A hole in the literature?

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In the comments of a previous post, readers discussed the incentives facing different types of landowners whose properties are facing potential upzoning, demonstrating just how complicated the relationship between land use regulations and property values is. As I see it, theory tells us that upzoning will increase the value of much of the land that will be redeveloped by opening up options for the developer to put the land to a higher valued use. However, land that is not economically viable for redevelopment and perhaps some land near this margin would fall in value due to the increased supply permitted.

The example from the earlier post was a proposal for upzoning in Hollywood. I would think that plenty of properties there would be ripe for redevelopment, as single family zoning is constricting supply to well below the market clearing level. If this is true, many homeowners would stand to receive a windfall with upzoning. I’m not very familiar with Los Angeles, but I’d think it likely that owners on the periphery of the area to be upzoned could potentially lose money, as the supply of housing would increase in the most desirable parts of Hollywood, devaluing homes in the less desirable areas. In the comments, awp provided clear analysis of what’s going on in this situation:

The excess “rent” comes from having a part of a limited SUPPLY. Any one individual would be able to increase their portion of the “rent” by being the only one allowed to increase their supply, while lowering the total “rent” through the increase in SUPPLY.  If the zoning is removed there will be no remaining excess “rent”.  It would take some serious analysis that I have never seen to figure who would benefit the by moving from a zoning regime to a free market regime.  My guess would be those whose real estate’s spatial properties (i.e. proximity to the amenity) had the greatest value that was underutilized.  So that those closest to the park or downtown would see a marked increase in their land values and would increase the density of the built environment on their real estate, while those the farthest away (who before had valuable buildings on their land because of the restrictions on the built environment closer in) could see their property values fall drastically.

One of the tricks of examining an upzoning is unbundling the value of current land uses from the land itself, as this is where the potential for redevelopment lies. I tend to stretch a priori reasoning to its limits, but analyzing the financial impacts of upzoning is an empirical question. The policy change will create winners and losers, but the number of people on each side and the change in land values can’t be deduced without looking at the data. I went looking for studies on upzoning and the resulting changes in land values but came up disappointingly short.

Gerrit J. Knaap of the University of Maryland’s National Center for Smart Growth Research and Education has conducted the only study of the impact of upzoning on land value that I’ve found. He studied land values outside of Portland because the city’s Urban Growth Boundary offers an opportunity to compare the value of comparable land parcels under different zoning regimes. His paper, titled “The Price Effects of Urban Growth Boundaries in Metropolitan Portland, Oregon,” was published in 1985, but unfortunately doesn’t appear to be available without institutional access or purchase.

Knaap looks at sales of vacant land in two Oregon counties, Washington and Clackamas. He writes:

Suppose there exist two types of residential land, urban and nonurban, where the difference is enforced by zoning regulations and defined by housing denisty, minimum-lot sizes, or some other allowable-use criteria. Suppose further that as a result of zoning, urban rents, Ru, are higher than nonurban rents, Rn, for some radial distance from the urban core. For ease of graphical exposition, urban rents are assumed to decline linearly with distance, t, and nonurban rents are assumed spatially invariant under permanent zoning. The market values of urban and nonurban land equal the present value of their respective rental streams.

Washington County, he finds, was more strongly impacted by the UGB because in Clackamas County development is limited primarily by sewer access rather than zoning. His results in Washington County offer support for this model. There, Knaap finds a positive, statistically significant impact on the price of land located within the UGB, the land allowed to be upzoned sooner than land outside the UGB:

In sum, and as the model suggested, urban land is higher valued than nonurban land; nonurban land inside a growth boundary is higher-valued than nonurban land outside a growth boundary; and urban land, when it exists, on both sides of a growth boundary, is not higher valued inside the boundary than outside.

Knaap’s results demonstrate that, unsurprisingly, restrictions on land use reduce its value. However, this study doesn’t get into the issue of land that is already developed and sold to be redeveloped following upzoning. Has anyone seen such a study? In the effort to provide support for the value created by permitting dense urban development, this seems like key data to have.

Transportation and Infrastructure Blues Links

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1. For anyone who doesn’t follow Stephen on Twitter at @MarketUrbanism, he’s now a real estate reporter at International Business Times. Here he covers criticism of the National Association of Realtors’ forecast that housing prices have bottomed out.

2. In the debate over whether or not to ban food on the Subway, a rider whom the New York Times interviews brings up the key issue of enforceability. The state senate proposed the ban to mitigate the system’s rat problem. While the state could certainly change the rules about eating on the Subway, the informal law wouldn’t be so easy to change. Metro has always (?) been food-free, and the ridership culture generally supports this, but New Yorkers who are in the habit of eating on their commute are unlikely to stop due to a small probability of a fine.

3. At the risk of turning Market Urbanism into an EconTalk fan blog, Russ Roberts has another great urbanism-related podcast with David Owens, author of The Conundrum. The book is about the unintended consequences of environmental activism. While the podcast (and I believe the book) deals primarily with climate change and cities’ relatively low per-capita carbon usage, the problem of unintended consequences is abundant throughout urban planning. As much as they’d like to, planners can’t change human behavior in a vacuum.

4. Yes! Melbourne Planning Minister Matthew Guy proposes not some wimpy upzoning, but abolishing height limits in the city’s CBD. The plan has a long road to implementation, but it’s a first step in allowing developers to meet the growing city’s demand for space. The opposition predictably cites the fallacy that density makes traffic worse.

5. Penelope Trunk ponders the fundamental differences between city people and non-city people and concludes that city dwellers are relatively unhappy because they are “maximizers.” I’m not totally sold on happiness literature generally, mostly because I think its subjectivity makes it exceedingly difficult for individuals to quantify their own happiness in these types of studies. There might be reason to believe that Type A city residents have higher standards for happiness than others, biasing the results.

