In a recent post on zoning, some commenters pointed out that new housing development can lower the property values of existing homeowners. That’s true, indeed the whole point of new development is to make housing more affordable for those who do not have a home in the area where they’d like to live.
If one argues that we should use regulation to maintain property values, that’s sort of like saying that we should use regulation to prevent millennials from living in cities where their parent live, or that we should use regulation to make it harder for homeless people to find housing.
Perhaps some people are mixing up pecuniary and technical externalities. A technical externality is something like air pollution, where one person’s activity physically damages another person. It may represent market failure. A pecuniary (monetary) externality is like when a Chevron gas station opens up next to an existing Exxon station. It adds competition and thus reduces the monetary value of the Exxon station owner’s business. It does not represent market failure.
Every property is like a small business. Owner-occupied businesses are producing housing services for the owner, whereas rental property sells the service to someone else. Having a regulation that restricts new development is no different from have a regulation that bans new restaurants or gas stations, in order to protect incumbent businesses.
It is theoretically possible that new housing construction could produce negative technical externalities, such as underpriced traffic congestion. But as a practical matter, dense infill development is good for the environment, which is why the smarter environmentalists favor the “YIMBY” position.
If you don’t allow high rise apartment buildings along transit lines in LA or Silicon Valley, the alternative is more suburbans sprawl in places like Riverside and San Bernardino counties, which is even worse for the environment. And if people move from California to Texas, that’s even worse (in terms of carbon emission.)
Zoning should not be used to prevent housing construction. If zoning is to be used at all, it should only be for technical externalities, such as preventing a polluting steel mill from opening up next to a residential neighborhood. Based on the experience of Houston, I’m not convinced that we need any zoning laws.
READER COMMENTS
MarkLouis
Apr 28 2021 at 11:25am
Everyone loves the idea of productivity until it impacts their own rent-seeking. Unfortunately productivity has few proponents outside of certain commodity goods as best I can tell.
Alan Goldhammer
Apr 28 2021 at 11:42am
Try living in Houston for a while!
KevinDC
Apr 28 2021 at 11:47am
I don’t live in Houston, but I’ve visited a few times and I have a couple of friends who live there. It seemed nice when I was there, and they love it there. And given how much population growth Houston consistently experiences as more and more people move there (and away from more heavily zoned areas like California), I’d say the “voting with your feet” model endorses Houston pretty strongly too.
Ben Lytle
Apr 28 2021 at 1:24pm
I think Scott’s statement questioning the need for zoning based on the experience with Houston is spot on. Houston famously has no zoning, but still retains a whole host of other land use regulations that impact the form and function of the built environment, such as minimum lot sizes, minimum setbacks, off street parking requirements, department of transportation standards, and private deed restrictions. To this outsider, it is hard to see how Houston is different from other Texan cities which do have zoning (such as Dallas, Austin, or San Antonio) other than that the costs of housing are lower. The urban form is strikingly similar.
I believe that a lot of people overestimate the value of zoning for keeping unwanted land uses out of a given area. The actual zoning designations for properties were determined in the past, when the impacted parties generally didn’t live nearby. And even with the most open public engagement process, the concepts are too abstract for any member of the general public to have meaningful input.
I live in a sunbelt city in a townhouse adjacent to a shopping center at a suburban mixed use district that was built in 2002-2008. The city has fairly conventional zoning regulations. In front of the shopping center at the end of my street, perhaps 300 feet from my front door, is a vacant lot. The lot has a sign indicating that it is available for lease and is zoned C-1.
When I bought my house, I looked up the land uses allowed in a C-1 zone. I found a list of approximately 40 uses. I assumed that the lot would eventually be built on, and nothing on the list jumped out at me as being particularly objectionable to me (no slaughterhouse or chemical processing plants), so I bought the house.
Last week, silt fences went up around the lot, so I looked up the building permit. A 7-Eleven is being built on the site, and there was no notice posted because a gas station convenience store is allowed as of right in C-1 zones in my city.
