Urban[ism] Legend: The Free Market Can’t Provide Affordable Housing

Over at Greater Greater Washington, Ms. Cheryl Cort attempts to temper expectations of what she calls the “libertarian view (a more right-leaning view in our region)” on affordable housing.  It is certainly reassuring to see the cosmopolitan left and the pro-market right begin to warm to the benefits of liberalization of land-use.  Land-use is one area the “right,” in it’s fear of change, has failed to embrace a widespread pro-market stance.  Meanwhile, many urban-dwellers who consider themselves on the “left” unknowingly display an anti-outsider mentality typically attributed to the right’s stance on immigration.  Unfortunately, in failing to grasp the enormity of the bipartisan-caused distortion of the housing market, Ms. Cort resigns to advocate solutions that fail to deliver widespread housing affordability.

Yes, adding more housing must absolutely be a part of the strategy to make housing more affordable. And zoning changes to allow people to build taller and more usable space near transit, rent out carriage houses, and avoid expensive and often-unnecessary parking are all steps in the right direction. But some proponents go on to say relaxing zoning will solve the problem all on its own. It won’t.

Well, if “relaxing” zoning is the solution at hand, she may be right – relaxing will only help a tad…  While keenly aware of the high prices many are willing to pay, Cort does not seem to grasp the incredible degree to which development is inhibited by zoning.  “Relaxing” won’t do the trick in a city where prices are high enough to justify skyscrapers with four to ten times the density currently allowed.  When considering a supply cap that only allows a fraction of what the market demands, one can not reasonably conclude “Unlimited FAR” (building density) would merely result in a bit more development here and there. A radically liberalized land-use regime would deliver numbers of units several times what is permitted under current regulation.

Ms. Cort correctly concludes that because of today’s construction costs, new construction would not provide housing at prices affordable to low income people.  This will certainly be the case in the most expensive areas where developers would be allowed to meet market demands by building 60 story skyscrapers.  Advocates of land-use liberalization who understand the costs of construction would not claim that dense new construction will house the poor.  But if enough supply is allowed to come to market today, today’s new construction will become tomorrow’s affordable housing.  And this brings us to the more meaningful discussion: filtering.  Here’s where Ms. Cort’s analysis completely falls apart.

It is true that increasing supply eases upward pressure on all prices. But the reservoir of naturally cheaper, older buildings runs out after a while.

Tragically, Ms. Cort is using the current radically supply-constrained paradigm to analyze a free-market counter-factual.  If development at levels several times the current rate were allowed over the past few cycles, the reservoir of cheaper, older buildings would have remained plentiful and affordable.  If the market were allowed to meet demand for high-end units in the form of dense new construction, there would be little or no market pressure for unsubsidized market-rate units to be converted into luxury units.  The 1400 Block of W Street NW example she gives would almost certainly still be affordable.

On a larger scale, the increased supply of housing in the area helps absorb demand for more housing, but it’s not enough to stem the demand for such a sought-after location. Between 2005 and 2011, the rental housing market’s growth added more than 12,500 units. But at the same time, $800/month apartments fell by half, while $1000/month rentals nearly doubled. Strong market demand will shrink the availability of low-priced units. That’s what has happened over the last decade as DC transformed from a declining city into a rapidly growing one.

But, 12,500 units is the amount of supply added under the current over-regulated regime.  This amount of development is minuscule in a large city. (see diagram below)  What if DC allowed as much supply growth as Austin or Miami?  The 12,500 figure would triple.  Further, since Austin and Miami are far from free-market, the development rate in a truly free-market DC would certainly exceed a tripling.  If you consider the amount of supply that would have been added over the last several decades in an unlimited FAR DC, Ms. Cort’s position starts to sound quaint.  Conservatively assuming 50-100,000 units of rental housing would have been developed over the last few decades of DC’s growth, rents certainly would not have doubled.  I’ll go out on a limb and estimate that average rent growth would be close to inflation.

Chart by the Citizens Budget Commission (via NYYIMBY)

Chart by the Citizens Budget Commission (via NYYIMBY)

Ms. Cort wants housing to be less than 30% of gross income for nearly all residents.  Will the market provide new housing affordable to minimum wage earners at the most expensive intersection in Georgetown?  Probably not, and I hope she isn’t setting the bar that high.  While nobody is wise enough to know whether a free-market in land use would accomplish this, a free-market DC could be affordable to 50-100,000 more people than the zoned-to-death DC of today.  Will stock of units deemed affordable to low wage earners be of the quality, location, and size acceptable to Cort?  The necessity for further intervention is a subjective preference.

