An update to Will up-zoning neighborhoods make homes more affordable? (below this article.)
STRONG TOWNS
What Would Mass Upzoning *Actually* Do to Property Values?
Daniel Herriges
January 19, 2022
Excerpts:
If we are to have a nation of strong towns, one key policy we have advocated here is that every neighborhood in every city should allow the next increment of development as of right. Without nitpicking here over exactly what that “increment” is, the principle is that developed places should always be able to intensify over time. Otherwise, you’re dictating by law a condition in which neighborhoods, once built, are frozen in amber forever—a deeply unnatural and ultimately societally untenable arrangement, as Addison Del Mastro argues in “Is Zoning a Contract?”
As a growing number of cities and states seek to reform their longstanding residential zoning policies in response to the housing affordability crisis, “upzone everything a little” is rapidly becoming the approach with the most political momentum. (Examples include Minneapolis, Charlotte, and the states of Oregon and California.) Instead of picking specific areas to concentrate new high-density housing, like around a transit station or a redeveloped warehouse district, this latest wave of zoning reforms allows the next increment—typically some version of duplexes through fourplexes—on nearly every residential lot in a whole city or state.
To this, a commonly heard objection has arisen, mostly from the defenders of single-family, homeowner-dominated neighborhoods: “Won’t allowing more development everywhere set off speculative feeding frenzies? Isn’t this tantamount to unleashing rapacious developers upon every neighborhood to transform it?”
The short answer is that no, it isn’t. Those who warn of this outcome are committing a classic Fallacy of Composition.
The Fallacy of Composition is a logical fallacy in which you assume that something that applies to the individual parts of a whole must also apply to the whole. What’s true: Upzoning a property, all else equal, increases its market value substantially. What’s not true: Upzoning every property will substantially increase the market value of every property.
To understand why the composition doesn’t work, you need to understand how zoning affects land value.
How Zoning* Affects Land Value
The amount a developer is willing to pay for a piece of property—including an existing home—is determined by their perception of its development potential. They’re looking to pay an amount for land that leaves it profitable to build a building on it, after all the costs (including construction labor, materials, professional services, loan interest, and fees) are accounted for. The larger the eventual building and the higher the rent or sale price it will command, the more the developer can afford to pay for the land up front.
But—and here’s the crucial thing—the zoning itself doesn’t create development potential. It can only restrict it. What creates that potential is genuine demand for the product: the finished building.
Zoning does act as a limiting ingredient in places where more intense development would be economically viable right now: where there would be many ready buyers if it simply weren’t illegal. Limiting residential development to single-family homes on spacious lots in a prosperous city with good jobs and schools, for example, tends to drive up the cost of housing, because it restricts the supply of homes in that place. But it also tends to keep the cost of the single-family-zoned land itself down relative to what it would be if that land could be used more intensively.
More importantly, though, doing this across a large enough area creates a lot of pent up demand. Think of the number of people who would like to live somewhere on the Westside of Los Angeles, given the right price point. The giant crescent extending west from downtown L.A. along the foot of the Santa Monica Mountains and then south along the Pacific Ocean is one of the most unaffordable real estate markets in the U.S., in part because it is dominated by single-family detached homes (in most areas) and was aggressively downzoned in the 1970s and 1980s to prohibit anything else. Many of the people who would prefer to live in this vast area currently live elsewhere in L.A.—maybe the San Fernando Valley to the north, or South L.A., or suburbs to the south and east.
That’s a lot of suppressed demand for new housing. Now imagine you upzone one little pocket of the single-family residential part of the Westside, and you do so dramatically, allowing six-story apartment buildings to be built. What would happen?
Ever taken a pot boiling aggressively with the lid on, and cracked the lid just a little bit in one corner and watched the WHOOSH of steam rushing to the opening? That.
This one neighborhood or corridor would now be absorbing all the development pressure from a much larger region around it that has not been upzoned. You would see a construction frenzy, and a speculative feeding frenzy on land. And you’d likely see property owners not only selling to apartment developers, but others holding out for a similar deal, driving prices up into the stratosphere.
This is a story well chronicled in many cities. The one hot neighborhood with a conspicuous flock of construction cranes, fueling the widespread perception of a development boom even though most residents live in neighborhoods untouched by it.