DC Office of Planning releases an underwhelming study of proposed new streetcar network

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Last week the DC Department of Transportation DC Office of Planning released a Streetcar Land Use Study describing the impacts that the proposed DC streetcar network will have for the city. Greater Greater Washington accepts the study as proof that the streetcar will be great for DC. The report is full of the feel-good economics that really bothers me about Smart Growth in general, and I think that this sort of treatment of the trade offs of public policy hurts the urban agenda in the long run.

The study finds that the streetcar will pay for itself by raising the property tax base. From a Smart Growth perspective, though, this is a problem because it will make housing less affordable. The study suggests that inclusionary zoning will provide the necessary affordable housing after the streetcar raises property values. Current zoning laws require new multifamily buildings with 10 or more units to comply with inclusionary zoning requirements for low-income housing. As Stephen has pointed out before, inclusionary zoning is just a more complicated policy that ultimately has many of the same unintended consequences as rent control or subsidized housing. Subsidizing the cost of housing for a select group necessarily makes it more expensive for those of all income levels who are not lucky enough to secure this subsidy. Forcing developers to provide this subsidy does not change its economic impact on those who are left paying market rate.

DDOT  The Office of Planning predicts that by far the greatest gains in real estate value will accrue to property owners within one quarter of a mile of the stops along K Street (see graph on page 24 of the study). It’s important to note that the vast majority of these gains will be realized in higher per-square-foot prices rather than new square footage since that area is just about built up to what the Height Act will allow. Are K Street building owners really a group that we DC taxpayers want to be subsidizing? If in fact this project would create over $3 billion in value for these property owners by raising the value of existing buildings and spurring new development, the Downtown DC BID should be clamoring for the opportunity to build it. This should present an opportunity for the city to lease the rights to the BID to construct and operate a streetcar that would be profitable, benefit downtown transit users, and raise the property tax base as a result. The study does allude to potential opportunities to seek financing help from developers, but it’s shy on specifics. Additionally, private funding for a public project carries the risk that the project will take on the “monstrous hybrid” characteristics of a public private partnership that Jane Jacobs warns against in Dark Age Ahead, benefiting private interests at public expense.

In lower-income areas where private funding will not likely be available, this public investment amounts to picking winners and losers among neighborhoods; what makes H Street more deserving of the first line over other transit-starved neighborhoods? By allowing private streetcars to determine the placement of lines, we can be sure that better incentives are in place to determine where these lines will be most useful, and the profit and loss mechanism will provide feedback along the way.

The study emphasizes DC’s history with streetcars that operated from the 1800s through 1962 but downplays that these lines were operated by private companies that were gradually regulated out of existence. A new publicly operated system represents a significant break from this history. Privately operated streetcars internalize the risk and reward of this investment, whereas a publicly funded project disperses the risk among DC taxpayers.

Conspicuously missing from the study is any evaluation of DDOT’s performance in building and running streetcars thus far. The H Street line is currently way behind schedule, and the project’s Buy America requirement is complicating even the procurement of the cars. The years long construction project was welcomed by many along the H Street corridor as it has resulted in private investment pouring into the neighborhood; however, if streetcar construction experiences such extreme delays on K Street or M Street in Georgetown, two of the most congested streets in the city, public opinion could easily turn completely against the project.

I certainly think that the District can support improved transit options, especially in light of growing frustration with WMATA. However, I’m not convinced that DDOT is a more competent bureaucracy based on the H Street results. If the study’s predictions of the economic impacts that a streetcar could have are correct, this project represents an opportunity for DC to really turn back to its transit roots in the form of private streetcar companies operating profitably.

Street art: violation of property rights or positive emergent order?

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Among Egypt’s pro-democracy protesters, graffiti has played an important role in the communication, providing a
platform for free speech under military rule. The Associated Press reports:

Graffiti has turned into perhaps the most fertile artistic expression of Egypt’s uprising, shifting rapidly to keep up with events. Faces of protesters killed or arrested in crackdowns are common subjects — and as soon as a new one falls, his face is ubiquitous nearly the next day.

The face of Khaled Said, a young man whose beating death at the hands of police officers in 2010 helped fuel the anti-Mubarak uprising, even appeared briefly on the walls of the Interior Ministry, the daunting security headquarters that few would dare even approach in the past.

Other pieces mock members of the Supreme Council of the Armed Forces, the council of generals that is now in power, or figures from Mubarak’s regime.

While this artistic movement in the Arab Spring puts the importance of freedom of expression in sharp relief, we of course more typically see graffiti and street art in freer societies where the act is often seen not as political uprising but as mindless vandalism. As a big believer in the power of property rights, I feel like I should be against street art as clear violations of building owners’ rights. However, it’s hard to argue that illegal street art doesn’t add something valuable to cities both visually and culturally, in times of peace as well as times of civil uprising.

It would be nice to suggest that a signalling mechanism could show artists on which buildings their work is permissible, but, not knowing much about the culture of street art or graffiti, I imagine that decriminalizing this art form would destroy it. What do you all think of unsanctioned street art? Does it make a difference if the building is industrial, retail, office, or residential?

Does it make a difference if it’s high brow street art like this?

(Who wouldn’t want a Banksy original on their wall?)

As opposed to more chaotic graffiti like this?

What do you all think is the appropriate response to graffiti from law enforcement and communities?

P.S. On the subject of city streets, thank you to Charlie Gardner and Flickr user hazer2006 for adding some great photos to the Market Urbanism Flickr Group.

Filed Under: Law