While acknowledging the validity of liberalization in her critique of supply-and-demand denialism, Cort’s conclusion fails to look at supply and demand wholistically:

Supply matters, but it’s not the whole story

Wrong. Supply really must be part of the whole story.  A city is only affordable to the number of residents it houses affordably.  Failure to recognize this only shifts the burden from one demographic to another. (and it won’t be the rich who pays the price)  If a zoning-plagued city fails to provide 1,000 units demanded, 1,000 people can no longer afford to live there.  Even if that city chose to subsidize housing for 2,000 people at 50-80% of AMI, that doesn’t change the fact that 1,000 people who wanted to live in that city must leave.  Any viable solution (free-market or otherwise) must involve increasing supply significantly, either through creating supply directly or subsidizing demand through vouchers, which induces new development.  But, this simply can’t happen if overall supply is capped through zoning.

Only 2 Ways to Fight Gentrification (you’re not going to like one of them)

Tompkins Square Riots in 1988

Gentrification is the result of powerful economic forces. Those who misunderstand the nature of the economic forces at play, risk misdirecting those forces in ways that exasperate city-wide displacement.  Before discussing solutions, it is important to accept that gentrification is one symptom of a larger problem.

Anti-capitalists often portrays gentrification as class war, painting the archetypal greedy developer as the culprit:

Gentrification has always been a top-down affair, not a spontaneous hipster influx, orchestrated by the real estate developers and investors who pull the strings of city policy, with individual home-buyers deployed in mopping up operations.

Is gentrification a class war?  In a way, yes.  But the typical class analysis mistakes the symptom for the cause, and ends up pointing the finger at the wrong rich people.  There is no grand conspiracy concocted by real estate developers, though its not surprising it seems that way.

Real estate developers would be happy to build in already expensive neighborhoods where demand is stable and predictable.  They don’t because they are typically not allowed to.  Take Chicago’s Lincoln Park for example.  Daniel Hertz points out that the number of housing units there actually decreased 4.1% since 2000 and the neighborhood hasn’t allowed a single unit of affordable housing to be developed in 35 years. The affluent residents of Lincoln Park like their neighborhood the way it is and have the political clout to keep it that way.

Given that development projects are blocked in upper class neighborhoods, developers seek out alternatives. Here’s where “pulling the strings” is a viable strategy for developers. Politicians are far more willing to upzone working class neighborhoods. These communities are far less influential and have far fewer resources with which to fight back. The end result is that rich, entitled, white areas get down-zoned, while less-affluent, disempowered, minority areas are up-zoned. Politicians appease politically influential neighborhoods through limited growth, and then appease developers who see less influential neighborhoods as the only viable place for new construction.

Too often, the knee-jerk response is to fight development in these gentrifying neighborhoods. The consequences of this are two-fold. First, economics 101 tells us that capping supply will only cause prices to rise. Instead of newcomers filling newly-constructed units, they will quickly flood the existing stock of housing, quickening gentrification. Second, thwarting development shuts the release valve that alleviates housing price pressures that caused gentrification in the first place. Since not building is not an option, politicians would prefer to funnel new construction into disadvantaged neighborhoods instead of letting it happen where there is market demand. Development suppressed, gentrification swiftly captures the neighborhood and moves on to the next neighborhood in its path.

When considering gentrification, we must accept the fact that rich people don’t just vaporize by prohibiting the creation of housing for them.  If housing desires cannot be met in upscale neighborhoods, the wealthy can and will outbid less affluent people elsewhere.  With that in mind, there are only 2 solutions to stem the tide of gentrification.  The first solution is widespread liberalization of zoning.  This is particularly needed in already desirable locations where incumbent residents have effectively depopulated their neighborhoods over several decades.  The only other solution is to eradicate rich people altogether. This, I hope, is not what people have in mind when they declare class war.

Whether you are a class warrior or Market Urbanist, here are some tips to more effectively fight gentrification:

  • The battlefield is not in the gentrifying neighborhoods.  It is in the more wealthy neighborhoods where empowered residents fight to keep new people out.
  • The enemy is not the gentrifiers or developers trying to serve them.  It is the rich people who use their influence to thwart development in their neighborhoods.  The more they fight to depopulate desirable neighborhoods, the more people are left seeking alternative neighborhoods.
  • The mechanism of gentrification is not development.   It is zoning, and other regulations that thwart development in currently desirable areas.
  • The solution is not to fight development in currently gentrifying areas.  It’s to call for radical liberalization of zoning in already wealthy areas, and to stand up to neighborhood groups who try to abuse zoning to prevent that.
  • The reason people gentrify is not to disrupt ethnic or economically-challenged neighborhoods.  It is likely because they have been priced out of the neighborhood they desire.

