Here is a housing study that looked at housing supply — in the US from 2000 to 2020 — relative to median housing values. And here is the key takeaway:

What this chart is saying is that new housing is rarely added in cities with the lowest-value homes. The bar on the left represents municipalities whose median housing values are less than 50% of the metropolitan average. And this makes sense. If values are low there is likely little to no incentive to build. The math just doesn’t work.

However, as home values increase, the incentive to build and the ability to finance new projects also increases, and that is what we see in the above chart. This also makes sense.

But something interesting happens in the highest-value cities — housing supply once again starts to fall off. And it turns out that there is a bit of a sweet spot. Municipalities whose relative housing values are 110 to 130% of the metropolitan average actually produce the most overall housing. Any higher than that and things start to decline.

Why is that? The answer likely has to do with restrictive land-use regulations. The highest-value cities (and wealthiest suburbs) often have a lot of large single-family lots, as well as policies to ensure that this kind of built form doesn’t change. This has the effect of both limiting supply and enshrining values.

So when it comes to housing supply, what you don’t want are low-cost areas. But you also don’t want the highest-value areas. What you want are areas that are doing well, but no so well that they start really restricting new entrants. This is what our industry often refers to as exclusionary zoning.

Now, one of the most common ways to respond to this problem is to develop an opposing policy, namely inclusionary zoning. But usually what this policy doesn’t do is direct more supply to these high-value and low-density areas. Instead what it typically does is force the segment that is producing the most housing — let’s call it the 110 to 130% band — to deliver more affordable housing.

It’s a neat trick that sounds pretty cool, but it is not at no cost.