Upzoning Isn’t Everything

Upzoning Isn’t Everything

In the face of rising housing costs and the associated rents to homeowners, it’s abundantly clear that cities across the U.S. need to change course to address the housing affordability crisis. Upzoning seems to be the most obvious solution, but a new study of Chicago’s 2013 and 2015 zoning changes by Yonah Freemark found that after upzoning, land values increased in the windy city, contrary to the expectations of many:

What are the local-level impacts of zoning change? I study recent Chicago upzonings that increased allowed densities and reduced parking requirements in a manner exogenous of development plans and neighborhood characteristics. To evaluate outcomes, I use difference-in-differences tests on property transaction prices and housing-unit construction permits. I detect significant, robust increases in values for transactions on parcels that received a boost in allowed building size. I also identify value increases for residential condominiums, indicating that upzoning increased prices of existing housing units. I find no impacts of the reforms, however, on the number of newly permitted dwellings over five years. As such, I demonstrate that the short-term, local-level impacts of upzoning are higher property prices but no additional new housing construction. [Emphasis added]

These results seem counterintuitive to proponents of increased density. Shouldn’t increased competition (in the form of more permissive zoning regulations) reduce land and housing costs?

On the one hand, while the price of land is heavily influenced by the restrictiveness of zoning and land-use regulations, the ability to build more housing on a given parcel of land will make it more valuable to a developer. (For an analogy, imagine a restaurant that is able to increase the number of customers it can seat. Its value will increase because the expected stream of profits will as well.)

If, for whatever reason, the restaurateur doesn’t expand his location, it will still be more valuable because the option to do so exists. Freemark says as as much in his study, finding “[t]his is a sign that land prices adjusted to expanded ability to build, providing a one-time boost to incumbent landholders and suggesting interest in future development at higher densities.”

But to increase housing supply itself, it’s necessary to increase permitting of new housing, which did not occur. “There is little reason to believe” writes Freemark, “that either of the zoning reforms produced a significant increase in housing permits.”

How do we resolve this? Writing for Bloomberg Opinion, Noah Smith has a few suggestions:

Despite these limitations [Freemark doesn’t analyze the costs of rent], the paper implies that increasing housing availability should involve more than just allowing more housing to be built on a parcel of land — it should involve strong incentives to build more units quickly.

Newly elected California Governor Gavin Newsom has some ideas for how to do that. His plan involves a combination of tax credits and loans for housing developers and grants to local governments to help them meet density targets. In addition, the governor wants to withhold transportation funds from cities that don’t meet state-mandated housing requirements.

Smith also proposes a land-value tax, more public housing, and government assistance in the creation of residential co-ops. There are merits to each of these proposals, but the findings of Freemark’s study are clear: upzoning is a necessary, but not sufficient condition to resolve the housing affordability crisis.

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By |2019-02-07T08:39:35-07:00February 7th, 2019|Blog, Land Use Regulation|