 

Gentrification in Reverse

Co-authored with Anthony Ling, editor at Caos Planejado

Gentrification is the process through which real estate becomes more valuable and, therefore, more expensive. Rising prices displace older residents in favor of transplants with higher incomes. This shouldn’t be confused with the forced removal of citizens via eminent domain. Ejecting residents by official fiat is a different problem entirely.

Greenwich_Village,_1900

Greenwich Village circa ~1900

 

A classic example of gentrification is that of Greenwich Village, New York. Affluent residents initially occupied the neighborhood. It later became the city’s center for prostitution, prompting an upper-middle class exodus. Low prices and good location would later attract the textile industry. This was the neighborhood’s first wave of gentrification. But after a large factory fire, the neighborhood was once again abandoned.

Failure, however, would give way to unexpected success: artists and galleries began to occupy the vacant factories. These old industrial spaces soon became home to one of the most important movements in modern art. In Greenwich Village, different populations came and went. And in the process they each made lasting contributions to New York’s economic and cultural heritage. This was only possible because change was allowed to take place.

Greenwhich Village circa 2014

Greenwich Village circa 2014

But change isn’t always easy.

As a neighborhood becomes more popular, it also becomes more expensive. Tensions run high when long-time residents can’t afford rising rents. Some begin to call for rent controls or other measures to prevent demographic churn.

But rent control is a temporary fix at best; in the longer term, its effects are negative. By reducing supply, it tends to actually drive up the cost of housing. And in the face of price controls, landlords may seek to exit the rental market entirely, further exacerbating any housing shortage.
What, then, does this mean for urban development? How can cities evolve without completely displacing their middle and working class residents? By embracing gentrification’s opposite: filtering.

Buildings, like anything else, are expensive when they’re new but depreciate over time. Architectural styles change. Wear and tear accumulate. Buildings become harder to update with the newest amenities. Here is where we find filtering; aging units, originally built for the wealthy, become more affordable over time. What’s difficult to see is that filtering occurs simultaneously with gentrification. Every “gentrifier” frees up their former unit for someone slightly less well-off. That person, in turn, also frees up a unit and so on down the line. The process is akin to a game of musical chairs.

But for the game to work for everyone, chairs must be added, not taken away. Cities must allow additional units to be built so that the housing stock expands over time. Research suggests that this is a necessary condition for filtering to take place.

While filtering is not some panacea that cures all housing ills, it’s an important part of how housing markets work. Allowed to take place, it contributes to providing housing at all levels of income. The more a city impedes the process by restricting growth, the more its poorest areas will gentrify without the offsetting creation of less expensive housing over time.

How to Fix San Francisco’s Housing Market

Want to live in San Francisco? No problem, that’ll be $3,000 (a month)–but only if you act fast.

In the last two years, the the cost of housing in San Francisco has increased 47% and shows no signs of stopping. Longtime residents find themselves priced out of town, the most vulnerable of whom end up as far away as Stockton.

Some blame techie transplants. After all, every new arrival drives up the rent that much more. And many tech workers command wages that are well above the non-tech average. But labelling the problem a zero sum class struggle is both inaccurate and unproductive. The real problem is an emasculated housing market unable to absorb the new arrivals without shedding older residents. The only solution is to take supply off its leash and finally let it chase after demand.

Strangling Supply

From 2010 to 2013, San Francisco’s population increased by 32,000 residents. For the same period of time, the city’s housing stock increased by roughly 4,500 units. Why isn’t growth in housing keeping pace with growth in population? It’s not allowed to.

San Francisco uses what’s known as discretionary permitting. Even if a project meets all the relevant land use regulations, the Permitting Department can mandate modifications “in the public interest”.  There’s also a six month review process during which neighbors can contest the permit based on an entitlement or environmental concern. Neighbors can also file a CEQA lawsuit in state court or even put a project on the ballot for an up or down vote. This process is heavily weighted against new construction. It limits how quickly the housing stock can grow. And as a result, when demand skyrockets so do prices.

To remedy this, San Francisco should move from discretionary to as-of-right permitting. In an as-of-right system, it’s much more difficult to stop construction. As long as a project meets existing land use requirements, city planners have to issue a permit. And although neighbors can sue based on nuisance, they don’t have any input in the actual permitting process. As-of-right permitting would go a long way toward defanging NIMBYs and overzealous planners.

