Planopedia

Market-rate housing is a term that indicates the kind of existing buildings or proposed developments that result from the market and regulatory environment, without any special subsidies or legal compensation. The word "market" in the term has an implied double meaning. There's the development market that operates as determined by the economy and the  regulatory regime at the various levels of government. But there's also the real estate market, where property owners and landlords set selling prices and rents and residents respond to those prices with varying levels of demand. 

Given the double meaning of the word "market" when used in market-rate housing, market rents or market housing prices often need to be quantified for an accurate understanding of market-rate housing. Methodologies vary for determining market rents, however. A common formula relies on the America Median Income (AMI) of the residential population. In this methodology, market-rate housing is measured by how much of a monthly paycheck at the AMI would go toward housing costs. In other methodologies, AMI is not factored in. Instead, market rents are determined by simply taking an average rent for all units in a defined area, by weighing the average market rent for all units, or by comparing average costs for various unit types, like studios, one or two bedrooms, or single-family homes.

Market-rate housing should be distinguished from affordable housing, which is housing available at rents and prices below the market rate, usually defined relative to the income level of residents. According to this logic, therefore, some forms of housing developed by the market, without subsidy, might also be considered affordable. Market rate affordable housing can be created by a variety of potential causes, like age, neglect, or location—whatever the reason, the rents and prices are affordable to a broader cross section of the population. The affordable housing that is more common in the public perception is created with the support of government financing or subsidies. 

Luxury housing is at the other end of the spectrum, usually implying housing built to meet the demands of a small cross section of very wealthy homebuyers and renters. Although luxury housing usually results from the same status quo of economic and regulatory conditions as market-rate housing, the market of demand for luxury housing is small enough that it should be distinguished from market-rate housing.

The market rate for housing is critical to planning in most U.S. cities because market-rate housing is increasingly out of reach for many U.S. households, following decades of housing prices increasing faster than wages. In many places in the country, more and more market-rate housing is, in effect, luxury housing. The debate is central to planning practice because of how the regulatory conditions of land use—the parameters set by zoning and other forms of regulatory control—influence the cost of developing and maintaining housing. Regulations can be set to provide either incentives or disincentives for more market-rate housing development.

The effect of market-rate housing on rents and housing prices in the surrounding neighborhood is the subject of intense academic and political debate, with very little consensus to speak of. Studies have shown evidence of two, wildly disparate outcomes as a result of market-rate development. One outcome is described by the terms gentrification and displacement, as rents and prices rise in the neighborhoods surrounding market-rate development, speculators sweep up land for more development, further driving up rents, and property owners and landlords evict tenants to make way for even more development and renovations of existing properties. Property taxes and rents increase beyond the reach of existing residents, and they are forced to relocate. The cycle deepens and continues. As a result, market-rate housing developments are a symbol of gentrification in low-income neighborhoods and communities of color with a history of underinvestment.

In the other outcome, market-rate housing increases the supply of housing commensurate with demand to ensure that scarcity doesn't drive up housing prices. In this version of the market-rate housing story, a lack of market-rate housing development can cause the same effects of gentrification and displacement as identified in the other scenario. According to this supply-side approach, the market-rate housing of the past ages into a more affordable range in a process called filtering. In many wealthy residential neighborhoods, populated mostly by single-family residential homes, market-rate development is suppressed by restrictive zoning (if developers could develop more, they would).

There is plenty of scientific and anecdotal evidence to support both of these versions of the story, and one of biggest, most challenging projects of contemporary planning is in finding the right solutions for the right locations to the challenges and controversies presented by either scenario.