Given the housing shortage, why is it so hard to build new apartments?

Pop quiz: What do inflation, climate change and zoning laws have in common? Answer: They’re all reasons that rental housing costs are pretty high these days, according to a Harvard University report.

Some new apartments have been built in the past couple of years, which has helped stabilize rents a bit. Still, fresh data from the Census Bureau shows that the number of building permits for new housing with five or more units was down 6% in May from the month before — and 31% from last May.

Even amid the ongoing housing shortage, it’s hard to get new apartments into the market.

It’s basic economics that when demand and prices rise — like, say, for rental housing — supply should go up too and bring prices back down.

And yet, “rents are high,” said Daniel McCue, who researches housing at Harvard. He co-authored the new report, which found there is “very little relief in sight.”

Particularly for lower-income renters, who have fewer and fewer options.

“We saw the number of units with inflation-adjusted rents of $1,000 or less has gone down by 6 million [in the last decade]. So we’re losing the low-end rental stock,” he said.

The apartments that have come online tend to serve the luxury market, said Priya Jayachandran, CEO of the National Housing Trust. 

“No one is building B-class apartments anymore,” she said.

Jayachandran said developers want higher returns because their own costs have gone up. Inflation has hit labor and materials, and interest rates have made financing new construction costlier too. 

“It is incredibly expensive right now to borrow, and when you’ve got a capped income stream and a rising expense side of the equation, the math makes less and less sense,” she said.

So it’s more expensive to rent. It’s more expensive to build rentals. And it turns out, it’s more expensive to operate them too. Insurance for apartments rose nearly 28% last year.

“Insurance is a function of the cost of repairing or rebuilding a home, along with the frequency of how often those repairs need to be made,” said Daryl Fairweather, the chief economist at Redfin. “The cost is going up because of inflation, the frequency because of changes in the climate” that can damage properties.

All this means, if you’re in the market for housing: “Whether you continue to rent or you decide to buy a home, it’s going to be expensive,” she said.

Fairweather added that there’s something that can help: looser zoning rules. She said places that allow for more apartments get more of them built.