Yellow equals a height limit of 40 feet or less than 5 stories.  Credit Mike Schiraldi

Yellow equals a height limit of 40 feet or less than 5 stories. Credit Mike Schiraldi

 

But even if San Francisco opened up the permitting floodgates, height limits, floor-to-area ratios, zoning designations, and minimum parcel sizes all prevent land from being put to its best use. Land use restrictions like these can increase the price of housing by as much as 140% over construction costs. Relaxing–if not abolishing–these types of restrictions would be hugely beneficial.

But for as much as regulatory reform would help, there’s another way of encouraging supply to catch up with demand. And, interestingly enough, it involves raising taxes.

Tax the Land

The more you tax something, the less of that something society produces. Raise taxes on income and you discourage labor. Raise taxes on capital and you discourage investment. Raise taxes on property and the same logic applies; the higher the tax rates the greater the burden on new construction. But property taxes aren’t just a tax on buildings, they’re a tax on the land underneath as well. Separate the two in favor of taxing land alone, and construction is not only unburdened, it’s encouraged.

A pure land tax would amount to fixed overhead for each assessment period. This would encourage landlords to use their holdings as intensely as the market would bear. Holding a valuable parcel vacant or underused would become prohibitively expensive.

In San Francisco, where land is incredibly valuable, a land tax would encourage  denser development.

In San Francisco, where land is incredibly valuable, a land tax would encourage denser development. Credit Ascher, Kate. (2011).

 

There are a few different proposals for implementing land taxation. The most aggressive approach calls for a 100% fee on land values and the abolition of all other taxes. A slightly more moderate proposal favors an 80% land tax to allow for some margin of error in assessment. The most realistic plan would be to retire San Francisco’s property tax in favor of a land tax and make the change revenue neutral. Considering the city’s property tax rate is barely over 1%, a revenue neutral land tax probably wouldn’t deliver the sun, the stars, and the moon like it would at much higher levels. That said, it would still be an improvement over the existing property tax.

Fix the Market, Not the Price

Neither rent control nor inclusionary zoning will fix the housing crisis. Both amount to price controls. Both drive up the price of market rate construction. Both create a gap between subsidized and unsubsidized housing. And as long as San Francisco can’t set its own immigration policy, there will never be enough subsidized housing to go around. It’s simply not a scalable solution. But that doesn’t mean there’s no room for a safety net.

Housing vouchers are like food stamps for….well, housing. They put resources directly in the hands of those who need them while avoiding the negative side effects of price fixing. It’s welfare that doesn’t try to mandate a price, but instead ensure that the least well off can pay whatever that price might be.

Funding via a land tax would tie the amount of revenue available for vouchers to the state of the housing market. When housing costs increase, it’s not the buildings themselves that are becoming more expensive, it’s the land that they’re sitting on. Houses aren’t wine, they don’t typically improve with age. The actual ground they sit on, however, can become more valuable if more people want to move into a neighborhood. If a sudden surge in demand sends land prices through the roof, a land tax would ensure that funding for vouchers would increase as well.

Funding through a land tax would also prevent vouchers from becoming a subsidy for landowners. Pumping other sources of revenue into housing might simply make the market more competitive and allow landlords to charge higher rents. A land tax would limit this by moving resources from landlords on one end of the market to tenants on the other end without increasing the total amount of dollars chasing housing. Regulatory reform would also limit any price increases from a voucher system since an increase in demand would better stimulate an increase in supply. The extra supply would then put downward pressure on prices.

Slowing down–let alone turning back–the rising cost of housing will require a massive amount of new construction. Relaxing land use rules will clear the path. Changing the tax code will hurry things along. And rethinking the social safety net will ensure that no one gets left behind.

Interview with Alain Bertaud

alainAlain Bertaud is probably the most interesting urbanist you’ve haven’t heard about. He is a senior researcher at the NYU Stern Urbanization Project next to names such as Paul Romer and Solly Angel. Bertaud used to be the lead urbanist at the World Bank, and Ed Glaeser has said that everything he knows about land use restrictions in developing countries he has learned from Alain. Bertaud has also worked as a consultant and/or resident urbanist in cities such as Bangkok, San Salvador, Port-au-Prince, Sana’a, New York, Paris, Tlemcen and Chandigarh.

Our Brazilian collaborator Anthony Ling, editor of Caos Planejado, met Bertaud at the NYU DRI conference last year entitled “Cities and Development: Urban Determinants of Success”, who gave us the following interview:

AL: You are currently writing a book tentatively titled “Order Without Design”, which in some way relates to the title of our website, “Planned Chaos”. What do you mean by the title of your next book – what should readers expect of it?

