How Even Luxury Housing Can Help Solve the Housing Shortage
Introduction
In cities and suburbs across the United States, the conversation about the housing crisis has reached a fever pitch. From soaring mortgage rates that lock out first-time buyers to rental costs that outpace wage growth, the American dream of stable, affordable housing feels increasingly out of reach.
According to a Pew Research Center survey cited in the report, more than two-thirds of Americans are now very concerned about the cost of housing. In response, local policymakers are scrambling for solutions some focused on tenant protections, others on subsidized housing for the poorest residents. But a growing body of research points to a controversial yet effective strategy: building more housing of every kind, including luxury housing, can help solve the housing shortage.
At first glance, this idea seems counterintuitive. When a new high-end apartment building rises in a working-class neighborhood, it is often met with resistance. Residents worry that luxury housing will raise nearby rents, displace longtime neighbors, and accelerate gentrification. However, the W.E. Upjohn Institute’s report, authored by Kathleen Bolter, argues that this fear, while understandable, overlooks a critical economic mechanism. Building more housing yes, even expensive market-rate units—can trigger a “chain reaction” that ultimately makes housing more affordable for middle-income and even lower-income families. The secret to affordability, the report suggests, lies not in halting new construction but in expanding the housing supply across all price points.
The Core Problem: A Lack of Housing Supply
To understand why luxury housing can be part of the solution, we must first diagnose the root of the crisis. The United States has been underbuilding housing for decades, particularly since the end of the Great Recession. The report notes that while the number of high-cost rental units has increased driven largely by large multifamily buildings the overall supply has failed to keep pace with demand. This lack of housing supply makes it difficult for lower-income families to find a place to live. When there simply aren’t enough homes to go around, competition intensifies.
Here is what happens in a supply-constrained market: wealthy families, unable to find suitable housing in the most desirable neighborhoods, start bidding for units in middle-income areas. In turn, middle-income families, priced out of their usual options, move down into neighborhoods traditionally occupied by lower-income families. This process, often called “filtering in reverse” or “trickle-down housing,” forces everyone down the economic ladder.
The result? A family with a modest income ends up competing for the same scarce, affordable unit as a family with significantly more resources. Wages don’t rise fast enough to cover the gap, and rents spiral upward. The report makes this dynamic clear with a simple illustration: five families with different income levels. When there are not enough homes for higher-income families, those families compete for homes where middle- and lower-income families would normally live. This makes it harder for lower-income families to find housing they can afford.
The Chain Reaction: How New Luxury Housing Creates Vacancies
So how exactly does building luxury housing help solve the housing shortage? The answer lies in what researchers call the “vacancy chain.” Imagine a city that approves a new 100-unit luxury apartment building. At first glance, those units are priced far above what a low-income worker could pay. But the benefit comes from what happens next. The report walks through a seven-step chain reaction:
A new apartment building is constructed in a neighborhood affordable for the highest-income family.
The highest-income family moves out of their current apartment into the new unit, leaving their previous unit vacant.
That previous unit, located in a neighborhood still relatively expensive but less so than the new building, becomes available.
A high-income family (but not the very highest) moves into that now-vacant unit, leaving their old apartment empty.
That apartment is in a neighborhood affordable for a middle-income family, so they move in, vacating their own place.
A low-income family can now afford the neighborhood where the middle-income family used to live, so they move in.
The chain continues until eventually, a unit becomes available in the most affordable neighborhood, potentially even for the lowest-income family.
This is not just theoretical. The report cites a study by Evan Mast (2019) from the Upjohn Institute, which estimates that building 100 new market-rate units creates 70 vacancies in less expensive neighborhoods, with 39 of those vacancies occurring in the least expensive neighborhoods. Nearly all these moves happen within five years of the new construction, and most benefit residents already living in the city. In other words, letting developers build high-end housing creates vacancies in affordable housing units. The wealthy don’t disappear; they simply move into nicer apartments, and their old homes filter down to the next rung of the income ladder.
