Home prices are soaring and Freddie Mac estimates America’s home shortage to be 3.8 million. So why not build more? That solution would seem intuitive, yet there’s a school of thought–common in urban America–that upzoning for more housing worsens affordability. Here we dissect the logic of that claim.
The problem: many of America’s big cities are mostly zoned for single family housing. Research from the New York Times shows that in Los Angeles, 75% of residential land is zoned for detached single-family homes. In Seattle, it’s 81% and in San Jose it’s a whopping 94%.
Now, many cities are trying to relax their rules in a process known as “upzoning,” which involves changing zoning codes to increase development densities, so that developers can build more and different kinds of housing. Proponents say it will increase supply and bring prices down, while opponents argue that it will inflate land values and “induce demand” into neighborhoods.
When Joseph Bivona, a grocery store owner in The Bronx, NY, tried to tear down his store and replace it with an 8-story building, people protested. The grocery store owner applied to change the zoning law to allow mixed-use residential and commercial buildings. His proposal would allow four new buildings that would house over a thousand residents.
“This affects the quality of life in this neighborhood,” said one protester. “The owner…does not have the community’s best interest at heart.”
“Once you lose that zoning you lose control of your community,” said George Havranek, president of the Spencer Estate Civic Association. “This is an appetizer for [developers]. This is not the main course.”
Do they have a point? These opponents cite “induced demand” as the reason why building more housing will actually increase prices. If the phrase sounds familiar, it is often made about road policy: when new lanes are added to a highway, that doesn’t reduce traffic, but supposedly induces people to drive more.
For housing, the theory is that the more units are built, the more people want them. If, moreover, that new development improves the neighborhood, it will attract wealthier residents, who then further attract upscale amenities. That increases property values and rent.
One study on upzoning in Chicago concluded that over 5 years, home prices increased without actually spurring much new housing. In an email to Bloomberg, the author says additional support, like “more affordable units and rent control” are needed. “Upzoning isn’t a sufficient affordability program in itself.”
“Upzonings are positively and significantly associated with the odds of a neighborhood becoming whiter,” adds Jenna Davis in a paper on upzoning’s impact on demographic change in New York City.
I’ve seen similar anecdotes in my hometown of Charlottesville. Mere talk of a citywide upzoning has pushed prices upwards–but the upzonings have not yet even happened, nor has the subsequent redevelopment.
My rebuttal to the “induced demand” theory is that these gentrifying areas were already getting more expensive. You might say they were suffering from “latent demand.” Since new housing is not being built to meet demand, prices increase everywhere.
Upzoning not only increases the supply of housing within these gentrifying areas, it also reduces building costs, by dividing the fixed costs of real estate development across more heads.
“Townhouses typically cost 30 percent less per unit, and apartments 50 percent less, than comparable-quality single-family homes,” says Todd Litman of the Victoria Policy Institute.
One place where upzoning has worked to cool gentrification is San Francisco. High income people have moved to the city due to the tech boom, leading to rising rents and displacement.
“Developers want to make money, so they like to build in places where prices are already rising. That means that new market-rate housing is positively correlated with rising rents and displacement, but it doesn’t mean that the new buildings are causing the neighborhood change,” says Kate Pennington of the Center for Economic Studies.
She looked at Craigslist rents and found that “monthly rents fall by…roughly 1.2 – 2.3%, for people living within 500m of a new project.” Not only that, but a new project “reduces displacement risk by 17.14% for people living within 500m.”
Xiaodi Li’s paper in New York found that “for every 10% increase in the housing stock within a 500-foot buffer, residential rents decrease by 1%.” But some claims about gentrification are true: “New high-rises and their high-income tenants attract new full-service restaurants, cafes, and coffee shops.” Nevertheless, Li concludes that the supply effect outweighs the induced-demand effect.
In Minneapolis, researchers found the results were mixed. New market-rate development lowers rents by 3.2% in more expensive buildings, but raises rents by 6.6% in less expensive buildings. This would support the case made by critics against upzoning. However, the study did not look at long-term effects of new construction on rents; it’s possible that affordability could improve with time.
In conclusion: upzonings may or may not increase surrounding home prices depending on the situation. Yet in a country with a huge home shortage, upzonings need to be part of the solution; the answer is not to just stop building housing. The key is coupling these upzonings with other measures, such as faster permitting and reduced parking minimums, to accelerate actual construction. Otherwise, the mere rumor that an upzoning might occur leads to speculation and the increase of nearby land values.
[This article was originally published by Independent Institute.]
Scott Beyer owns and manages The Market Urbanist.
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