Does Granny's Flat Reduce the Rent? Evidence on accessory dwelling unit effects in California

• In Event: The Policy and Politics of Housing Supply

Abstract

California is in the midst of a long-running housing affordability crisis, exemplified by growing and pervasive homelessness, and caused in part by a failure to build homes. For nearly a decade, the state has made it easier to build accessory dwelling units – ADUs – on residential land reserved for single-family homes and other low-density housing. These efforts have sparked consistent growth in ADU production across the state, to the point where roughly one in five housing permits are to build ADUs.

Given the connections between housing production and affordability, we need to know whether ADU legalization and production is affecting housing affordability – specifically for renters. There are no studies that have assessed these effects, which is the goal of this paper.

ADUs can affect rents in at least two ways. First, they can induce a supply effect, where the presence of more housing drives down or stabilizes asking rents. Second, they can induce a composition effect due to their sheer volume in the market. We test for supply effects by regressing city-level median gross rent and median asking rent on the number of ADUs produced by the jurisdiction as a share of the existing housing stock. We assess composition effects by examining asking rents for ADUs and comparing them to citywide rents, with the expectation that they are lower (particularly in cities or neighborhoods dominated by detached single family homes).

We use ADU production data provided by the California Housing and Community Development Department and link these data to proprietary statewide parcel-level files to geolocate ADU permits and derive city and tract-level measures of ADU production. Our rent estimates come from the American Community Survey and web-scraped data on ADU asking rents. We combine ADU production and rent data with demographic and housing production data from the American Community Survey, California Department of Finance, and Building Permits Survey to attempt to isolate the effect of ADU production on rents and identify heterogeneous effects across socioeconomic and housing demand contexts.  

Our preliminary results using only data from the Southern California region suggest that ADU production is having a minimal effect on rents. There is no direct bivariate correlation between ADU production and rent growth across the 176 cities that comprise the Southern California region.

In our regression models, we detect a statistically significant, small positive increase in the percentage change in median rent from 2012-2016 to 2019-2023. However, in models including an interaction term for rent at the start of the study period and ADU production, the impact of ADU production on rent trends is lower, and even negative in places with higher rents. In other words, we detect an affordability effect in higher rent cities. This is in line with related research on zoning and housing affordability suggesting that regulatory relief is more likely to make housing production possible and reduce rents in higher cost, higher demand markets.

 

 

Author

• Jessica Schirmer, University of California - Los Angeles
  Presenting Author