Market Urbanism

Liberalizing cities | From the bottom up

“Market Urbanism” refers to the synthesis of classical liberal economics and ethics (market), with an appreciation of the urban way of life and its benefits to society (urbanism). We advocate for the emergence of bottom up solutions to urban issues, as opposed to ones imposed from the top down.

Covenants as a substitute for Euclidean zoning

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Recently, Adam, Stephen, and I did a podcast with Jake at The Voluntary Life about The Voluntary City. The book is a collection of papers on free market solutions to urban challenges, and we will post a link to the podcast here when it’s available.

In one chapter of the book, Stephen Davies discusses covenants as an emergent solution to the externality challenges inherent between neighbors using their property as they see fit. Since this topic came up in the comments of a recent post about neighborhoods built before Euclidean zoning was widely adopted, I thought it deserved further discussion. A couple of commenters suggested that because properties in Baltimore’s Roland Park neighborhood were sold with deed restrictions attached, the development there was not “organic.” My word choice was ambiguous, but in the post I meant it to signify that the development occurred in response to a market process as opposed to a regulatory regime. Private contracts governed land use as opposed to municipal rules.

Davies explains that covenants first came into widespread use in England, as the country was urbanizing between 1740 and 1850. Because developers could achieve higher values for their land by ensuring complementary uses between adjacent property owners, they put covenants in place to restrict the land uses that would be permitted within a community. Some of these covenants even went so far as to specify house’s architectural details. He writes:

Covenants were used in almost all urban development of the period and for a long time thereafter. Whenever a piece of land or the power to use that land was transferred from one party to another, the transfer, whether a lease or a sale, would normally contain a number of specific stipulations, or covenants. Covenants (literally, treaties) were legally binding agreements between the parties that were part of the contract of sale or lease, so that the failure to observe them could render the sale or lease invalid. . . . They could apply for a fixed term of years or for the term of the lease but were often “perpetual”–in other words, indefinite (The Voluntary City, 28).

While covenants serve some of the same purposes that Euclidean zoning does — preventing land uses that would impose undue negative externalities on neighbors — Davies explains that covenants are not coercive because landowners freely buy into these properties that have covenants in place. Furthermore, developers are competing to create the covenants that consumers most desire. If only deed restrictions limited land use, we would surely see huge variation in their strictness across neighborhoods and cities with some developers perhaps selling lots with no restrictions at all. Developers’ profit incentives and feedback mechanisms to meet varied consumer demand has no parallel in municipally-imposed zoning regulations.

Stephen previously discussed deed restrictions in Houston, the city that many libertarians point to as an example of free market urban development. In Houston, the city actively prosecutes and fines property owners who violate covenants, rather than allowing these contracts to be enforced only by neighbors who would go to the expense and effort to sue violators for breach of contract.

In the comments on the Roland Park post, Charles Gardner points out the awkward fact that privately created deed restrictions are often back by public legislation that allows for enforcement that would not be possible if covenants were treated purely as contracts. In general, the authors of The Voluntary City are optimistic about free market alternatives to zoning. Do you all see potential for deed restrictions replacing top down zoning in urban settings? If so, do you know of any instances of covenant enforcement working well without heavy government intervention?

Comments

  1. “Private contracts governed land use as opposed to municipal rules.”

    This is a distinction without a difference. Deed restrictions are no more a product of the free market – and certainly not more conducive to individual liberty – than regulations imposed by a municipality. Libertarians tend to get hung up on categories with specific labels, but they fail to see that, in reality, the actual outcomes are far more blurred.

    For example, compare two places in my own region. One is a gated community with 4500 homes governed by an HOA. The other is a small town in the same county with about 50 homes, governed by a municipal government that imposes zoning. The HOA happens to be far stricter (watch the color of your mulch!), levy higher fees, control a larger population and area, and offer fewer opportunities for democratic input from people affected by their rules than the small town. It’s hard to tell how this would come out on top in any calculation of individual liberty just because it’s called an HOA and not a government.

    Let’s look at Davie’s two defenses of HOAs in the is context. Do homebuyers freely choose to accept the rules when they purchase? Sure, but they do so with the Town as well. What’s the difference? And one could make an arguement that the sheer abundance of deed-restricted communities in the region, especially among new construction, limits the available home options for someone who prefers not to live a highly regulated lifestyle. Second, does the community have to compete with others for homebuyers? Yes, but so does the town. What’s the difference? In fact, the much smaller scale of the town could make it’s competition even more acute.

    And a word about developers profit incentives? They have an incentive to make the homes attractive to potential buyers until they are all sold for the first time and everything is off their books. Maybe about a five year horizon, and no more. This is why it’s not uncommon for the initial homebuyers in HOAs to find that their fees have been underpriced to meet the required maintenance in the long term, and they typically have to be raised about – what a coincidence! – five years after the opening. I guess you could use the typical “buyer beware” line, but it’s really complicated for a potential homebuyer to do a complete audit of the HOA budget (assuming it’s even transparent and available) before making a purchase.

