The Overdue Debate: Smart Growth Versus Housing Affordability

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American households face daunting financial challenges. Even those lucky enough not to have suffered huge savings and retirement fund losses in the Great Recession seem likely to pay more of their incomes in taxes in the years to come, as governments attempt pay bills beyond their reasonable financial ability. Beyond that, America's declining international competitiveness and the easy money policies of the Federal Reserve Board could well set off inflation that could discount further the wealth of households.

In this environment, the last thing governments need do is to raise the cost of anything. It is bad enough that taxes may have to rise and that a dollar will probably buy less. America's standard of living could stagnate or it could even decline.

The Choice: Smart Growth or Affordability

The Washington Examiner, however, succinctly put the choices that face the nation, states and localities with respect to the largest element of household expenditure --- housing. In an editorial entitled "Take Your Pick: Smart Growth or Affordable Housing," the Examiner noted:

"No matter how much local politicians yammer about how much they support affordable housing, they are the principal cause of the problem via their land use restrictions, such as the urban growth boundary in Montgomery County and large-lot zoning in Loudoun County."

The editorial was in response to our Demographia Residential Land & Regulation Cost Index, which estimated the extent to which the land to construction ratio had risen in metropolitan regions. The principal finding was that the share of land and regulatory costs to new house prices had risen only with the impostion of more restrictive land use policies. This is principally because strategies such as urban growth boundaries, suburban large lot zoning and geographical growth steering (such as allowing state financial assistance only in areas meeting smart growth criteria) makes land for housing unnecessarily scarce, raising its price just as surely as OPEC's oil rationing raises the price of gasoline.

Urban planner and mayor of Ventura, California Bill Fulton objected to our attributing these increases to land and regulation, instead suggesting that smart growth increases homes prices much less than we claimed although, he admits, “at least a little“ . The pro-smart growth study Costs of Sprawl --- 2000 concedes that a number of smart growth strategies can increase house prices (See Table 15-4). Thus, the debate is not about whether more restrictive land use policies raise the price of housing, but rather by how much.

More often, however, proponents of more restrictive land use regulations have avoided and even denied that the inconvenient truth linking their policies with higher housing costs. Rarely, if ever, have proponents of such policies fully disclosed to elected or appointed officials that more restrictive land use policies would lead to higher house prices. It is doubtful that any urban planning department ever sent representatives to an NAACP chapter to explain how fewer African-Americans would be able to own their own homes, despite already having a one-third lower home ownership rate than non-Hispanic whites. Similarly, the planners probably never told La Raza chapters that Hispanic households, also with a one third less home ownership rate, would find home ownership more costly. Nor was the message delivered to the religious organizations concerned with improving the standard of living for lower income households.

Pervasive Evidence

Yet the evidence that smart growth boost prices substantially seems incontrovertible. An early 1970s research effort led by renowned urbanologist Peter Hall quantified the impacts of the restrictive Town and Country Planning Act of 1947, which brought smart growth measures to England. The result, The Containment of Urban England revealed how strict regulations on development had driven the price of land for development from five to ten times the value of comparable on which development was not permitted, but might be permitted in the future. More recently, Bank of England Monetary Policy Committee member Kate Barker, was commissioned by the Blair Labour government to review housing affordability and land regulation. She attributed England's more steeply rising house prices relative to continental Europe to its more restrictive land use regulations.

The same effect is evident in the United States. Dartmouth's William Fischel noted that California house prices were similar to those in the rest of the nation as late as 1970. By 1990, however, California house prices had escalated well ahead of the nation. Fischel found that the higher prices could not be explained by higher construction cost increases, demand, the quality of life, amenities, the property tax reform initiative (Proposition 13), land supply or water issues. His conclusion was that the expansion of land use restrictions were the culprit.

Let Them Eat Cake?