You wouldn’t believe the things my neighbors have been saying. They have been furiously calling the city council members, the mayor, the planning staff, admonishing them for allowing a gas station to be built there. Demanding to know how to stop it. Of course, the way to stop it would be to buy out the owner or to go to a time machine to 2001 when the lot was rezoned to C-1 from its previous agricultural designation. But they don’t see it that way. They believe that they should have veto rights over their neighbor’s land. I’m not sure what can be done to counteract that sense. But I am glad my city essentially has no course of action to stop the project,even if I would prefer that my neighbor not be a gas station.
Steven Brown
Apr 29 2021 at 1:38pm
Amen, brother.
KevinDC
Apr 28 2021 at 11:45am
I remember one time when someone was telling me that housing deregulation was a bad idea because it wouldn’t decrease the cost of housing (which goes against basically all of the theoretical and empirical literature) and then argued that it was a bad idea because it would lower the housing values of existing homeowners. I was so stunned by this blatant contradiction that I didn’t even think to point it out – it’s rare to find examples of kettle logic that explicitly made.
Scott Sumner
Apr 28 2021 at 12:20pm
Good example, that’s motivated reasoning on steroids. I see those sorts of internal contradictions quite often.
Robert D.
Apr 28 2021 at 11:53am
Scott, what are your thoughts on some of Japan’s zoning rules? I thought this old blog post was interesting: https://urbankchoze.blogspot.com/2014/04/japanese-zoning.html. It is a little dated, but I liked how inclusive the rules were, especially where residential housing could be built.
I live in a small city that has almost zero mixed-use zonings. Almost everything is like classic SimCity, where each zone could only accommodate one type of usage. It would be nice to have at least some areas where housing could be within walking distance of a few essential shops. I know America isn’t built that way, but I still like to think about more interesting ways in which cities could be allowed to grow.
Scott Sumner
Apr 28 2021 at 12:24pm
Thanks for the link. Tokyo has far more housing construction per capita than equivalent cities in North America.
robc
Apr 28 2021 at 1:33pm
Japanese zoning is a big improvement over what we have, but still worse than no zoning (like Scott, I am okay with industrial zoning, but don’t think its really necessary).
Brian Donohue
Apr 28 2021 at 12:41pm
Great post. Crystalline.
MarkW
Apr 28 2021 at 12:55pm
If you don’t allow high rise apartment buildings along transit lines in LA or Silicon Valley, the alternative is more suburban sprawl in places like Riverside and San Bernardino counties, which is even worse for the environment. And if people move from California to Texas, that’s even worse (in terms of carbon emission.)
Even if they move to Houston? Why would living in Texas be ‘even worse’ than Riverside/San Bernardino? And is living in those places really worse for the environment if the people living there also work nearby (or — even better — from a home office and shop mostly online)?
But by all means, lets have as many people as possible living densely in LA high-rises and using public transit. I think other people should also take as many ‘high-density’ vacations as possible in Vegas or at theme parks or on cruise ships.
MarkW
Apr 28 2021 at 1:26pm
Less snarkily, let’s take non-zoned Houston as an exemplar. How dense is Houston? Denser than you might think. But it’s also far less dense than it could be if preferences for density among Houston area residents were stronger. Judging by Houston, there’s some amount of unmet demand for dense living in other cities, but not that much. And if changes in work patterns persist (companies abandoning their downtown offices), the recent decline in demand for dense city living seems likely also to be a lasting change.
Daniel Kling
Apr 28 2021 at 1:50pm
See https://en.wikipedia.org/wiki/List_of_U.S._states_and_territories_by_carbon_dioxide_emissions and sort by C02 per capita (second to last column). California is the 3rd state on the list at 9 tons per person while Texas is the 9th state from the bottom at 25 tons per person. There are some policy reasons for that (CA has more renewables, more CO2 efficient building standards, car stuff, etc), but I believe the big difference comes from most of CA just having better weather than most of TX and needing way less AC (and comparably little heating).
MarkW
Apr 28 2021 at 8:22pm
That’s a strange list. The U.S. Virgin Islands has very high per-capita emissions while frigid Vermont and New Hampshire are almost as low as California? It appears to me that this is mostly a list of which states are still burning coal for power generation (and maybe also which states are net importers vs exporters of electricity if that is not adjusted for).