AB: “Order without design” is a quotation from Hayek that he uses in a different context in “The Fatal Conceit”: “Order generated without design can far outstrip plans men consciously contrive”. In the context of cities it means that cities themselves are mostly self generated by simple rules and norms applied to immediate neighbors but with overall design concept designed by one person or a group of designers. The spatial structure of large cities is a mix of top-down design and spontaneous order created by markets. Spontaneous order appears in the absence of a designer’s intervention when markets and norms regulate relationships between immediate neighbors.  Most evolving natural structures, from coral reefs to starlings’ swarms, are created by spontaneous order. The objective of my book is to show that top-down design should be reduced to a minimum and much more room should be given to spontaneous order.

AL: Brasilia is almost a national token for urban planning, in this case with design. On top of that, its strict modernist “Plano Piloto” was landmarked only thirty years after being built, becoming probably the youngest city considered a heritage site. Today it suffers a lot of criticism from Brazilian urban planners, who usually take a stance against modernist urbanism. Many of them point out the lack of mobility as the main problem: the automobile is almost a requirement to live in Brasilia, as urban and architectural form limits access to pedestrians and public transit. There is a lot to say about Brasilia, but could you summarize your view on it? Do you think urban mobility its biggest problem or are there bigger problems with a planned city?

AB: I have written several articles on Brasilia, in particular: “Brasilia spatial structure: Between the Cult of Design and Markets” presented at a seminar in Brasilia in 2010.

I think the problem with Brasilia is the design process itself and the lack of markets. While buildings and apartments can be sold, the land belongs to the government and is therefore not subject to market forces that could recycle it to respond to changing conditions. The transport problem is only one aspect of it.  The idea from the start to design a city as a finished product is a terrible mistake. Incredibly arrogant.

I wrote also an earlier paper on Brasilia, Johannesburg and Moscow titled “The Cost of Utopia” that summarizes my views on government designed cities. It is not that a better designer would have done a better job, it is the concept of design without market feedbacks from the users themselves that become a permanent flaw that cannot be corrected by more design.

mariordo59

“The land use of Curitiba is designed to make BRT viable, not to transport people to their job in a minimum time.” (Photo by mariordo59 @ Flickr)

AL: In both Brazilian and international urban planning literature, Curitiba is frequently referred to as a “green city” practicing “sustainable urbanism”, in large part due to the introduction of the BRT (Bus Rapid Transport) system. However, BRTs are being built in Brazilian cities gradually showing a number of problems: the system centralizes transit on a single operator – which frequently fails to deliver – and previously scattered routes are designed into a single fixed infrastructure. Are the several Brazilian cities currently building BRTs doing the right thing? And from what you have seen does Curitiba deserve its title as an international reference of urban planning?

AB: I think that the people who managed Curitiba in the last 30 years had many good ideas, for instance recycling water to irrigate public parks. Even the concept of BRT is interesting while limited in its application. However, Curitiba’s original sin has been to design an urban land use that will make a preselected transport system work, instead of looking at the land use and trying to find a transport system that would increase mobility. The land use of Curitiba is designed to make BRT viable, not to transport people to their job in a minimum time.

The idea, of course, that one mode of transport could solve the mobility problems of all its inhabitants for ever is also wrong. I think that BRTs being installed now in many very large and dense cities of Asia are creating more problems for their future and are in reality reducing mobility. See my paper on Danang (Vietnam) and the unfortunate plan for a BRT.

Of course fantastic public relations is one of the major achievements of Curitiba. No city has spend as much on it. At the Istanbul second Habitat conference in June 3–14, 1996 , the Curitiba municipality exhibited an entire BRT bus and bus station shipped from Curitiba to Istanbul!

AL: Rio de Janeiro gives us some of the most striking views of urban inequality: Leblon and Ipanema, two of the most expensive neighbourhoods in the country, are surrounded by favelas, the poor informal communities that usually occupy public land but lack public infrastructure. What do you think is the best way to help the lives of residents of these communities through urban policy? Is land formalization a good solution?

AB: I think that the favelas are not there by chance. The denser they are the more demand it indicates for their location.  They should be made permanent. The first step is to provide infrastructure, water supply, sewer and storm drainage and a convenient way to go up and down. The need to provide formal tenure depends on the country. Establishing a formal cadaster is long and costly. Sometime an informal tenure works well. In Indonesian kampongs one year water bill (which has an address) serves as tenure a document and allows the transfer of title with very little discount compared to cadaster registered tenure. If an informal tenure title allows real estate transactions and is recognized by the state then formal tenure is not necessary. What is important is for the state to recognize the rights of residents, whether they are renters or owners. Being next to expensive neighborhoods is an advantage for the poor residents. More formal jobs are available nearby and probably a better access to high level primary infrastructure.