Data from the Chicago metro area reinforces this. The report includes a chart showing that most people who move do so to better neighborhoods than where they started. And crucially, most moves in the U.S. happen locally within the same county. That means new housing primarily serves existing residents rather than attracting a flood of outsiders. So when a city builds luxury apartments, it is not importing new demand; it is accommodating the natural upward mobility of its own population.
The Debate Over Just Building More Housing
Of course, this approach is not without its critics. The report dedicates a section to “The Debate Over Just Building More Housing.” Skeptics argue that market-rate construction especially luxury housing does nothing for the poorest families. They point out that a newly built studio apartment renting for $3,000 a month does not directly help a family earning $25,000 a year. And they are correct.
The report acknowledges that market-based solutions alone may not fully address the goal of creating communities where everyone has a place to live. For the lowest-income families, who cannot afford even the cheapest units in the least expensive neighborhoods, the chain reaction is unlikely to lower rents enough to make decent-quality housing affordable without excessive rent burdens.
However, dismissing new construction entirely ignores the broader market dynamics. When wealthy families struggle to find homes, they don’t simply wait they outbid middle-income families for existing housing. By building new luxury units, we effectively “protect” middle-class and lower-cost housing from being invaded by higher-income households. Building more housing reduces competition for less expensive units and lowers prices for the units left vacant. Multiple studies have found that new construction also reduces rents in nearby buildings, benefiting even those who never move.
A Balanced Approach: Market + Nonmarket Solutions
The report’s most important takeaway is that building more housing helps, but it doesn’t solve ALL housing issues. For the families at the very bottom of the income distribution those who struggle to afford housing even in the lowest-income neighborhoods, additional policy tools are essential. The report recommends combining market solutions with nonmarket solutions. These include:
Housing vouchers that subsidize rent for low-income households.
Tenant protections to prevent no-fault evictions and rent gouging.
Direct public assistance to help lower-income households pay the rent required to obtain decent housing.
Investments in subsidized affordable housing for those who cannot access the private market even after filtering effects.
In other words, luxury housing is not a silver bullet. It is one part of a multifaceted strategy. The report concludes that “a balanced approach of market and nonmarket solutions one that combines new construction, targeted policies for existing tenants, and investments in affordable housing, is essential for inclusive housing solutions.”
Why Policymakers Should Embrace (Not Fear) High-End Development
For local policymakers, the implications are clear. Restrictive zoning laws, lengthy permitting processes, and community opposition to new development have artificially constrained the housing supply for decades. If a city truly wants to solve the housing shortage, it must remove barriers to new construction of all types including luxury apartments, townhomes, duplexes, and accessory dwelling units. Updating zoning to allow greater density and expanding housing types are among the most effective policy levers available.
The report notes that housing costs rank among the top economic concerns for American adults. Yet many residents remain wary of supporting high-end housing development because they worry it will raise nearby rents. The evidence suggests the opposite. While luxury housing does not directly serve the poor, it indirectly improves affordability for everyone else by loosening the entire market. When the supply of housing increases, even at the high end, the pressure valve releases across all price points.
Conclusion: The Bottom Line on Housing Affordability
So, can luxury housing help solve the housing shortage? The answer, according to the W.E. Upjohn Institute, is a qualified yes. Building more market-rate housing creates a cascade of moves that opens up affordable units for middle-income and lower-income families. It reduces competition for existing cheap housing, lowers nearby rents, and accommodates local residents’ natural desire to move to better neighborhoods. However, it is not enough on its own. For the lowest-income families, who face the most severe housing insecurity, targeted subsidies and protections remain indispensable.
The secret to affordability is not to stop building it is to build more housing of every kind while simultaneously investing in a safety net for those whom the market still leaves behind. As the report succinctly puts it: “Expanding the supply of housing, even more expensive housing, emerges as a key solution to improving affordability for many.” In the fight against the housing shortage, every new unit luxury or otherwise, is a step in the right direction.
Also Read: “The New Poverty Line in Urban Sri Lanka: What It Means for Affordable Housing Design”