Urbanism Legend: Zoning Creates Density
This post will be the first of many of an ongoing feature at Market Urbanism entitled Urbanism Legends. (a play on the term: “Urban Legends” in case you didn’t catch that) In many public forums and in the blogosphere, I consistently encounter myths about land development and Urban Economics. These myths typically look at how policies may benefit or harm a specific person or groups of people. However, as with many popular economic misconceptions, these viewpoints fail to look at how a particular policy may affect other, less visible people. These less visible people are the ones who William Graham Sumner called “The Forgotten Man” in a famous 1883 lecture. These myths are plentiful, and I expect the feature to be stocked with myths to dispel well into the distant future.
In many different contexts, I have heard people argue that liberalizing zoning restrictions will cause “over development” or high density development filled with low income people. Even in relatively low density areas, people make the sensationalist argument that if zoning restrictions were lifted, high rises would be built in their community, creating congestion and overburdening infrastructure.
On the other end of the spectrum, I have even heard free-market advocates argue against Smart Growth and other urbanist concepts using several Urbanism Legends. They argue that Smart Growth goes against the market and causes density to increase in urban areas. They are correct when they refer to Urban Growth Boundaries that restrict development in outlying areas. Strangely, these market advocates rarely applaud Smart Growth proponents advocacy for loosening zoning restrictions in infill areas. They have argued that the upzoning discourages single family homes, which is the desired living arrangement for most people. And that the market should allow for more single family homes.
The reality is that zoning can not create density. Zoning only restricts density. Loosening zoning restrictions only allows market forces to meet the demands of the marketplace.
So, if there were no zoning would skyscrapers go up in quiet single family neighborhoods? Most likely not, unless zoning restrictions have serious hampered redevelopment or something drastic has caused demand to skyrocket in an area.
There’s the simple reason why: Construction costs (per square foot) rise as height and density increases. This is because more expensive construction materials and systems are necessary to build densely. So, building a 50 story building in a quiet suburban neighborhood rarely makes economic sense for a developer. Construction costs would be so high that the developer would not be able to sell the space in the tower at a high enough price to justify the construction costs, since space in single family homes would be significantly cheaper.
Other than construction costs, the other main variable driving density is land prices. Higher density development does allow for the cost of land to be shared by more constructed space. However, in typical suburban areas the land cost is relatively low, and has a very negligible affect on the cost of building densely.
In order for a higher density development to be feasible, it must be in a location desired by many more people. The land prices are likely higher in such a location. However, demand is sufficient enough to charge more money per square foot for that location. The developer will be willing to build more expensive, high density construction which spreads the high land costs over more units.
A rational developer would likely not be willing to build single family homes on very expensive land in normal circumstances. By the same rationality, if developers were restricted from building densely on desirable property by zoning, land values are held artificially low. This helps values of already built homes, but hurts the value of the land under them.
There are even instances where zoning has no effect on density since zoning restriction may be so loose that a developer could build the highest and best use as-of-right. In such cases, loosening density restrictions have not effect.
In microeconomics terms, zoning is a supply ceiling, which behaves almost inversely to a price ceiling. As the market is not allowed to optimally meet full demand, prices are forced higher by the shortage. These measures are regressive in that wealthy homeowners can afford to remain in the area, while middle class people are forced to look elsewhere for housing. Often, those middle class residents are displacing poorer residents from their low cost housing.
Wealthy municipalities, such as Beverly Hills use zoning to protect it’s wealthy home owners from more optimal higher densities. Beverly Hills is proud of their market distortions, and use the “Zoning Creates Density” legend (among other legends) to deceive people in their own propaganda video called, It’s a Wonderful City.
The bottom line is that zoning itself cannot determine density. Construction costs and desirablity are the main factors that determine density. Zoning can only restrict market forces from meeting demand, artificially driving up housing prices, while driving down land prices, thus pushing people to more affordable, yet less desirable locations.
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If I may paraphrase: “Government does not create; government only restricts.”
Also, if density increases in some places, it will have to decrease in others. The supply of people is fixed (in the short- and medium-term) and the supply of land is a phrase long worked into the vernacular of real-estate agents.