AL: Brazilian cities are gradually enforcing a “progressive property tax” on unnocupied real estate: owners of empty buildings or lots pay higher taxes the longer they remain unoccupied. A frequent reason given by urbanists who defend this policy is that the owner of this real estate would be failing to deliver the “social function of property” (a concept established in our legislation) by devaluing adjacent properties and restricting access to housing in order to profit by real estate speculation. Are you in favor of this kind of progressive progressive tax? In what scenarios might it be applicable?

AB: I think that urban land should pay a property tax “ad valorem”. Buildings should not be taxed.  An empty lot fully served by urban infrastructure should pay a tax to cover the amortization of primary infrastructure networks and road maintenance.  Empty lots should therefore pay the same tax as a built lot, but just based on its land value.  Rents from built property should pay a tax as part of the income tax of the recipient of the rent.  The decision to build on an empty lot should left to the owner. Sometime it is an advantage to society when land owners delay construction as they may build a structure that is more responsive to demand. William Fischel documented well this apparent paradox. I do not see the point of a progressive property tax.

AL: What cities – or periods of development within a city – do you consider your favorite examples of good urban policy?

AB: Hong Kong has many very positive aspects. In particular because they try to maximize land values by having land use regulations that reflect demand. Shenzhen also has some impressive achievement. I like more and more Indonesian land use policy, Surabaya in particular. None of these cities are perfect models, all of them have some bizarre regulations that are detrimental to the welfare of their inhabitants, but in general they are doing well.

cyalex11

“Hong Kong has many very positive aspects. In particular because they try to maximize land values by having land use regulations that reflect demand.” (Photo by cyalex @ Flickr)

AL: A large part of your work explains how city planning, the attempt to control the apparent chaos of our urban environment, leads to negative unintended consequences, many times being the source of problems cities face today. Being so, what should be the role of urbanists in urban policy and working with city governments?

AB: Urbanists have a very important role to play in city development, but they are not playing it. They usually adopt unmeasurable slogans like “smart growth”, “sustainability”, “livable cities”.  Do not use slogans, use measurable indicators and indicate what action will be taken to  move these indicators in a given direction.

  • Objectives: They should concentrate their effort in insuring mobility and housing affordability as a city develop.
  • Monitoring changes in indicators: They should develop and monitor indicators, for instance, average commuting travel time. Here is a reference to an interactive data base providing the number of jobs accessible from any area of Buenos Aires using transit cars or bicycles. Planners should also monitor changes in land prices, housing prices and household incomes. They should identify the affordable type of housing by income groups and current housing consumption per group. Monitor land and housing supply: how many ha develop every year, how many building permits are given, how long does take to obtain a building permit. Monitor pollution.
  • Action: Infrastructure – Plan road development to insure a steady supply of land and reduce travel time (reducing distance travelled is not a good proxy for travel time). Regulations – audit regulations and remove all regulations whose objective is unknown or has been forgotten. Submit any land use regulations to cost test: what impact has this regulation of land development and floor area cost. Change regulations to allow all income groups to have legal access to land and housing. Take any action related to changes in indicators mentioned before, for instance, increase land supply if land prices are climbing too fast compared to income.

AL: In your opinion, what are three essential books an urban planner or a city enthusiast should read in order to understand how cities work and thrive?

AB: Read a lot, any type of book. For planners who have been trained traditionally (like myself) without much understanding of urban economics, read books on urban economics, Jan Brueckner “Lectures on Urban Economics” for instance. But best of all, walk around cities for hours and look around, and ask yourself “why is this building there? Why was it build that way?” nothing in a city is random or haphazard. A palnner needs to understand why a city is the way it is. Here is a link on my methodology to understand how cities work from a blog from Jon Stewart from NYU.

BART, Josefowitz, and Mass Transit in the Bay

Lake_Merritt_BART

Last week, Nick Josefowitz unseated a multi-decade incumbent for a spot on the BART board of directors. Normally I don’t pay too much attention to elections, but Mr. Josefowitz might actually have some good ideas.

For everyone outside the Bay Area, the BART (Bay Area Rapid Transit) system is a commuter rail line that constitutes the vital transportation link between the East Bay and San Francisco. On a typical weekday it provides 400,000 rides and that number is increasing as the regional economy continues to boom. Suffice it to say that BART is a big deal to a lot of people who rely on it every day (myself included).

While Josefowitz’s campaign website talks about cleaning up dirty stations and increasing late night train availability, I had the privilege of hearing him outline an interesting proposal during a private, small group discussion some months ago.

