Urban Design, Social Equity and
Urban Land Value.
By Professor Patrick M. Condon.
(those who prefer pdf click here)
INTRODUCTION
Housing affordability has reached
the crisis stage and urbanists can no longer escape responsibility for
understanding how their actions may impede or enhance access to secure
affordable housing. This chapter introduces readers to what is unique about
this historical moment, why former strategies for mixed income urban design
strategies may no longer be adequate, and what practices have been taken up recently
to address this problem.
What is happening.
During the past two decades the
asset value of urban land has skyrocketed. In the USA the urban land price
collapse of 2008 has been reversed with urban land prices far above what they
were in the pre-collapse “bubble” year of 2006. The jobs rich coastal cities (e.g.
Boston, Washington DC., San Francisco, and Los Angles) have seen urban land
price increases of over 400 percent[1]
in many districts in just the seven years between 2012 and 2019.
The situation in other parts of the
English-speaking world (UK. Australia, Hong Kong, New Zealand, Canada), having
escaped much of the dramatic collapse in urban land value experienced in the US during 2008 are suffering even more
unmanageable increases in urban land price. Canada is the most extreme example
with a 200 percent rise in inflation adjusted housing prices in Vancouver and
Toronto in just 10 years. The statistics are just as alarming in the other
countries mentioned. In no case are these
increases in home prices matched by increases in salary. Average hourly
wages in these countries have stayed flat, (in inflation adjusted terms), since
the 1980s. The link between average wages and average home prices, which for
decades was considered a real estate “fundamental”, no longer applies.
Many economists and aligned pundits
explain that this extreme situation, which defies the “fundamental” of wage/housing
cost balance, and the so-called laws of supply and demand, must be a function
of “exogenous forces”. This term is used by economists to explain away
instances where presumed neo-classical economic rules seem broken by empirical
observation. If supply is not matching demand, they say, it must be because
something is blocking new supply from entering the market. The handy and
intuitively reasonable culprit offered to explain this market failure are zoning controls. Zoning controls place limits
on the “highest and best use” of urban land, they say. Their removal would
presumably open up a floodgate for new supply to rush into urban markets
lowering prices, they say.
But as Yogi Berra was reported to have
put it: “In theory, theory and practice are the same. In practice they are different.” It seems Mr.
Berra was right, because in theory, no place in North America should have seen
greater cost reduction benefits from adding density than the city of Vancouver,
Canada. Over 30,000 new units have been added to our miniscule downtown making
that city famous for “Vancouverism” in the process. Accessory dwelling units
were legalized 15 years ago legalizing and opening up 60,000 more. More
recently “laneway housing” units were allowed city wide authorizing 60,000
more. Then within just the past few years the city abolished any remnant of
single-family zoning making every small 4,000 sq. ft. lot owner eligible to
build 4 units (which works out to a net density of 40 du per acre, which is
townhouse density). This last change
authorized up to 150,000 new dwelling units in a city that only had roughly 200,000
to begin with. Add all this together and Vancouver has either built or
authorized more than a doubling of housing units since the 1990s. And the
results? A larger housing price increase than any other city in North America,
including New York and San Francisco, and a gap between wages and home prices
second only to Hong Kong. Clearly the empirical evidence in this case does not
support the “fundamental’ rules of neo-classical “supply and demand” economic
theory.
How then do we explain this?
So, if it’s not about “supply and
demand,” how do we explain this? Well, let’s start with the basics: workers
don’t get paid enough. The overarching background to the housing crisis is of
course the inequality crisis. While productivity has more than doubled ( in the
developed world) in the past 40 years,
those gains have not gone to wage earners. They have instead been captured by
owners. What was also, until relatively recently, construed as a “fundamental”
part of the neo-classical rule book, that as productivity increased, owners
(“capital”) would get 40% of new value and wage earners (“labor) would get 60%
has not held true. Now 100% of
productivity gains goes to capital.[2]
Labor gets none of it. In consequence owners of capital are enjoying a flood of
new wealth. They are not storing that new wealth under the mattress but are
pouring it into assets, setting off a raging dumpster fire of asset price
inflation. And asset price inflation would not be so bad if it only affected
gold, stocks, bonds, and bitcoin. Unfortunately, the lion’s share of this
wealth is being poured into, you guessed it, urban land. The value of just the
urban land in the 100 largest metro areas in the US now exceeds the country’s
annual GNP. A 100 percent increase in 10 years.