Most of the research on the economic effects of upzoning has looked at scenarios in which specific neighborhoods were micro-targeted for it. For example, a 2020 study by Yonah Freemark found that upzoning of select, transit-served areas in Chicago caused property values to increase. This study is often cited by opponents of upzoning to argue that it will not aid the cause of housing affordability, but it’s not at all clear that it is applicable to the blanket upzoning of a whole city, because of that pesky Fallacy of Composition. Freemark has responded to the misuse of his study to this effect, pointing out that the Chicago rezoning he studied involved “a relatively small portion of land (just about 6 percent of the city’s total parcel area), [thus] it encouraged intense interest just in the areas that were affected.”
Broad But Shallow Upzonings Are Different
Think of our boiling pot analogy. This time, instead of cracking a corner of the lid, lift it straight off the pot vertically. You don’t get the same rush of steam, because the effect is distributed and thus muted. This is, essentially, the hope of advocates of broad but incremental upzoning applied to an entire city or state at once.
The development that does occur will not be spread like an even blanket across the entire city or region, of course: it will tend to concentrate in areas where demand is strongest and potential profits are highest. But it is unlikely to be anywhere near as concentrated as under the targeted-upzoning scenario, where local government policy forces development into one or two neighborhoods only. If I had to guess at where we’ll see the most triplex and fourplex activity in the states and cities that have allowed it, I would say, “Look at the neighborhoods that already have a lot of single-family teardowns and renovations.” What would have been a new McMansion might instead be four townhome units. The construction methods and economics are similar, but the result is a greater amount of somewhat less expensive housing.
Upzoning an entire city is not going to double or triple the total amount of development that happens in that city. (Though it ought to increase it, by bringing more and, more importantly, different developers into the game.) It is going to redistribute where that development happens, on balance away from the suburban fringe and a small handful of hot neighborhoods where things are happening at a very large scale, and toward, well, everywhere else.
Comment:
Indeed, the conventional public solution to providing multifamily housing has been for the past 40 years to zone for high density apartments predictably in peripheral areas – adjacent to freeways or major streets and commercial districts. What is it that causes a preference among the majority (single family homeowners) to consign the minority (usually renters) to the margins? Many who argue against new higher density housing projects cite the loss of “neighborhood character”. They’re worried about changing the feel of the neighborhood with taller buildings. But for many people it’s also impressions about the type of persons who live in denser housing, as if apartment dwellers aren’t suitable for living in genuine neighborhoods. Isn’t it about time we discard these outdated notions of preserving “neighborhood character”?
Another objection from the same quarters is that allowing more development everywhere will set off “speculative feeding frenzies” raising land values. The answer is no, and some of the evidence for this is found in our recent working paper on Portland’s zoning code amendments legalizing low density multifamily housing types in single family zoning districts. The decision to replace houses with duplex and triplex buildings will depend on particular site characteristics such as structure condition, whether a property’s land value exceeds building value, and lot size. Conversions of single family homes on underutilized lots will occur in widely scattered locations. This is nothing like the concentration of large scale higher density projects centered in high value areas. Thus is the “fallacy of composition”.
So is it right to say “…as soon as you tell me I can put two units [on a lot], it’s going to affect the price of land since it becomes more valuable”? Citing evidence from Chicago where allowing denser housing near transit stops increased land values is not a valid comparison. That is a case of rezoning for concentrated large scale development. Moreover, land values are not lot-specific, they are common to a sub-area sharing location attributes. Our working paper found no evidence of higher land values near the dispersed sites of new small scale attached dwellings.
So “upzoning everything a little” is not itself a land value accelerator, pushing up the cost of housing.
Tom Gihring, Research Director
Common Ground OR-WA
Curbed Daily Newsletter
Will up-zoning neighborhoods make homes more affordable?
Cities and states across the country are proposing new up-zoning laws to combat the housing crisis. Will they work?
By Diana Budds
Jan 30, 2020, 1:00pm EST
Excerpts, with an updated reference in What Would Mass Upzoning Actually Do to Property Values?
Housing affordability is a growing issue in America, and there’s a battle over how to fix it happening on blocks across the country. Zoning—the rules that govern how cities use their land—is on the front line.
