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.

The Land Value Argument Against New Housing

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One common argument against new housing is that permitting it causes land to become more valuable, thus leading to higher rather than lower rents.  It seems to me that this argument is unpersuasive for a few reasons.

First, if it was true, places with permissive zoning would have higher rents rather than lower rents, as the possibility of building would cause land values to explode.  Obviously this is not the case.

Second, the argument leads to absurd results.  If downzoning reduces land values, obviously the best way to ensure low rents is to prohibit as much housing as possible.  Perhaps we could prohibit all housing not on five-acre lots.  But suburbs with large-lot zoning tend to be pretty expensive, suggesting that such policies are more likely to increase property prices than to lower them.

Third, the argument suggests that land costs are the primary determinant of rents.  But in fact, land values are much more volatile.  The Lincoln Institute has created a database of land value data, and shows huge swings in land prices.  For example, in the New York City metro area, the land price (apparently per house) swung from $99,000 in 1996 to just over $433,000 in 2006, down to under $225,000 in 2012, and up to about $250,000 today.  It goes without saying that rents and housing prices follow very different patterns.

Comments

  1. It seems to me that this is completely right as an argument against the idea that upzoning *always* increases rents. However, you’d need to do more to say that it *never* increases rents. There could well be a range of conditions in which loosened zoning would increase land values enough to increase rents (partly through the greater value of land on which you’re allowed to build more, but perhaps more so through the greater amenity value that high density land tends to get with more specialized businesses and the like). Of course, it seems that generally we should expect that increased supply of spaces for housing should decrease the cost of housing. So the burden of proof would be on the person using this argument to show that the current conditions are in the special range where looser zoning would in fact increase rents.

  2. It’s my experience that most people focused on land values don’t think higher land values increase rents or home prices. Instead, they argue for land value capture and public benefit zoning.

  3. I don’t think that I have ever heard the comment, “Permitting new housing causes land values (and rents) to rise.” Instead, I have heard the following:
    1. “New housing is always built for the luxury market. New luxury housing will inflate the price (and assessment) of existing housing. So new housing hurts existing homeowners by increasing their assessments.” or
    2. “Zoning for higher density produces new luxury housing.”

    Responses to #1: “First, new houses are typically built for the most affluent segment of the market for which housing demand exceeds supply. So new luxury housing is following the market, not leading it. Second, if there’s a demand for new luxury housing and it isn’t built, the affluent will buy existing homes and renovate them. So, building new luxury housing to soak up luxury demand can help existing homeowners remain. Third, most buyers (and assessors) understand the difference between a new luxury home and an older, existing home with modest amenities and aging appliances. The assessments of existing homes will rise in a tight housing market. But these assessments are not rising because new housing was built nearby.

    Responses to #2: Increasing zoning density does cause land price to increase. However, if the new zoning envelope is fully developed, the land price per unit might be lower than under the existing lower density zoning. Increasingly, we live in a “sharing” economy. Density is simply a way to share scarce high-value locations.

    Regardless or #1 or #2, the primary culprit for higher housing prices are higher land prices. Land prices are high, in part, because we allow private owners to appropriate publicly-created values. This is the fuel for land speculation, a parasitic activity that produces nothing of value. Primarily, it produces booms and busts in land prices — neither of which are good for families seeking housing or businesses seeking locations for shops, offices or factories. Returning publicly-created land values to the public sector reduces the speculative demand for land and helps moderate inflation in land prices. It also allows communities to reduce the tax on privately-created building values — and this reduces the price of buildings as well.

  4. Higher land values don’t increase rents or home prices? Oh so that’s why it’s so cheap here at the beach. Oh wait….

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