The disregard at least some smart growth proponents show about house prices may be characterized, for example, in a comment on the Planetizen website:

"... smart growth can lead to more expensive housing. So what? At least it's REAL value, generated by a higher quality of life, easier commutes, more transit options, walkability and a more enriched cultural experience..." (emphasis in original)

Perhaps it never occurred to the proponents of more restrictive land use policies that not all households have the benefit of incomes typical of urban planners or new urbanist architects. One has to question the "REAL values" of smart growth since most housing consumers place their highest emphasis on things like privacy, security and good schools, not always available at a decent price in urban areas.

In fact, higher priced housing reduces the discretionary income that is crucial to an acceptable standard of living to many households. Millions of households will not be in the market for "a more enriched cultural experience" until they can afford the housing they desire.

Housing Affordability and the Cost of Living

It is not accidental that the cost of living is higher (both in nominal terms and relative to incomes) in metropolitan regions where land use regulation is the strongest, such as San Diego, Washington-Baltimore, Seattle or Boston. Nor is it accidental that house prices have escalated to 40 percent above historic norms in Portland, Oregon, where planners have skimped on geographical urban growth boundary expansions, choosing instead to look skyward, seeking higher densities. California's aspiration under Senate Bill 375 for new housing at 20 units to the acre offers a more than Jakarta level of density (residential densities above 30,000 per square mile) that could escalate the unprecedented exodus of people and businesses.

Higher Housing Costs: The Poverty Connection

The acknowledged relationship between more restrictive land use regulation and higher house prices also applies to standards of living, which are sent lower, and poverty rates, which must inevitably be pushed higher. This constitutes a second inconvenient truth: as discretionary income drops, more households fall into poverty. This creates a difficulty for proponents of more restrictive land use regulation, because there is no constituency for increasing poverty. It is no wonder they have generally discounted, ignored or even denied the nexus between smart growth and higher housing costs.

Considering the financial uncertainty American households face, it is long past time that the choice between smart growth and housing affordability be seriously debated.

----

Photograph: "Low density" smart growth development adjacent to the urban growth boundary (Hillsboro) in suburban Portland (by author)

Wendell Cox is a Visiting Professor, Conservatoire National des Arts et Metiers, Paris and the author of “War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life



















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The elite of the elite in urban economics

Quite apart from the affordability issue, "Fringe Urban Growth Limits" effects on land values result in the opposite outcomes from what the planners intended anyway.

I explain at length on these 2 recent threads.

http://www.newgeography.com/content/001853-auto-centricity-should-cars-r...

http://www.newgeography.com/content/001865-livability-and-all-that

While the number of commentators who now accept the connection between "Fringe Urban Growth Limits" and housing unaffordability and price bubbles, are still like an enlightened elite minority, the number who understand that "Fringe Urban Growth Limits" never did bring any "benefits" anyway (and could not), to stack up against "the costs", are a small minority subset of the first minority.

What do you propose philbest?

So you have pointed out these effects of growth boundaries which sound plausible at first sight. Do you favor doing anything to combat sprawl, like say change tax and other incentives to favor redevelopment over new construction on the fringe? This seems like it could achieve a similar goal to a UGB with a more market based approach that would achieve the distortions you bring up.

Some suggestions.

Thanks for your interest, pbozarth. I think getting some solutions on this is vital. I have been vexing myself over this for some time.

Urban planners have to keep the fringe land cheap, or nothing will work re getting the efficiently located land redeveloped at higher densities. Subsidies or tax breaks are all very well, but as long as there are supply induced price inflation effects, these other inputs will tend to be "costed in" by the market. Here are my suggestions, for what they are worth.

One crude one is to have no limits at all, or to keep up at least 20 years of land supply (by shifting the limit annually) because "land bankers" will then not bother. I believe that this is benefit-cost effective simply because so few people DO locate out in the Styx, compared to the numbers who are forced to "leapfrog commute" or to live at high density near the fringe, when you have price-inflating limits in place.

