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.

The Renewed Debate on Inclusionary Zoning

Stephen Smith and I co-wrote this post. In case you haven’t been following Stephen elsewhere, he’s also been writing at The Atlantic Cities and Bloomberg View.

 

This year, some of the first apartments and condos subject to inclusionary zoning laws in DC are hitting the market, stoking debate over development laws that the city adopted in 2007. The inclusionary zoning requirement is currently stalling the city’s West End Library renovation with Ralph Nader leading efforts to include an affordable housing aspect with the library project. Inclusionary zoning advocates often base their support on the desirability of mixed-income neighborhoods, while challengers argue that inclusionary zoning is an inefficient way to deliver housing with unintended consequences.

Heather Schwartz, who studies education and housing policies at the RAND Institute, says that one important feature of this policy tool is that it gives low-income families access to high-income neighborhoods while at the same time limiting the number of low-income residents in a neighborhood. She said, “Since IZ is a place-based strategy that tends to only apply to high-cost housing markets, it can offer access to lower-poverty places than housing vouchers and other forms of subsidized housing have historically done.”

David Alpert, editor-in-chief of Greater Greater Washington, a local urban planning blog, offers another argument in favor of inclusionary zoning, “a policy that builds support for both greater density and affordable housing,” he said in an email. “Much of the opposition to greater density involves a feeling that it is just a ‘giveaway’ to developers who make the profit and impose some collateral burden on a neighborhood, but many people are more supportive of the density if it serves an affordable housing goal.”

While inclusionary zoning proponents may see its ability to introduce just a few low-income residents to a higher income neighborhood as an asset, it does not typically meet an area’s demand for affordable housing. Montgomery County, MD, outside of Washington, DC has one of the nation’s most established inclusionary zoning problems. In over 30 years, inclusionary zoning has created fewer than 13,000 housing units in the county, which area developer AJ Jackson with EYA describes as “a drop in the bucket of housing demand.”

Jackson explains that the requirement to take a loss on some units leads developers to build only higher end housing, where they can make up the losses they take on the affordable units, making the remaining market-rate units still more expensive. Jackson suggests that the only viable solution to the problem of a lack of affordable housing is to increase allowable densities broadly. He points to several neighborhoods in DC and surrounding counties are currently zoned for commercial or light industrial uses, but that profitable residential development could succeed with zoning changes.

However, he points out the political obstacles to this type of development. He said, “For these jurisdictions, office density and jobs are great. But residents take more than they give in tax revenues,” so city officials may oppose residential development for budget purposes. An even greater obstacle may be current residents’ opposition, a well-documented setback to all sorts of DC-area projects from residential to restaurants.

The political incentives that confront politicians when they do decide to embrace more development complicate the density bonus calculus. The pro-density argument for inclusionary zoning is that the bonuses allow developers to build where they otherwise could not, but when an area is being targeted for development anyway, anti-density activists can easily anticipate bonuses when base zoning allowances are being hashed out and factor them in to their maximum tolerated building envelope. If those who oppose development in and of itself have enough clout, the “bonus” that developers can be reduced just a technicality.

For example, during the rezoning process for Manhattan’s West Chelsea neighborhood in 2005, New York City Assemblyman Richard N. Gottfried wrote in a statement that the city should follow the lead of the Hudson Yards rezoning, where the affordable housing programs were made “effectively, if not technically, mandatory,” which he attributed to “the leadership of Councilmember Christine Quinn,” now frontrunner to succeed Bloomberg as mayor.

The city did eventually take steps to increase the amount of affordable housing built by Hudson Yards developers by tweaking the “bonus” formula so that the rezoning yielded more affordable housing without more bulk than the administration’s proposal. Some below-market units were carved out of the proposed development, while others were pushed off-site – the affordable housing “will not generate additional bulk in the neighborhood through an inclusionary bonus,” as Chelsea Now wrote in 2009. The affordable apartments will be built on city-owned plots 15 blocks north, which given their location, were destined for development soon anyway.

And for those who support inclusionary zoning programs because of the extra density they can bring to neighborhoods, Assemblymember Gottfried’s suggestion for West Chelsea should be especially troublesome: “The Commission should look for places to lower the base FAR to allow the area available for affordable housing to increase.