Between 1986 and 2017, the median price of single-family housing in the U.S. rose from 370 percent of the median U.S. household’s yearly income to 410 percent, according to the Harvard Joint Center for Housing Studies. Eleven million American households spend more than half their paychecks on rent and utilities.
Recently, policymakers at the state and local levels across the country have zeroed in on a culprit: zoning that limits development to single-family detached houses in large swaths of America. Zoning now makes it illegal to build anything other than a detached single-family home on most residential land in many of the American cities. Detached, single-family homes account for 94 percent of all land zoned for residential use in San Jose, California; 81 percent in Seattle; 77 percent in Portland, Oregon; and 70 percent in Minneapolis.
From the east and west coasts to the Midwest, lawmakers are beating the drum for up-zoning, which means changing single-family zoning codes to allow taller and denser housing, like duplexes, triplexes, accessory dwelling units (ADUs), and apartment buildings. In the last few years, up-zoning legislation has been introduced or passed in California, Oregon, Washington, Seattle, Minneapolis, Nebraska, Virginia, and Maryland. But is up-zoning enough to alleviate the housing shortage?
What is up-zoning and why are lawmakers proposing it?
In response to the growing housing affordability crisis, policymakers in many cities and states are trying to figure out how to add more housing. The challenge is that buildings occupy most of the land in cities. Up-zoning opens up the capacity of this land for more housing. There’s also a climate case for up-zoning: Building housing closer to transportation and jobs means people have to travel shorter distances to work and shop, lowering vehicle miles traveled and potentially allowing them to use public transportation and walk in lieu of cars.
As Christopher Herbert, managing director of the Harvard Joint Center for Housing Studies, explains it, as long as there is sufficient demand for housing, developers will build. The price of land, the cost to build a home, and what the market is willing to pay for a home all factor into a developer’s math. If the cost of land is low enough that the developer can earn a profit, then the developer will build. By increasing the number of units that can be built on each parcel, up-zoning lowers the cost of land per unit. But there’s a caveat.
“There’s a hope that if we up-zone this land worth one million dollars and now we can put two units on it, the land cost is $500,000 [per unit],” Herbert says. “But as soon as you tell me I can put two units, it’s going to affect the price of land since it becomes more valuable.”
A study published in January 2019 in the journal Urban Affairs Review analyzed the impact of new up-zoning policies Chicago passed in 2013 and 2015 that allowed denser housing near transit stops. The study concluded that over a five-year timespan, up-zoning didn’t increase housing supply, but it did increase land values
Proponents of up-zoning argue that allowing denser construction will encourage more housing supply, and as more supply enters the market, housing will become more affordable through the filtering effect, where even high-priced new housing can lower rents for lower-income residents by reducing the competition for homes. One challenge with this approach is that added capacity doesn’t necessarily translate into added construction because developers don’t always choose to build.
According to Virginia Delegate Ibrahim Samirah, the current way affordable housing is constructed in his state isn’t working. “There are a lot of very expensive solutions to our housing crisis in Virginia, and it seems like throwing money at the problem is the solution,” he tells Curbed. “People are advocating for Housing Trust Fund money to develop affordable housing and it’s led to very modest results in affordable housing. The same with incentivizing developers to set aside affordable units.”
Does up-zoning work?
Because up-zoning of single-family residential land is a relatively new phenomenon there are few studies that analyze the effects.
“Oregon and Minneapolis are going to be our guinea pigs,” says Jenny Schuetz, a Brookings Institute expert on urban economics and housing policy. “Now that they’ve got this new legislation, how quickly does the housing market start to respond? Are we seeing increased housing of the kinds that we wanted?
According to Schuetz, the value of up-zoning lies in areas where land value is high, where developers already want to build, and where additional units will generate a profit for whoever owns the land.
“A lot of cities are saying let’s open the spigots, we’ll build so much housing we’ll get to the point where we get vacancies,” says Christopher Herbert, managing director of the Harvard Joint Center for Housing Studies. “But If developers see vacancies rise they will stop building…It’s the nature of our capitalist system.”
Who supports and who opposes up-zoning?