The next way is to impose strict controls on land ownership and development within your chosen urban boundary. I got this from the Chinese; they are seriously looking at doing this right now. When a boundary is expanded, it should be required of existing greenfields land owners within it, that they "develop" within 1 year, or lose their right to develop altogether. Any purchaser of greenfields land has only 1 year to develop the land, or they lose the right to develop it. This would stop "land banking" and speculative gains, because developers would have to be looking at making their money by actually building homes on newly-bought land(like they used to), not by "cornering" land supplies. Of course there are all sorts of ways people might try and cheat; we will see if the Chinese solve this.

The 3rd way I know of, is to abandon stricter zoning within the boundaries, and go in for as "mixed land use" as possible. In metros like this (Houston, Atlanta), there is no great agglomeration of "location efficient" land price premiums in and towards the centre of the metro. Land prices tend to flatten off throughout the metro area; it is not that you NEED to pay 10 times as much to be near the sole concentration of employment in the metro. The best work on this topic is William Wheaton's "Commuting, Ricardian Rent, and Housing Appreciation in Cities with Dispersed Employment and Mixed Land Use".

I have wondered about a subsidy/tax break of first home buyers along the following lines, to restore social justice in their case if the public demand post-bubble continues to be for "restored" high property values. First home buyers should be offered a subsidy or a credit against property tax payable in the future, TO THE VALUE OF THE LAND that is included in their first home purchase; and the limit on this value could be related to SIZE of the lot rather than the price. The incentive would be, to buy a first home where the land value relative to the structure value, is as high as possible. The first home buyers would obviously go for condos rather than fringe Mcmansions.

The results filtering through the property tax system would be interesting, because the incumbents club would have to carry the cost of their own gain that they have up till now successfully imposed on the first home buyers. (See Robert Bruegmann's "The Housing Bubble and the Boomer Generation"). I would expect that land prices would ultimately level out, and the condos be as affordable as anything else on the market, because of many of the first home condo buyers moving out as they needed more space for their children. The big "vote buyer" to me is that first home buyers have got their feet on the new style property ladder that is missing its bottom rungs, and can sell and buy within "the same market" - while incumbents property values can remain propped up by the continued flow of first home buyers into the market (interrupted when they are priced out of it, and stay with mom and pop, or drop out to some cheap rural marijuana paradise).

px1234 notes that compact

px1234 notes that compact walkable neighborhoods tend to be expensive and serve as bastions of nimbyism. He says affordability needs to be addressed in these places. It strikes me that the problem of affordability in those neighborhoods might just be that everyone likes them, and we don't build very many of them. Thus, a big part of the affordability equation could simply be steering more new growth in that direction. Or at least not explicitly banning it in zoning codes.

Another aspect of smart

Another aspect of smart growth that I feel is as much a contributor to such neighborhoods being more expensive is NIMBYism. I've lived all over the country and on both coasts. I've rented in a number of fairly well-to-do traditional older, walkable neighborhoods. In each case there was a noticeably strong tendency among residents to oppose any sort of infrastructural change. New homes were especially seen as evil and threatening. The cry of: "It'll ruin our quality of life!" was perhaps the most common theme to their counter arguments. In the few instances that new homes were built, the builders took great care to ensure that the homes they built were expensive enough to not threaten the property values of the existing homes. In other words they were unaffordable.

This brings up something I've thought about. If smart growth is really and truly meant to spur universal, healthy growth throughout the local socioeconomic strata then more efforts need to be put into building actual affordable housing. This also needs to be looked at as a sliding scale sort of thing. For example perhaps 20-25 years ago it was possible for a middle class family to afford a 2 story, 4 bedroom home in such and such area. Now that the area has gentrified that same home is out of reach for today's middle class. As such the homes they could afford would naturally be smaller and less costly. Thus as the purchasing power of one economic class dwindles, so too does the expectation of what they can afford on part of home builders.

suburban subsidies

Epar made a very good point. Subsidies for sprawl are widespread, and articles like this don't give us a clear picture of what is happening unless they fully account for all those hidden costs. I never see this issue addressed in these types of articles.