But if you don’t want them to move to Texas, let them move to Arizona, Nevada, or Florida (all of which are quite low in per-capita emissions)
Scott Sumner
Apr 28 2021 at 2:00pm
See Daniel’s post for why Texas has much higher carbon emissions.
I agree that not all of LA and Silicon Valley would turn into Manhattan, just certain districts. Still it would be a big boon to the US economy.
Floccina
Apr 28 2021 at 4:31pm
One of my pet peeves is people saying this is a unique environment we cannot allow building here. That environment is unique just all the others. They should have to say why it is more damaging here than most other places.
Same with neighborhoods, this is a unique neighborhood we cannot let someone build a high rise apartment here, yeah it’s unique just like all the others.
AlexR
Apr 28 2021 at 5:08pm
That new construction depresses existing property values is the underlying reason for NIMBY. Renters (whether current or prospective) will tend to favor new construction, whereas property owners will tend to oppose it. Prospective (out-of-area) renters have no vote, and voting renters are often outnumbered by owners. As a matter of practical politics, a relaxation in zoning restrictions to allow more construction would likely have to be bundled with some kind of countervailing benefit to owners, to get them to support the move. This is a margin along which people should be thinking. Any bright ideas?
Scott Sumner
Apr 28 2021 at 5:31pm
We see the same problem with regulations limiting competition in other industries, such as taxis, car dealerships, health care, etc. It’s a tough problem.
MarkW
Apr 29 2021 at 12:39pm
Just to give the pot another little stir — should we think of neighborhoods regulated by HOAs the same way we do as those with single-family zoning? And HOAs aren’t only for new development — apparently it’s possible to create an HOA to govern an existing neighborhood. So how would we feel about a neighborhood that was losing its single-family zoning voting to create an HOA that imposed the same restrictions?
What’s the libertarian position on HOAs? OK (because freedom of contract)? Or not OK (because of the same arguments that apply to zoning)?
robc
Apr 28 2021 at 10:12pm
We need scotus to step in and decree zoning unconstitutional.
Either due to being a takings or a clear cut 9th amendment violation.
Floccina
Apr 29 2021 at 1:10pm
IMHO We need the SCOTUS to step in under the commerce clause. Euclidean zoning is akin to tariff between states. The commerce clause has been used inappropriately but it is not used even though it would appropriate in this case.
Christophe Biocca
Apr 29 2021 at 8:33am
One approach is to recognize the de-facto veto that owners have today, and turn it from an informal thing that exists because of voting structure to a formal easement of some sort. By turning it into an alienable property right, it becomes possible for a prospective builder to purchase, much like the land they’ll be building on. By Coase’s theorem, this should still lead to land being used efficiently.
robc
Apr 29 2021 at 10:08am
And make sure you tax that property right.
I would like to see deed restrictions taxed. If you sell a property with a deed restriction (that you placed on it), then you still own part of the property and should pay property tax on the difference in value between the sold property and an unencumbered property. That would probably be tiny at first, but over time could become very large time as best use of the property changes. It some point, you would release the deed restriction and allow best use of the property, as the tax becomes too high.
AlexR
Apr 29 2021 at 6:55pm
You raise an excellent Coasean point, Christophe, but if the purchase of such easements were by a developer negotiating individually with nearby property owners, the familiar holdout problem would arise.
A Vickrey-Groves-Clarke mechanism might work better, by truthfully eliciting how much each nearby property owner would be willing to pay to avoid the new construction. But I think such a mechanism might also be impractical, as the implied payments to property owners (made by the developer, or by the government) could turn out to be very high.
Alternatively, suppose we can estimate the elasticity of demand for housing, forecast how much the price of housing would fall from an increase in the quantity supplied, and compensate current owners for their loss from the price reduction.
Expanding the housing stock would reduce deadweight loss from the zoning restriction, but does that mean there is enough incremental surplus created by new construction to compensate existing property owners for their loss, e.g. by a payment from the developer (who acts as a kind of agent for the interests of new renters)?