While most people can agree that there’s an affordable housing shortage, there’s disagreement on how best to address it.
In Oregon, some cities expressed concern about the extra pressure on their infrastructure. Arguments opposed to new housing frequently cite changes in “neighborhood character” as reasons why such legislation shouldn’t be passed.
“The idea of ‘preserving neighborhood character’ is nicely vague enough that it can cover lots of things without being very explicit,” Schuetz says. “They’re worried about changing the feel of the neighborhood with taller buildings. But for many people this is also the type of person who lives in the neighborhood. If it’s white and wealthy and mostly nuclear families, there are places that would like to keep that. And they don’t have to say we want to keep out black people, they just have to say ‘we want to preserve the neighborhood character.’”
Housing advocates who fear displacement and gentrification—like Oakland’s Moms 4 Housing—are also concerned about changes to neighborhood character up-zoning might accelerate.
California state senate candidate Jackie Fielder is running on a social justice platform. Housing is a major part of her agenda and she signed the Homes Guarantee pledge, which includes repositioning housing a human right rather than a commodity. She has criticized SB 50 for its reliance on trickle-down economic theory, its focus on market-rate housing, and its lack of attention to affordable housing creation and protection for vulnerable communities.
“We need to build for need—not for profit,” Fielder recently said. “And with the fifth-largest economy in the world, with 157 billionaires worth more than $700 billion combined, California has all the resources we need to do more.”
The future of up-zoning and the housing crisis
At the heart of the up-zoning debate is a seemingly simple question: Can we provide more affordable housing solely by allowing for more construction? But the real question is much deeper: Can we build our way out of a crisis that’s the product of an economic system that extracts as much as it can from most individuals in order to enrich the few?
Up-zoning is challenging a symbol of American homeownership—the single-family home—that has been subsidized by the government for over a century, and that remains a major source of wealth for millions of people. The real debate around up-zoning is an ideological reckoning over whether housing is a commodity or a right. Solutions that fail to address this question cannot solve the housing crisis.
“We have got to de-commodify [housing],” Fife says. “We’ve got to take the profit motive out of essential needs. That’s the biggest fight. We need to figure out other ways for investors to make money that don’t rely on the things that people need to survive. We shouldn’t be able to commodify air, water, and housing.”
Comment: (This is a much-abbreviated excerpt of Diana Budd’s wide-ranging article.)
Certainly, up-zoning alone is not going to solve the housing crisis in the nation’s rapidly growing cities. Christopher Herbert cites an important clue to solving the following dilemma. “If the cost of land is low enough that the developer can earn a profit, then the developer will build. Up-zoning lowers the cost of land per unit.” But here’s the rub: The cost per unit may be potentially low enough to reach the decision to build, but the act of up-zoning itself gives additional value to the land due to its enhanced income potential. “As soon as you tell me I can put two units, it’s going to affect the price of land since it becomes more valuable.” So up-zoning to allow multifamily units is more efficient, the boost in land cost cancels the economic advantage. The solution? De-commodify housing by phasing-in a land value tax. Taxing land more heavily dampens the speculative increase in land price.
But is that where we simply walk away from the dilemma? If we do, we concede that up-zoning inevitably results in giveaways for landowners who either (i) generate even more profit if they build luxury units, or (ii) reap windfalls through the speculative holding of land. Then we fall back to the default of raising more public funds for housing subsidies. As Delegate Samirah stated: “There are a lot of very expensive solutions to our housing crisis in Virginia, and it seems like throwing money at the problem is the solution.”
There is a better solution. The most simple and effective way to drive down the cost of up-zoned land is to first introduce a general land value tax as an alternative to the ad valorem equal rate property tax. Placing a high tax rate on land assessments and a low rate on building assessments produces two complimentary incentives: to exert downward pressure on the selling price of a land parcel, and to lower the effective cost of development. And it is true: “the value of up-zoning lies in areas where land value is high.” The higher the land values the stronger the incentives. LVT is in fact a market approach to “de-commodifying” housing. If housing is a right, then we have to retreat from the notion that home ownership is a major source of wealth-building.
Yes, up-zoning can work to boost housing production if it is coupled with incentive taxation.
Tom Gihring, Research Director
Common Ground OR-WA
