRC QCEW

Until last week, the latest population figures we had came from a July 2017 Census survey (published near the end of May 2018) while the construction figures come from the Seattle permitting office’s annual tabulation for all of 2017 available only a few months ago. Since May reporters have been using nearly year-old population figures and six-month-old construction figures to explain rents today. If rents primarily respond to demand–or supply lags behind demand even in the most streamlined development environment–then we’re looking at mismatched supply and demand data. And, crucially, we’re explaining changes in rent with only (the weaker) half of these two forces. With last week’s population estimate we can finally look at the demand data contemporaneously with rent data and start to fill in the other half.

Washington State’s Office of Financial Management (OFM) publishes population estimates for April first of each year at the end of June, a much faster turn-around than the Census’ annual population updates. The April population estimate, by allowing us to compare the Seattle population of April 2017 to April 2018, gives us a view, for the first time, of the demand driving Seattle rents for the first part of this year.

For the last seven OFM surveys, Seattle’s population growth rate has, itself, grown. That changed last week.

Source: Office of Financial Management

From April 2017 to April 2018, according to the OFM, Seattle’s population boom reversed course and fell to 2.3% annual growth, a 40% drop in growth rate from the prior survey. It’s this difference from the previous survey–translating to about 11,000 fewer people–that best explains the flattening rents in Seattle.

Did the 10,000-plus housing units built in 2017 help temper rent increases in 2018? Of course, but this building boom was itself responding to a population (and income) boom. Now that the latest OFM population estimate shows a tempering in demand, we should not long expect the building boom to continue. If we want to seriously confront housing affordability in Seattle, we can’t primarily rely on market-rate supply to dig us out of the hole we’re in. Policies like a progressive income tax can rein in demand at the high-end while policies that extract value from land like inclusionary zoning can fund below-market-rate housing construction when the market-rate boom goes bust.

An Affordable Housing Platform for Seattle

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13 COMMENTS

  1. Population growth isn’t a reliable indicator of demand for housing. For example, in San Francisco in years past the lack of new housing kept population from growing much but massive job growth created huge demand for housing.

    OFM’s estimate of a slowdown in population growth is curious. As shown in the first bar chart, PSRC’s data shows shows strong growth in covered employment for 2017. Has anyone seen other job growth data showing a slowdown that would account for OFM’s reduced population growth estimate? What else could be causing it? The high rents/prices compared to options in nearby cities such as Renton?

  2. I think the important thing, to be picky about the statistics, is not that the percent growth is down, but that the incremental growth is down – we aren’t so much interested in (b – a)/a, as (b – a). And that undoubtedly has a point of intersection with some curve of new units on the market, so of course supply and demand are both variables, but – to your point – dramatic changes in growth rate have inevitably predominated in market effects.

    As to what progressive income tax has to do with it (another commenter wonders) – don’t kid yourself about why all these high wage workers are here. I mean, sure, there are other factors, but our regressive taxation is a draw, and I’m sure that’s one reason Bezos will fight for it tooth and nail.

  3. Curious post…

    Tries to discuss supply and demand for housing, and the meanders to the income tax at the end, as if that will solve issue of high rents and housing supply.

    The Urbanist is just all over the map these days.

    • There is obviously a difference between falling population and falling population growth. I attempted to make that clear in the text and the second chart above. But I’ll restate for clarity: going from 3.9% growth to 2.3% growth is declining population growth not declining population.

  4. … Seattle’s population boom reversed course and fell to 2.3% annual growth …

    Wait, what? 2.3% annual growth is somehow a reversal of course? That’s nuts. 2.3% is huge for a city this size. We added over 16,000 people. Yes, for three years we have actually added more people, but this hardly represents a reversal.

    Besides, you seem to be getting the entire “supply and demand” thing mixed up. Supply is not people. Supply is the number of apartments (or units). People are simply the number of people who can actually afford to live here.

    Without more data (about both demand and supply) it is tough to say what has actually happened. My guess is that hiring has slowed down. Companies like Amazon are not hiring as many people, which means that demand has slowed down (a bit). At the same time, supply has been increasing at a steady clip. It hasn’t been increasing as fast as it would if the city changed their zoning rules, but we are still building more units. Enough units to actually get a bit ahead of supply, and thus have the higher vacancy rates (which in turn have lead to moderating rental prices).

    If the city changed the zoning rules, then you would have a lot of marginal property that is currently being developed into McMansions be developed into apartments, duplexes of townhouses. You would also have a lot more ADUs. Both of these would result in lower rents, as both make financial sense even when rent is low.

    • Getting too granular here can be misleading, as the estimate sources are not that accurate or timely. Population estimates by the State and the US Census are educated guesses, and the State is still 10,000 people behind the US Census. I’m not sure how accurate or current the jobs data presented in this post’s first chart, but it shows 2017 as the year with the fastest employment growth. The only data source that is close to accurate/real-time (as in monthly or quarterly) is housing permits and rent prices/vacancies.

      Rent growth has slowed and vacancy rates have risen, particularly at the high end downtown. Building permits are full-steam ahead. We don’t really know what employment or population is doing in 2018 yet.

    • There is obviously a difference between falling population and falling population growth. I attempted to make that clear in the text and the second chart above. But I’ll restate for clarity: going from 3.9% growth to 2.3% growth is declining population growth not declining population.

      Further, in the first chart supply is represented by housing units and demand is represented by households, which just means the average # of people who live in a housing unit (in Seattle that’s roughly 2 people). Hope that clears things up.

    • The city’s very likely to change the zoning rules, upzoning a lot of the city this summer via MHA and this ADU bill. Care to guess what the numbers are going to look like in following years, for new units opening? I bet a quarter, they’re going to be lower. You won’t have a lot of anything being developed to its new maximum density, because 1) the market is sagging, and 2) MHA isn’t really such a grand bargain after all, if you aren’t one of the big outfits that were there at the table. Zoning is highly overrated as a central issue – it evidently hasn’t strangled building in the last several years, and it won’t stimulate it this year. We just get worse zoning, for no net difference in outcome.

  5. Inclusionary zoning won’t produce anything if the market-rate boom goes bust, for what it’s worth. The whole idea is that it depends on cross-subsidization of affordable units using the profits from market-rate units.

  6. I was reading my 2 week old paper copy of the PSBJ (don’t judge), and there were multiple articles mentioning that developers & construction firms think the construction boom has already peaked, and the volume of housing (& commercial space) will start to drop off in 2020 after we work through our existing backlog.

    If rents flatten, it will be interesting to see if the boom tapers out, or if the opening of Northgate & East Link will provide sufficient local stimulus for mini-booms in the relevant neighborhoods to maintain the growth in housing supply at a regional level.

    • Even if rent growth flattens, the rents themselves are still too high for many working class people to live in the city. We need to build more social housing so that everybody who works in Seattle can afford to live in Seattle.

      • GTFOH! I work in Medina in an office near Lake Washington. I DEMAND affordable housing in Medina on the Lake. Do you see how ridiculous and childish that sounds? Workers can make the adult decision and take the bus or light rail to their place of employment.

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