I think this is only true if the elasticity of demand is high enough, so that much new construction would reduce price only slightly. The kinds of quantity restrictions that persist, I believe, are those where the elasticity of demand is relatively low. So the worse the problem, the less likely it is to be solved by a Coasean political bargain.
The market solution to the problem is that people and businesses will vote with their feet, moving e.g. from San Francisco to Houston.
Lizard Man
Apr 28 2021 at 5:50pm
I disagree that looser zoning will lower the value of existing structures, especially if that looser zoning is only for central municipalities in a metro area and those central area have very little undeveloped land.
It is expensive to acquire urban land. If a development project requires purchasing multiple contiguous lots, it is even more expensive to get the project off of the ground. It also becomes more expensive to build anything more than about 5 stories tall, as after that height you can no longer go with wood frame construction, but generally will use steel beams and concrete. It is also more expensive to prepare a lot for construction if there are already some structures on it.
What all of this means is that developers will only undertake infill development and redevelopment if they can sell the units at fairly high prices. There also usually isn’t a whole lot of spare land in the central parts of a metropolitan area either. So even looser zoning rules in central municipalities seem to me unlikely to lead to outright falling prices, as there simply isn’t enough land to build that many units at prices that make it worth it to developers to build that much infill development, though I would concede that maybe the home prices in the SF Bay are so high that developers would go on a huge binge of building housing towers. But even in LA, there are only so many people who can afford the rents or prices that would make it worthwhile for developers to build densely in central areas.
Also, land that is upzoned generally becomes more valuable, not less, so upzoning in central areas of a municipality should raise the value of existing real estate, not lower it.
I think where upzoning and building more densely might actually lower prices is in the more distant suburbs and exurbs of metropolitan areas. Most all of the land in the central areas is already developed, and redevelopment is so costly that it limits the amount of additional supply that infill and redevelopment can be built at a profit (though the government could build housing itself in those areas without the constraint of making a profit). So there is unlikely to be enough net new units in central areas to see outright price declines. However, if denser development is allowed on greenfield sites on the fringes of a metro area, that is a different story. Land for greenfield sites is still usually valuable enough that land makes up a substantial portion of the price that a buyer pays for a dwelling. Also, I think that it is the case that some forms of denser housing and development have lower costs per square foot than single family homes. In particular, I think that townhomes and apartment buildings that don’t need parking structure, excessive amounts of parking lots, or elevators cost less per square foot than single family construction due to things like fewer external walls, roofing, and slab per square foot, though I could be wrong about that. Additionally, denser development on the urban fringes preserves more greenfield land for future development, allowing more units to be built before reaching a metro area starts reaching hard geographical limits like coasts or mountains.
Lizard Man
Apr 29 2021 at 12:11am
TLDR
Dense infill and redevelopment are expensive to construct, even with a better regulatory/ planning/ permitting process, and there aren’t many lots anyway. So that will likely never add all that many new units to a metro area. Greenfield development and “missing middle” type housing is much cheaper to construct, and there tends to be a lot more developable land on the fringes of a metro. Most of a metro’s net new housing units will come from greenfield development. Therefore, what happens with greenfield development is far more important to the typical home prices and affordability of housing in a metro area.
Floccina
Apr 29 2021 at 1:15pm
Lizard Man
Apr 29 2021 at 9:32pm
I think that there are discontinuities in cost at 6 stories, when you can no longer use wood frame construction, and at 50 stories, which of course if you are going that tall you are using steel frame construction.
“The buildings themselves are an effort to fit within the small niches made available by local building and zoning codes. According to Mohler, due to height limits and safety/fire requirements, most of these structures are what’s known as “5 over 1” or “one-plus-five”: wood-framed construction, which contain apartments and is known as Type 5 in the International Building Code, over a concrete base, which usually contains retail or commercial space, or parking structures, known as Type 1. Some codes also mandate a modulated facade, or varying exteriors across adjacent buildings to avoid repetition.”