According to Josefowitz, BART sits on a substantial amount of real estate in the form of station parking lots. His proposal was to repurpose some of this space as high density housing. This would help with the region’s housing shortage and support BART ridership by clustering population around the system’s stations and the lost spots could be offset by building parking structures on the remaining lot space (many BART parking lots are ground level only as opposed to multi-level parking structures). This sounded a lot like Hong Kong’s integrated rail-property development approach which has proven to be an unqualified success, so my interest was definitely piqued.

As always, there’s plenty of which to be skeptical. The fact that the proposal was brought up in a private discussion, but isn’t listed on the campaign website may say something about where it falls in Josefowitz’s priorities. Also, it’s difficult to tell how effective the incoming director will be in pitching new ideas to the incumbent directors on the board. And finally, any plan to build housing on BART property will be sure to include some kind of “affordable” housing requirement, the beneficial effects of which remain questionable to say the least.

But, if Josefowitz is serious about the proposal and he manages to find support amongst the other members of the board, it could be a step in the right direction. More housing would be better than less in the supply constrained Bay Area and allowing for greater density around BART’s stations could contribute to a more sustainable regional transit system.

For the record, I did not vote in this election and this post does not equate to a political endorsement of any kind.

 

The Status of Smart Growth Regulation

Image via Urban Milwaukee

Debates over land use policy often devolve into opponents arguing over how to interpret the same set of facts. For example, “market suburbanists” argue that because apartments in walkable neighborhoods tend to cost more per square foot than suburban single family homes, high densities make coastal cities expensive. Smart Growth advocates may look at the same data and argue that zoning rules that restrict the supply of high-density housing in desirable locations is what makes housing expensive.

In order to provide clarity to the debate on land use regulations, Mike Lewyn and Kip Jackson survey the zoning codes of the 24 cities with populations between 500,000 and 1,000,000 residents. In their new Mercatus Center study, they find that while some cities have in fact enacted the sorts of policies that market suburbanists fear — minimum density requirements and maximum parking rules — these regulations remain very rare relative to near-ubiquitous maximum density rules and minimum parking requirements.

Lewyn and Jackson list the mid-size cities that have adopted various types of Smart Growth regulations below. While a handful of cities have adopted the types of regulations they surveyed, every U.S. city in this sample has a maze of traditional zoning rules.

Lewyn Table

A perpetual challenge in studying the effects of both traditional and Smart Growth regulations is finding data. Municipal codes are all housed on unique websites with varying degrees of accessibility. The difficulty of achieving clear answers as to what causes high housing prices contributes to advocates of traditional zoning and Smart Growth to shout past one another.

While Smart Growth as a whole is maligned by some advocates of the free market, many Smart Growth tenets are actually deregulatory. Policy changes including upzoning, reducing parking requirements, and permitting mixed-use development are all steps toward laissez-faire land use relative to the status-quo, even though these policies are sometimes criticized by those who claim to support free markets. A clear analysis of whether and how cities are implementing Smart Growth allows us to evaluate whether Smart Growth as a whole is a step toward or away from the free market.

Lewyn and Jackson’s study shows that rather than embracing the deregulatory tenets of Smart Growth, regulators in some cities have layered Smart Growth rules on top of their traditional zoning rules, creating a complicated web of regulations. They explain:

Fort Worth imposes a variety of minimum parking requirements, adding simply that the “maximum number of parking spaces shall not exceed 125% of the minimum parking requirement.” For example, the city requires one parking space per bedroom for multifamily housing, which means the maximum parking requirement is 1.25 spaces per bedroom. Because the difference between Fort Worth’s minimum and maximum parking requirements is so small, it appears that almost all parking that is not prohibited is compulsory.

The authors show that while many Smart Growth objectives of such as permitting higher density, mixed-use neighborhoods could be achieved with deregulation, urban planners have instead chosen in some cases to replace traditional zoning rules with Smart Growth rules, in some cases requiring development that would have been prohibited under the traditional zoning regime. As Stephen has pointed out previously, some cities have gone from parking minimums directly to parking maximums without giving the market outcome a chance.

By assessing the legal environment in this sample of cities, Lewyn and Jackson have set the stage for empirical work on how Smart Growth rules are affecting prices. This empirical work is badly needed. Understanding the costs of both these new rules and traditional zoning rules is crucial for evaluating these policies, and these costs cannot be estimated without a clear understanding of which rules cities are putting on the books. This paper demonstrates that today Smart Growth policies are unusual relative to traditional zoning rules that restrict density. However Smart Growth is in some cases complicating the policy landscape rather than providing more freedom for developers to respond to consumer demand.