Indeed that seems to be what happened. “Building density in the entire [West Chelsea] district has been reduced from the previous plan,” The Villager wrote the next month, “in order to provide more incentives for developers to apply for higher density under the inclusionary housing program.”

And New York City is not the only place that affordable housing groups have fought as-of-right density in the name of bonus incentive programs. Last year in California, some housing advocates were hostile to legislation, supported by developers and environmentalists, that would have forbidden municipalities in the state from requiring more than one parking space per unit in neighborhoods adjacent to frequent transit corridors.

As Lisa Payne, policy director at the Southern California Association of Nonprofit Housing, told the California Planning & Development Report in regards to their opposition to Assembly Bill 710, “We have 30 years of history with density bonus law, that recognizes the value of trading a planning concession, whether it be height, density, or parking for supplying the mix of incomes in a project. This bill would have removed that tool.” Affordable housing groups withheld their criticism of the 2012 iteration of the parking reform bill, but it has yet to pass.

While inclusionary zoning provides significant benefits to residents who are lucky enough to live in allotted affordable units, it does not provide sufficient housing units to address many cities’ housing affordability challenges, and in some cases can even breed alliances between affordable housing advocates and anti-density constituents. As Jackson explains, permitting more and denser development is the only viable path to this goal.

Selling the Rights to Greater Density

At Next American City, Mark Bergen has an interesting long-form piece on municipal infrastructure financing. He argues that the property owners who benefit from public policies, such as infrastructure investment, should be required to fund these policies. He suggests infrastructure improvements should be paid for with Tax Increment Finance or value capture (PDF). I don’t necessarily agree with his infrastructure funding prescriptions, and may take these up in a future post. What I found even more interesting, though, is his suggestion that developers should pay for zoning changes.

The basis for this proposal comes from the Georgist land tax. Because in urban settings, land’s value largely comes from the amenities surrounding it, landowners do not have the exclusive rights to this value, according to Henry George. The suggestion that developers should pay for the rights to build on the land they own is based, Mark explains, on a policy from São Paulo, called Certificates of Additional Construction Potential (CEPAC). These bonds, representing rights to build, are transferable and are publicly traded. He quotes Gregory K. Ingram of Lincoln Institute of Land Policy:

“They’re essentially selling zoning changes,” explained Ingram. Crucially, the building fees have not eaten away at developers’ profits. By some accounts, the rates of return for real estate in the districts increase.

[…]

The notes, sold by municipalities, are one of the world’s most innovative public financing techniques. Across many sections of São Paulo, if a developer hopes to build or do nearly anything with her property — adjust its uses, expand outward or upward — she must first buy a CEPAC.

On a fairness level, selling zoning changes seems wrong to me. Current zoning policies are an arbitrary starting point, so it doesn’t make sense that developers should have to pay for permission to change a policy that is limiting their rights. Additionally, the overarching objective of value capture, as Mark explains, is to facilitate progress toward Smart Growth objectives. To the extent that these objectives include affordable housing, walkability, and permitting denser development, great progress can be made toward these goals with upzoning alone without significant public investments.

On the residential side, increasing the housing supply is the only feasible path toward large numbers of affordable homes. On the commercial side, walkable neighborhoods cannot be achieved without permitting more mixed-use, dense development. From this angle,  São Paulo’s CEPAC policy would act as a tax on Smart Growth.

From a political perspective, it seems that the CEPAC policy would be subject to abuse. Those who oppose density on the conservative side would lobby for the issuance of few CEPAC bonds. Those on the progressive side who support increased public revenue for their favorite causes may also support the issuance of few bonds, requiring developers to pay high prices for the rights to build.

Despite these problems, though, as Mark points out in Brazil the program has led to increased developers’ profits indicating the program has not had these detrimental effects. I was not familiar with the program before reading Mark’s article, and I don’t know much about how CEPACs have played out politically in Brazil. However, I can imagine that paying for the rights to build would be an improvement for many U.S. developers, even though they act as a tax on density.

Currently, to achieve the zoning changes necessary for increasing density and market-rate affordable housing, developers have to spend significant resources of time and money to go through an uncertain political process. In some cities, as-of-right development is so limited that  the rule of law does not extend to urban development. Given this status quo, CEPAC bonds could benefit developers by removing some of the uncertainty surrounding zoning variances. Rather than spending money on lobbying for property rights they may never achieve, developers could simply buy these rights on the open market. This might also benefit small-business development if buying the needed bonds is cheaper than investing in a lobbying arm.