“Code constraints, which allow construction on restricted areas, help create the second major restraint: cost. The reason our cities are filled with so much of the same kind of building is because it’s the cheapest way to build an apartment. In this case, that’s light-frame wood construction, which often uses flat windows that are easy to install; a process called rainscreen cladding to create the skin of the building; as well as Hardie panels, a facade covering made from fiber cement.“
https://archive.curbed.com/2018/12/4/18125536/real-estate-modern-apartment-architecture
Fazal Majid
Apr 28 2021 at 6:45pm
Ah, but Millennials and the homeless don’t vote, or at any rate far less than Boomer homeowners, and politicians respond to incentives.
Renters make 70% of San Francisco voters, but that doesn’t stop SF’s NIMBY lobby from being extremely effective at stopping almost any housing construction, usually under hypocritical faux-progressive talking points like local control and neighborhood character, or (Goebbel’s Big Lie) that new construction will lead to gentrification. And when that fails (hardly ever), there is good old-fashioned legal obstructionism that will deter almost any property developer who doesn’t have zero cost of capital, and who will usually give up after a couple years.
Frank
Apr 28 2021 at 6:47pm
The silver lining to high price real estate in existing conglomerations is that new centers will be formed. Sprawl is an intermediate solution.
RusselNotSCP
Apr 28 2021 at 7:03pm
While my intuition tells me that the numbers are pretty favorable permissive zoning, I’d like to see the specifics of the flat carbon costs of new construction (concrete and steel production, energy spent on the demolition and literal construction, etc) vs the myriad enviromental gains of high density construction over time. Where is the expected break point? how does this breakpoint change from city to city (eg LA, relatively low density, high automobile usage vs NYC, already high density, high mass transit usage?) How have these numbers changed over time as construction techniques and transportation technology have become more efficient? is there a curve associated with the cost/benefit of high density building, or is it simply more dense=more relative benefit? should we always be trying to put burj khalifas on every street corner or is there a different, more optimal answer?
Lizard Man
Apr 29 2021 at 9:35pm
More skyscrapers in NYC means fewer tract homes in North Carolina, Tennessee, Georgia, Florida, and Texas. So building more densely in NYC should have a very big impact on carbon footprints.
Thomas L Knapp
Apr 29 2021 at 8:10am
As a character in Spider Robinson’s Night of Power points out, worrying about property values only makes sense if you’re buying property as a financial investment to flip at a profit. If you’re buying or renting a place to live in, on the other hand, lower property values are what you want because they mean lower property taxes.
Gene
Apr 29 2021 at 9:04am
Maybe where you live, but not me. I’m in Baltimore city, just a few blocks from the Baltimore County line. If I moved 4 blocks, out of the city limits, this same house would have cost me probably 15% more, but my property taxes would be 50% of what they are in the city. (Not an exaggeration.)
Thomas Lee Hutcheson
Apr 29 2021 at 2:11pm
Does anyone admit to wanting to preserve property values per se? Arguments are in term of externalities — traffic or visual ugliness of the new structure. Besides, reduced restrictions on land use would raise, not lower property values, though not of every single plot.
Chris
May 1 2021 at 11:45am
I’m not convinced that there would be lower property values in any place where zoning is eliminated/relaxed and new building actually happens. If densification occurs that means that typically would mean that property values are high enough to actually tear down existing structures and replace with structures that have more units. Tear down a single family home, built four townhomes, etc. This still would mean that the average “unit” falls in price, but the existing low density properties would increase (most of the value would be in the land).
What would seem to happen is that if California eliminates or relaxes zoning you’d see probably even higher property values in places like Santa Monica as it would densify dramatically, and falling property values in Riverside, as it becomes cheaper to move closer to the coast. You’d probably also see prices in Texas and Arizona fall as there would be less demand from Californians moving in.
Phil H
May 2 2021 at 9:51pm
@Thomas and @Chris, thank you! I’ve pointed out a number of times on this blog that deregulation and increased density are very unlikely to reduce house prices, and every time the writer suggests that I’m a crazy person. But apparently I’m not the only person to see how the logic will actually play out.
I still agree with the policy proposal, to reduce zoning regulations, because prices will go up (locally) and the overall value of the local and national housing stock will increase. That still seems like a good thing. But it’s not because “more supply means lower prices”.
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