The second and related problem,
also unfamiliar to us and not such a large problem before the turn of the
millennium, is the way that land appears to have an infinite capacity to absorb
whatever value is created by the human activities
occurring around it (capital creation). This one is a little bit more
complicated than the inequality problem so bear with me.
Why is land price a problem?
Going back all the way at least to
Adam Smith,[3]
the “landlord” was seen as essentially parasitic on the machinery of capitalist
wealth creation. Smith had deep respect for the industrialists or farmer (owners
of capital) and their workers (labor) seeing in their collaboration a goose
that laid the golden egg: capital creation. However, you need more than capital
and labor to create wealth. You also need land. And it is in the essential
nature of the landlord/capital/labor relationship for the landlord to take as
large a share of the new wealth created by capital and labor as s/he can get away with - up to and
sometimes over the point where all the value beyond what’s necessary to keep
the laborer alive and the factory running gets taken up in land “rent.”[4]
This view is the fundamental underpinning of what is know as “classical
economics”. These three factors were acknowledged as the necessary triad of
wealth creation, with land having no contribution of its own, but rather absorbing
wealth passively in the form of rent.
Henry George’s Urbanist Insight
More recently, in the 19th
century, it was left to American economist Henry George to apply this concept
to what he observed in the emerging American industrial city. His work was in alignment
with the classical tradition. He explained that as urban areas mature, more and
more of the new wealth created in cities gets poured into land price, up to the
point at which the economy strains and buckles under the weight of this land
“rent”, (with poverty and homelessness an obvious manifestation of this problem).[5]
His analysis of land markets is presently being rediscovered by urbanists.
Henry George had a simple insight.
By George’s time, the late 1800s, land value was no longer primarily tied up in
agricultural estates as in the time of Smith, but increasingly by wealthy
holders of urban real estate (i.e. urban land). Updating Adam Smith, George
complained that as cities became more and more wealthy, most of that wealth
ended up locked up in the value of urban land. Such well-located land would
produce massive “rents” (either actual rents or payments to banks to amortize
the full cost of land purchase paid monthly). His conclusion was that there was
no way to limit this phenomenon besides taxing that land value. By taxing urban
land at its full value, it would reduce to the point of insignificance its
price (its rent value), while providing tax funds to maintain the social safety
net. His work was important in establishing US state and local tax systems that
fall differentially on land value and improvements.
Unfortunately for us, this tax rate,
usually in the form of local property taxes, is usually set at about 1 percent of full value of the land per year.
At these rates, land taxes do not approach the 9-12 percent annual tax he
suggested – too low to quell speculative land price increases sought by ”rent
seeking” investors. A 10 percent tax
would approach the full annual “rent” value of the land. Such a high tax would
both squeeze out the normal speculative pressures that urban land is subject
to,[6]
while providing funding for social requirements and city infrastructure.
All of this is explained in his
very lucid and accessible book Progress
and Poverty[7] so
that will have to do for now: but interested readers should go to the source. His
book is lucid, accessible, riveting, and passionate.
George’s book hit the world like an
explosion, and for more than a decade his book sold more copies in the US than
the bible, and provided the political underpinning for the Progressive Era.[8] It was translated into over a dozen languages
and influenced land policy from China to Hungary.
Where we are today.
However, the years since his death (near
the turn of the 20th century) have not been kind to his legacy. The
multiple conflagrations of World War One, the Depression, and World War Two,
interrupted this pathological accumulation of wealth into land rent – so that
by 1945 urban land price (relative to other goods) had fallen dramatically.
Secondly, after WWII the expansion of urban areas allowed by the car made vast areas
of new urban land available so quickly that its raw abundance lowered its price.
But that huge new suburban supply has
met the limits of urban expansion, and we find ourselves, yet again, in the
grip of excessive demands for land “rent,” at prices yet again beyond the
capacity of average wage earners to afford. [9]
Why don’t urbanists generally see this problem in these terms.
Why was the sense of urgency on the
subject of urban land price lost? Unfortunately for urbanists, Classical Economics
and the current dominant economic theory “Neo Classical Economics” differ in
one key respect. Neo classicists (with one important exception as mentioned below)
lump together unproductive land wealth and productive wealth (like a factory or
a coffee shop), considering both to be capital.
It is made additionally difficult
for urbanists to understand the role of urban land price because land wealth
usually serves as equity value backing up the lion’s share of the finance
industry (which, like land, is not productive), blending the two in economic
discourse. So urban land shows up in most models as “equity” for the “financial
industry” and thus does not show up in most accountings as out of control urban
land value and as a (perhaps the) main driver of wealth inequality.