I'm not saying its necessarily false that smart growth strategies are more expensive. But, its important to consider the possibility that the advantages attributed to unplanned sprawl are representing a broad array of subsidies rather than an efficient development pattern.

What Rick Harrison says makes sense though, something I've never really heard before. That could certainly drive up costs.

Yet again, a false choice

The principal finding was that the share of land and regulatory costs to new house prices had risen only with the impostion of more restrictive land use policies. This is principally because strategies such as urban growth boundaries, suburban large lot zoning and geographical growth steering (such as allowing state financial assistance only in areas meeting smart growth criteria) makes land for housing unnecessarily scarce.

Yet large lot zoning is the antithesis of smart growth and "geographical growth steering" is merely the recognition that public infrastructure can't be built everywhere so it should be built where people already are. In fact, you could say that without geographic growth steering, land would be unnecessarily abundant, since the government is subsidizing its accessibility. Apparently you would like us to believe that subsidies for sprawl are somehow pro-market yet regulations allowing developers to build more densely to meet demand are somehow anti-market.

Smart Growth & Affordable Housing are Symbiotic

Nicomaco
Thank you Dr. Cox for an excellent article. Here is what I observe as a real estate appraiser and journalist. "Smart Growth" and "Affordable Housing" policies are symbiotic - they hang together not apart. By this I do not mean that Smart Growth creates or facilitates "affordable housing." To the contrary, Smart Growth impedes affordable housing as Wendell Cox points out. But "affordable housing" policies and programs are a byproduct of Smart Growth - or centralized land use planning.

Let's take Pasadena, CA where I live as an example because many people know of the city from the Rose Parade and Rose Bowl. "Smart Growth" policies of steering new condo and apartment development into the core of the city on very expensive commercial land at high densities with high transaction costs (mitigation fees, inclusionary housing, park fees, etc.) results in ONLY expensive housing.

But with the inclusionary housing component one in five condo or apartment units have to be low income. These inclusionary units are not paid for by developers but by price and rent premiums on the other four units. This inflates condo and apartment unit prices and rents over market. This has a ripple effect on surrounding rents and sales prices as long as there is a bubble (an up market). In a down market the trend reverses and has a compound negative effect. Hence, boom and bust. Now there is something like 1,000 units of unsold new overpriced housing in Pasadena's "Urban Village" and most of the units occupied are the low income units.

The Pasadena Water Fund is $4 million in the red because of unsold and unrented new units not using water or paying water bills, thus water rates for all other water customers have to rise to pay for the shortfall.

Oddly, there is plenty of private affordable housing in Pasadena in the form of older, functionally obsolete and under-parked housing stock now primarily occupied by a large number of economic migrants mainly from South America who work in the posh hotels, restaurants, museums, and for wealthy estate owners in the Pasadena area. But first time home buyers do not want to buy old homes in these immigrants enclaves for a variety of reasons not due to discrimination or prejudice (crime, graffiti marking out immigrant turf, poor performing public schools, etc.). So with about 15% to 20% of the older housing stock being affordable in the private market, the City of Pasadena still must create "inclusionary housing" in upscale new condo and apartment units to attract first time buyers and upscale renters.

In other words, inclusionary housing is luxury housing for the working class. Gone is the notion of affordable housing as "affordable." Affordable housing now has luxury amenities such as gyms, pools, spas, walking proximity to light rail transit stations, and built-in conveniences such as food markets, clothes cleaners, drug stores, etc.

The immigrant enclaves did not just occur by waves of economic migrants arriving. It occurred by a series of public policies such as lax code enforcement allowing the doubling and tripling of families in older housing units, stringent anti-landlord laws about evictions and so-called housing discrimination, and block busting resulting in "white flight" from public schools in selected neighborhoods. Landing zones and enclaves had to be created for economic migrants if a cheap pool of labor was to be created to keep home grown industries competitive in a global marketplace. There is a price to be paid for creating such landing zones or immigrant enclaves -- lack of affordable housing for the younger generation who are pushed out further and further to the suburbs or exurbs. Thus, the "push-down - pop-up" theory of urban-suburban growth.

