Effects of “Filtering” and New Housing Construction on Housing Affordability

A new CMHC research paper, Understanding Filtering: A Long-Term Strategy to New Supply and Housing Affordability, released in June, provides insights into how “filtering” can improve housing affordability. It also discusses depreciation and rent declines in buildings as they age. 

It builds on another CMHC paper, Evaluating the Impacts of Increasing Housing Supply in Canada, which was released in May.

By increasing the housing stock through new construction, a broader range of Canadians can benefit, not just those moving into the newly built homes through filtering, where newer housing units gradually transition from higher-income to lower-income households as they age and as more new units enter the market.

Filtering helps make housing more affordable over time. When new homes are built, they typically attract higher-income residents, who then vacate their previous homes. These vacated homes, now available to the market, become accessible to slightly lower-income households. This chain reaction continues down the income ladder, eventually allowing lower-income families to move into better housing than they previously occupied. 

CMHC’s research highlights how the type of new housing being built plays a crucial role in optimizing affordability and overall welfare. Building a balanced mix of housing, including mid-cost options, is identified as the most effective strategy. This approach not only fosters affordability but also mitigates the negative consequences of homogeneous housing developments. For example, only building low-cost housing can unintentionally decrease local amenities and drive away higher-income residents, reducing the economic vibrancy of an area. 

Vacancy chains, a direct result of the filtering process, show how new housing impacts affordability and community welfare. The cascade effect can significantly improve the housing situations for various income groups. CMHC’s studies in Toronto reveal that building mid-cost or a balanced range of housing types enhances affordability and reduces the likelihood of low-income families being forced to leave their communities due to rising costs.

Rent Impacts

As housing ages, its relative affordability increases. CMHC’s data shows that rents in new buildings tend to decrease by about 5% in the first four years after construction, adjusting for inflation, and can drop nearly 20% over 20 years. This depreciation makes older units progressively more affordable. Supporting this, U.S. research has found that the real value of buildings decreases by 0.3% annually, with rents dropping by 0.7% per year, showing how the continuous aging of housing stock contributes to broader affordability.

Spillover Effects and Community Impact

New housing developments also influence the affordability of nearby properties. The increased supply can lead to a cooling effect on rents as landlords compete to attract tenants. However, the impact of these spillover effects can vary depending on local market conditions. One study showed a 5 to 7% rent reduction in existing buildings near new developments, while another study showed contradictory rent increases in areas with ample vacant land when new constructions occurred. This highlights the complex interplay of supply and demand dynamics in different contexts.

Overall, however, monitoring filtering effects, while accounting for other real estate market influences, may provide insights into ongoing trends.