I would also think that many people in low-density areas would be pleased to sell to a high-density developer for a huge bucket of money — which could be put towards a new house in a different low-density area, with plenty of $$$ left over.
Part of the problem might be that eminent domain confiscations do not provide sufficient compensation to home owners. Let the market sort it out, and all sides will walk away happy.
I agree, in the big picture, “Government does not create; government only restricts.”
But, government can create density by subsidizing it (and it often does). Of course, subsidizing diverts capital from more productive uses, which ultimately restricts the overall economy.
I would also think that many people in low-density areas would be pleased to sell to a high-density developer for a huge bucket of money — which could be put towards a new house in a different low-density area, with plenty of $$$ left over.
Unfortunately, their NIMBY neighbors don’t see it that way. The neighbors have an economic incentive to stop the developers from exercizing their property rights. Although, their action usually hurts their own property values in the long run….
“In order for a higher density development to be feasible, it must be in a location desired by many more people”
Yes. And, essentially, the key factor in this is transportation infrastructure.
Transportation has always shaped cities, and it changes zoning where required (at least, it does in the long run). A rapid transit line attracts desirability among consumers and, hence, high density developers, who push politicians to change zoning within proximity of stations. On the other hand, highways attract low density within a wide basin on either side of the highway, and there is no demand, and therefore no pressure, to upzone.
Thanks for the input Bert,
You are very correct in pointing out how transportation shapes our landscape.
Unfortunately, public pressure tries to keep density low to preserve character, etc. Many places are severely underzoned, even where very high density could be built. For example, try to get a site upzoned in Boston…
Hopefully, this website will help dispell some of the myths people & politicians use to restrict development.
Government “creates” density like it “creates” education, transportation, etc.
I know what you are saying, but (at the risk of sounding too exacting), I would reword it: Government, through laws and regulations, creates incentives that change density patterns that would not occur if left to individuals and their private actions.
Or, put another way: If the resulting densities are such a good idea, then why must the government force it on people?
I do think that there is some merit to the “NIMBY” argument insofar as externalities are concerned; i.e., should I be able to exercise my property right to build a slaughterhouse or brothel next to your single-family house? I don’t know what the solution to this is, though, other than perhaps private covenants.
I do think that there is some merit to the “NIMBY” argument insofar as externalities are concerned; i.e., should I be able to exercise my property right to build a slaughterhouse or brothel next to your single-family house?
I agree that there is some merit to restricting certain uses. But, it would rarely need to be implemented. In the current land use patterns where transport costs are negligible, it would be unlikely that a slaughterhouse would want to locate in a residential area where land prices are higher. That is, unless the residential area is declining and property is cheap…
Although some sort of voluntary private covenants could work just as well, if not better than zoning.
Though I can see merit to the externalities argument, I’m not so sure about the merit to the government-restriction solution. And that is because of the “slippery slope” problem of today’s govt restrictions on slaughterhouses leading to tomorrow’s restrictions on other uses.
Incidentally, I agree that it is unlikely that a slaughterhouse would want to locate in an expensive residential area. But even the most obvious economic predictions are prone to error. It’s certainly possible that a slaughterhouse executive might prefer an “irrational” location for reasons that we cannot anticipate.
And what then?
Should the nearby homeowners pay the slaughterhouse operator to go elsewhere (as the Coase Theorem might predict)?
Should the nearby homeowners accept the property rights of the slaughterhouse operator and live with it?
Should the nearby homeowners sell (presumably at a loss) and move away?
Obviously, I don’t have the answers…but I haven’t seen evidence that anyone else has the answers, either. And so, I guess we take the easy way out, establish government zoning, and hope that they won’t abuse their powers. (Just like the proverbial alcoholic in a liquor store won’t abuse his powers…)
Bill Nelson:
You forgot another option: the owner of the apartment building next to the slaughterhouse could outright buy the property, thereby ensuring that its original property is not surrounding by any undesirable businesses. This increases the incentives of having a large piece of property (as only the edges of it would be subject to others’ externalities), which is desirable in and of itself for other reasons – including the far-off goal of all us market urbanists of private developers building their own transportation systems.