To go into much greater detail in
this short piece would dull the senses; but before moving on it’s worth
pointing out that George’s original insights have been taken up by important successors.
Notably by Nobel Prize winning economist Joseph Stiglitz. In his 2015 article
“The Origins of Inequality”[10]
he explains how urban land “wealth” is the major contributor to our current
crisis of inequality while this wealth adds nothing to the productive capacity
of the economy. In short, these new trillions in urban land value are,
according to him, a cancer on both the economy and the social well-being of our
national community.
Why adding density won’t fix the problem.
There is a tremendous amount of
debate about whether or not adding density will help solve this problem. The
bad news for urbanists is this. The research points in two directions. There
are studies that show that adding density pushes housing prices lower (or more
accurately that it slows the rate of increases in a particular city district)
and others that show it does the opposite (gentrification). Probably the best
way for urbanists to understand this conundrum is to read a “meta study” by Gabriel
M. Ahlfeldt, Elisabetta Pietrostefani. They compiled 200 separate studies on the issue
to understand the influence of density on cost and on a number of other issues
of interest to urban designers (e.g. transportation, pollution, etc). Their
conclusion? Maybe adding new density reduces prices sometimes but, in most cases, it
does not. [11]
If for the sake of argument, we
accept that adding density by itself does not reduce the price (per interior
square foot) of housing, (which certainly is verified by the empirical evidence
emerging from Vancouver and other hard-hit cities), we must ask why not? Surely
increasing the allowable density on a million-dollar parcel of land by a factor
of four should lead to a 75% reduction in the land share component of the price
of the new housing.
Unfortunately, the evidence on the
ground is unsupportive. In the case of Vancouver attempts to increase allowable
density in the hopes of lowering housing costs have failed to produce the
desired results.
Why? Because those new land use
authorizations are matched in a nearly linear fashion with land cost increases.
[12]
Land in Vancouver and in other hard-hit cities is no longer sold based on the
price of a square foot of the dirt, but rather on how many square feet that
foot of dirt allows for in terms of “buildable” square feet of interior space.
If the allowed interior area jumps from an FSR (floor to surface ratio) of FSR 1
to FSR 4 you can expect a near quadrupling of the land price almost immediately
(and in many cases well before the density increase is allowed - increases
sniffed out well in advance by intelligent land speculators). This really
matters in high priced urban locations. In Vancouver the price of land per
“buildable” is around twice the price of building that same square foot of
housing ($600 vs $ 300).
This is of course because land price
is “residual” based on the market price of an interior square foot minus construction
and “soft costs”[13]. So, the higher the number of square feet of
interior space to be sold on a parcel the higher the residual and the higher
the price a landowner can demand for the land.
Of course, some of the most
successful developers will capture this land price windfall based on its former
zoned allowance and successfully argue for an increase in density, putting this
land price inflation in their own pocket. But the land speculation function and
the development function are best seen as separate; the first focused on
capturing land value increase and the second focused on the process of
construction and sales. The first function, the land speculation function, is
seen by many economists as not contributing to the economy in a productive way,
while the development function is quite rightly seen as adding value to the
community.
What can urbanists do about all of this?
Even in the face of this evidence
many urbanists will still maintain that this land price inflation is not a
caused by adding new density authorization in the way I have described, but
rather is because new density authorization is given too rarely, and only here
and there (spot zoning for denser projects is an example). What is needed, they
say, is blanket rezoning where single family zoning is rendered illegal over
vast areas with a stroke of the pent.
California will soon test that
hypothesis. There Senate Bill 9 of 2021 renders single family zoning illegal,
statewide.[14]
It requires the newly “stratified” lot to have an owner/occupant in at least
one of the units for a certain number of years (to quell speculation hopefully)
It will take a number of years to see if those who argue scarcity of building
opportunity is the culprit, but this author, sadly, has doubts. My doubts are
based on empirical observation and my own failures to see prices lowered by
adding supply.
What can we do on Monday
In the immediate term there are
more fruitful ways to stream land value away from the pockets of land
speculators and towards social purpose. If city authorities are going to create
many millions of dollars’ worth of new value by the stroke of the pen, adding
new density in the hopes of creating more affordable housing, they have the
power, the right, and indeed the obligation to – not just upzone in the hopes
of producing affordability – but to insist on it. Municipalities can insist
that new density allowances be only offered if a certain percentage of the new
housing units are permanently affordable (through “housing agreements” or
through deeding to nonprofit providers, etc). This sort of quid pro quo demand
on private property rights has been upheld by both state and federal supreme
courts in the US, as a valid use of “police powers” which are the legal
foundations of zoning. California has been particularly active in using this
tool.