While I think many market urbanists would prefer to see more housing and walkable development allowed as-of-right, perhaps selling these rights is a second-best solution. Additionally, by compensating taxpayers for the damages to their light and air, CEPAC bonds could reduce the validity of NIMBY arguments. Is anyone more familiar with how the CEPAC program has changed land use rights in Brazil or other ways in which value capture has changed land use policy?

Market urbanism vs. market suburbanism smackdown at Cato: “The Death and Life of Affordable Housing”

The debate you’ve been waiting for! Randal O’Toole, Matt Yglesias, Ryan Avent, and Adam Gordon participated yesterday in a discussion at the Cato Institute moderated by Diana Lind from Next American City/Forefront. (How had this never happened before??)

Randal O’Toole did not disappoint, arriving in top form in his shoestring necktie and armed with a surprisingly interesting Powerpoint, but I think New Jersey-based attorney Adam Gordon stole the show with his discussion of inclusionary zoning and the Mt. Laurel doctrine (probably because he was on the only one on stage who hasn’t already spewed hundreds of thousands of words on the subject).

You can download the 90-minute discussion as an MP3 from Cato (much easier to scroll through), or watch the video streaming:

Affordable housing for the rich and the failure of zoning bonuses

In the past I have not been kind to affordable housing programs. I have a lot of deeper problems with them that I’ll get to in a minute, but I think the extraordinarily high upper income limits on some of the projects are indicative of the broader problem of the essentially arbitrary and random (literally – they’re usually decided by lottery!) nature in which they’re doled out. In a way, even when the beneficiaries are blatantly undeserving, everybody wins – politicians get votes, and affordable housing advocates get paid. Everybody, that is, except market-rate renters, but when’s the last time they ever voted somebody out of power for sabotaging their interests?

Even with an upper income limit of $192k for the affordable units, they still can't sell 'em

Anyway, your latest affordable housing outrage story comes from New York City (where else?) – specifically 138th Street in Harlem, where the 73 units at Beacon Towers are almost all under contract, and Curbed claims that most of the remaining units are income-restricted “up to $192,000″!!! Oh yeah, and they can’t even find enough people who qualify.

Which brings me to another point: the Beacon Towers are not towers, and are certainly not any kind of beacon. They’re eight stories tall, and considering we’re talking about new construction in Manhattan, I’m going to take a wild guess and say they built right up to the zoning envelope. The immediate neighborhood is a mix of turn-of-the-century five- and six-story walkups (but little in the way of even cornice lines), some post-war towers-in-a-park-style buildings that reach up to 15 (!!) stories, along with a smattering of parking lots and other woefully underused lots. As Robert Fogelson wrote in Downtown, the New Yorkers of 1900 fully expected that by 2000, the whole island of Manhattan would be a river-to-river block of commercial skyscrapers. Perhaps that was unrealistic even if there had been no zoning code, but I bet they’d be shocked to know that a hundred years into the future and we’re still building 8-story buildings in Manhattan.

To be sure, bad zoning laws and not affordable housing mandates are to blame for the fact that taller buildings aren’t allowed in America’s most desirable city. But wasn’t this something that affordable housing was supposed to alleviate? Urbanist boosters of the mandates often tout “density bonuses,” or allowing developers to build a little more in exchange for subsidized units, as a way of eking out a little more density from the zoning code. Clearly that didn’t work in this case.

In fact, back during the 2005 Chelsea rezoning, affordable housing advocates were actually successful in getting the district’s allowed density reduced, “in order to provide more incentives for developers to apply for higher density under the inclusionary housing program.” In other wards, completely subverting the original voluntary “density bonus” idea. I suppose it was inevitable – the “density bonus” concept was forged by planners as a way of achieving their goals by enlisting the support of affordable housing activists, but they failed to recognize that the whole scheme is really just an incentive for affordable housing activists to push for downzonings. After all, they are ideologically disinclined to trust in market mechanisms, and certainly don’t care about increasing the market-rate housing supply, which often comes in the form of new luxury construction.

Anyone else know of other instances of this happening? Is it systemic, or are most affordable housing advocates not that cynical? (…or do the zoning committees stop them?)