When a neighborhood becomes significantly more popular, we should expect real estate developers and individuals to respond to increased demand by increasing the number of units available for sale and rent. In neighborhoods with detached homes, developers have an incentive to create townhouses. In areas where these already exist, developers might look to build mid-rise apartment buildings that allow for greater density. If a neighborhood already has mid-rise buildings and rents are high enough, developers start to build high-rises. This process of change keeps prices lower than they otherwise would have been in two ways.
First, it increases supply, which in turn lowers the equilibrium price for housing. Second, availability of new units means wealthier residents leave their old digs behind, freeing up more affordable housing for others. This process is important, because it means that houses get cheaper for middle-class renters even if developers are building more luxury units.
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