  2. “Private contracts governed land use as opposed to municipal rules.”

    This is a distinction without a difference. Deed restrictions are no more a product of the free market – and certainly not more conducive to individual liberty – than regulations imposed by a municipality. Libertarians tend to get hung up on categories with specific labels, but they fail to see that, in reality, the actual outcomes are far more blurred.

    For example, compare two places in my own region. One is a gated community with 4500 homes governed by an HOA. The other is a small town in the same county with about 50 homes, governed by a municipal government that imposes zoning. The HOA happens to be far stricter (watch the color of your mulch!), levy higher fees, control a larger population and area, and offer fewer opportunities for democratic input from people affected by their rules than the small town. It’s hard to tell how this would come out on top in any calculation of individual liberty just because it’s called an HOA and not a government.

    Let’s look at Davie’s two defenses of HOAs in the is context. Do homebuyers freely choose to accept the rules when they purchase? Sure, but they do so with the Town as well. What’s the difference? And one could make an arguement that the sheer abundance of deed-restricted communities in the region, especially among new construction, limits the available home options for someone who prefers not to live a highly regulated lifestyle. Second, does the community have to compete with others for homebuyers? Yes, but so does the town. What’s the difference? In fact, the much smaller scale of the town could make it’s competition even more acute.

    And a word about developers profit incentives? They have an incentive to make the homes attractive to potential buyers until they are all sold for the first time and everything is off their books. Maybe about a five year horizon, and no more. This is why it’s not uncommon for the initial homebuyers in HOAs to find that their fees have been underpriced to meet the required maintenance in the long term, and they typically have to be raised about – what a coincidence! – five years after the opening. I guess you could use the typical “buyer beware” line, but it’s really complicated for a potential homebuyer to do a complete audit of the HOA budget (assuming it’s even transparent and available) before making a purchase.

  3. Restrictive covenants are substantially worse than a decent planning regime. They allow the dead hand of the past to sterilise land use far, far into the future, and end up increasing the cost of every single sale of that land. By contrast, planning permissions can be changed administratively by people who are democratically elected, but more importantly, still alive.

  4. Seems to me that one of the more pernicious effects of HOAs is that, unlike towns and other democratic institutions, they often have a very high bar to any changes. Some changes can only be made by unanimous consent, which guarantees even the most obviously productive change can be held up by a tiny minority to extract large concessions.

  5. I tentatively agree with much of the previous comments by both “Daniel” and “Marcin Tustin” on the negatives of restrictive covenants and would like to add a third concern of mine as well: less adequate regulation of areas of legitimate public interest.

    Although I realize that some market urbanists feel streets (i.e., thoroughfares), even in cities, should not be publicly owned, I disagree with this.  And if streets are public owned, then I think there is a legitimate public interest in having zoning regulations that affect public streets, like height and setback regulations governing the “light and air” that reaches a street.

    Benjamin Hemric
    Monday, August 8, 2011, 7:50 p.m.

  6. It also stops making any difference when government agencies demand specific kinds of covenants in exchange for providing mortgage financing assistance, as is in fact the case with the FHA and Fannie/Freddie. In fact, it was in part due to FHA requirements for “racially harmonious neighborhoods” that racially restrictive covenants and redlining became so widespread.

  7. Bernard Siegan has a chapter directly on point in “Land
    Use Without Zoning” in which he basically agrees with Davies.  His problem is not with covenants, but with
    zoning (PUD requirements specifically) controlling the development of vacant land
    which essentially mandates the form of any restricted subdivision which is
    built.  Implied is that a city with
    restrictive covenants but no zoning (including, presumably, no minimum street
    width requirements or parking minimums) would produce a much greater variety of
    built forms, as you suggest.  The bottom line for him is
    the freedom of contract, without which “the market could not possibly
    operate.”

    Reading his argument next to Daniel’s, though, the
    distinction Siegan draws between covenants and zoning appears to me to be a
    matter of degree rather than type.  He
    even produces quite a bit of evidence showing that the expiration of covenants typically leads to a substantial rise in property values — showing that the
    covenants are largely failing at their primary intended purpose (conservation
    of value), or rather, that covenants are not preventing a decline in values so
    much as preventing their rise, just as zoning (probably) does.

    As for covenants working well in the absence of government intervention, it can be that the threat of a lawsuit alone is a sufficient deterrent, even where the suit has a less than even chance of success.  Going much further back in time, it’s interesting to read Besim Hakim’s work on Mediterranean cities, which basically functioned (and still function, in places) under a socially-accepted set of “covenants” regarding property development which evolved over time to balance community interests with individual property rights, and rights of existing owners with those of newcomers.  That type of system long predates the emergence of property “developers,” as we understand them, who may be a prerequisite to the creation of such covenants, and who not coincidentally came along at the same time (industrialization) as these covenants started being used on a large scale.

  9. Many if not most municipalities won’t allow subdivision without an HOA. If that’s not coercive, what is?

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