A requirement for affordable units
does not increase the price of adjacent market rate units. Rather it lowers the
“residual value” of the development parcel below what it would have inflated to
without this affordability demand.[15]
A more aggressive use of the
inclusive zoning tool would be the one adopted in 2021 by Portland Oregon,[16]
where they allowed any “single family” lot to be rebuilt for six units in
return for three of the six being permanently affordable. They also lowered the
FSR for new single-family homes to make parcels less attractive in the
marketplace for that competing use.
Finally, most aggressive of all
would be Cambridge Massachusetts,[17]
where their council approved an “Affordable Housing Overlay District” covering
the whole city which allows a doubling of density anywhere in return for an
agreement that 100 percent of all new units be affordable to those making 80
percent of median household income or less. The important point to make here is
that inclusive zoning in its various forms does not increase housing prices in
cities where land value approaches construction cost per square foot, and that
high land cost is a feature of virtually everywhere where housing affordability
is a problem.
Further Reading.
The above more or less summarizes
the contents of my recent book Sick City
and naturally I recommend reading more there. This volume is available from the
usual sources and also as a free download here: https://justicelandandthecity.blogspot.com/p/download-sick-city-pdf.html.
Also, as mentioned above, Progress and Poverty is a lucid and accessible book
on land economics and economics generally. If you liked Piketty’s Capital in the 21st Century,
you will love Progress and Poverty.
Also available free and on line at: https://www.gutenberg.org/ebooks/55308
[1] Land
Price and Land Share Indicators https://www.aei.org/housing/land-price-indicators/
[2]
Piketty, Thomas. (2017) Capital in the 21st Century. Cambridge:
Harvard.
[3] Smith,
Adam (1776). An Inquiry into the Nature and Causes of the Wealth of Nations.
Vol. 1 (1 ed.). London: W. Strahan.
[4]
Land “rent” is in quotes here because in this chapter the term is used in the
way that economists use the term, i.e. as a cost to production that is
necessary yet contributes nothing directly to production. Many things demand
rent, but currently, urban land is making by far the largest aggregate demand
for rent globally.In laymans terms the words land price and land rent are
nearly interchangeable.
[5]
Georgism/geoism https://en.wikipedia.org/wiki/Georgism
[6]
This part takes a bit of time to get your head around. The value of a piece of
land is not its full price, but rather its value every year during the time
period necessary to pay off the financing needed for its “purchase”. So
economists often figure the period for that would be 15 years. So, the yearly
cost would be about 7% of the total cost plus another point or two for
interest. Economists call this kind of thinking the “present value” of money. https://en.wikipedia.org/wiki/Present_value
[7]
Progress and Poverty https://en.wikipedia.org/wiki/Progress_and_Poverty
[8] https://en.wikipedia.org/wiki/Progressive_Era
[9]
This brief summary doesn’t do justice to this issue. However, if the readers
interest in piqued a more robust explanation is captured in the author’s new
book “Sick City”
[10]
Available here https://drive.google.com/file/d/1a-U9jsMRjjvzwh8HvWaoeykg33KYj4OY/view
[11] “The
economic effects of density: A synthesis”http://eprints.lse.ac.uk/100482/1/GA_EP_The_economic_effects_of_density.pdf
[12]
“East Vancouver property marketed as ‘land assembly’ sold 121 percent over
assessment for $2.8 million”
by Carlito Pablo on December 9th, 2021 at 11:23 AM https://www.straight.com/news/east-vancouver-property-marketed-as-land-assembly-sold-121-percent-over-assessment-for-28
[13]
Soft costs are a grab bag of project costs that include design and permitting
fees. Developer profits are also sometimes placed in this category)
[14] The California Home Act https://focus.senate.ca.gov/sb9
[15] I
go into more detail on this point in my new book “Sick City”, chapter 6. https://justicelandandthecity.blogspot.com/p/download-sick-city-pdf.html
[16] Portland
Just Showed Vancouver How to Fix Its Housing Crisis https://thetyee.ca/Analysis/2020/08/28/Portland-Showed-Vancouver-Fix-Housing-Crisis/
[17] 100%-Affordable Housing Zoning Overlay https://www.cambridgema.gov/CDD/Projects/Housing/affordablehousingoverlay
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