How Affordable Housing Policies Backfire

Affordable housing policies have a long history of hurting the very people they are said to help. Past decades’ practices of building Corbusian public housing that concentrates low-income people in environments that support crime or pursuing “slum clearance” to eliminate housing deemed to be substandard have largely been abandoned by housing affordability advocates for the obvious harm that they cause stated beneficiaries. While rent control remains an important feature of the housing market in New York and San Francisco, even Bill de Blasio’s deputy mayor acknowledges the negative consequences of strong rent control policies. In the U.S. and abroad, politicians and pundits are beginning to vocalize the fact that maintaining and improving housing affordability requires housing supply to increase in response to demand increases.

While support for older housing affordability policies has dissipated, the same isn’t true of inclusionary zoning.  From New York to California, housing affordability advocates tout IZ as a cornerstone of successful  housing policy. IZ has emerged as the affordable housing policy of choice because it has the benefit of supporting socioeconomic diversity, and its costs are opaque and dispersed over many people. However, IZ has several key downsides including these hidden costs and a failure to meaningfully address housing affordability for a significant number of people. Shaila Dewan of the New York Times captures the strangeness of IZ’s popularity:

New York needs more than 300,000 units by 2030. By contrast, inclusionary zoning, a celebrated policy solution that requires developers to set aside units for working and low-income families, has created a measly 2,800 affordable apartments in New York since 2005.

DC’s City Center includes 92 affordable units. Image via Foster and Partners.

Montgomery County, a Maryland suburb of DC,  has perhaps the most well-established IZ policy in the country. After 30 years, the program has produced about 13,000 units. Montgomery County is home to over one million people, 20 percent of whom have a household income of less than $43,000 annually. While this is an extraordinarily high income distribution relative to the rest of the country, this makes the county’s median apartment rental of nearly $2,300 out of reach for many more people than even an aggressive IZ policy can serve.

While Montgomery County’s IZ housing does not reach a large percent of its population, it has provided many more units than other cities’ programs have. Washington, DC’s IZ law was passed in 2006, requiring developers to set aside 8-10% of units as affordable in all new projects with more than 10 units. As of the most recent 2012 report, DC’s IZ program has yet to reach a single beneficiary. The IZ units that have made it to market are sitting empty. This is in part because IZ units, priced to be affordable to those making between 50% and 80% of the Area Median Income, are not the most cost effective choice for many people in this income range, potential beneficiaries of owner-occupied IZ units may not be able to qualify for a mortgage. IZ units tend to be one- or two-bedroom apartments. Low- and moderate-income DC residents may be able to find housing that is much more affordable than what IZ provides by living in a larger apartment with a roommate(s), in a group house, or with family. By attaching these affordable units to new, often luxury buildings, IZ siphons affordable housing resources to the type of housing where it will buy the least.

Evidence on the benefits that mixed-income housing provides for low-income people is mixed, but it’s hard to deny that inclusionary zoning beneficiaries win a lottery. They live in new construction in desirable neighborhoods, housing that would cost several times as much at the market rate. However, IZ’s effects are not limited to beneficiaries, and its costs are not fully borne by developers. Because developers will lose money on the IZ units they build, this cost has to be made up in the market rate units in order for the project to go forward. This adds to construction costs and also incentivizes luxury units that can better absorb the cost of the IZ units relative to more affordable construction. While providing affordable housing to a few lucky low-income people, IZ also makes housing less affordable for everyone who doesn’t receive the benefit by reducing housing supply and skewing the market toward luxury housing that can subsidize the affordable units.

IZ appears free to everyone except developers because it’s not paid for out of city budgets. But ultimately housing consumers share in the cost of IZ units through a hidden tax. By making new construction more expensive, IZ also reduces the rate at which the prices of older or less desirable housing filters down to the point that it becomes affordable to low- and middle-income residents. Putting affordable housing in new construction ensures that it will benefit fewer people than the same amount of resources otherwise could. IZ supporters emphasize the importance of neighborhoods that are socioeconomically diverse but ignore the opportunity cost. Low-income people may be well-served by putting resources toward living in a diverse neighborhood, but this competes against many other places their resources could go, including investing in a business, pursuing education, or prioritizing nutritious food.

As economist Ben Powell explains, IZ can be designed not to have an effect on market-rate housing prices if developers are allowed to voluntarily trade the provision of IZ units for density bonuses. In that case the bonuses must be high enough to offset the cost of the below-cost units. However, as Stephen has pointed out, IZ creates an affordable housing lobby that opposes upzoning without affordability requirements. Eliminating IZ would put all housing affordability advocates on the same team. The same amount of resources currently providing for IZ units could be levied as a transparent tax and transferred to low-income people as cash rather than as luxury housing. This would also allow for resources to be distributed based on need, rather than giving a few households a jackpot.