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.