Another sociological problem arises with inclusionary housing - poor families are uprooted from the mediating structures of churches, family and immigrant networks, and ethnic neighborhoods that provided social support and acculturation. So you have welfare families living in inclusionary housing units in luxury settings who can't afford anything at their doorstep. Many such families are without cars and must treck long distances to discount food and clothing stores as they can't afford to shop at the upscale stores next to them. This is why we see so many shopping carts left in front of new upscale housing in downtown Pasadena. And then there is the delinquency of adolescents who can't afford cars or anything they see around them and have no parks, teen clubs, extended families, or other institutions to replace the social isolation that is a part of centrally planned policies.

There still is the older version of affordable housing which by definition means old, obsolescent, with few luxury amenities and far from shopping centers or public transit (that is why it is "affordable"). But these affordable neighborhoods are gradually being 'gentrified' by redevelopment by bringing new stores, public transit, and other public amenities to these neighborhoods. Of course, redevelopment axiomatically results in higher home prices (and a higher tax base) thus resulting in less affordable housing. So under the rhetoric of redevelopment, affordable and inclusionary housing, less and less affordable housing is available and cities can raise their property tax bases. The last time I looked, more older affordable housing units were demolished than replaced with new so-called inclusionary units. But nobody wants to look or study that phenomenon.

Connecting reality with my thesis

Really interesting observations, Nicomaco.

The point I am trying to make is that the land values are the main influencer of these outcomes. Of course Condo markets have boomed and busted.

If fringe land is several times the price it should be, so will inner suburb land, simply because of the expectations of land owners re efficient location. Then what happens is that LESS people can afford to locate at the efficient locations, unless like you say there are quotas for "affordable" units (who draws the straws?). But that of course puts up the prices of "the rest".

Urban planners have to keep the fringe land cheap, or nothing will work re getting the efficiently located land redeveloped at higher densities. There are 3 ways to do this that I know of so far. One is to have no limits at all, or to keep up at least 20 years of land supply (by shifting the limit annually) because "land bankers" will then not bother. I believe that this is benefit-cost effective simply because so few people DO locate out in the Styx, compared to the numbers who are forced to "leapfrog commute" or to live at high density near the fringe, when you have price-inflating limits in place.

The next way is to impose strict controls on land ownership and development within your chosen urban boundary. I got this from the Chinese; they are seriously looking at doing this right now. When a boundary is expanded, it should be required of existing greenfields land owners within it, that they "develop" within 1 year, or lose their right to develop altogether. Any purchaser of greenfields land has only 1 year to develop the land, or they lose the right to develop it. This would stop "land banking" and speculative gains, because developers would have to be looking at making their money by actually building homes (like they used to), not by "cornering" land supplies. Of course there are all sorts of ways people might try and cheat; we will see if the Chinese solve this.

The 3rd way I know of, is to abandon stricter zoning within the boundaries, and go in for as "mixed land use" as possible. In metros like this (Houston, Atlanta), there is no great agglomeration of "location efficient" land price premiums in and towards the centre of the metro. Land prices tend to flatten off throughout the metro area; it is not that you NEED to pay 10 times as much to be near the sole concentration of employment in the metro. The best work on this topic is William Wheaton's "Commuting, Ricardian Rent, and Housing Appreciation in Cities with Dispersed Employment and Mixed Land Use".

Other costs why New Urbanism is more

Here are a few other reasons:

To pull off any new urban development sucessfully there needs to be a much higher level of architectural and landscape detail than in suburban settings where space has the effect of softening a lack of detail. For example when homes and businesses are just feet away from the walk (human scale) there is more awareness of the structures adjacent to pedestrians. Plain vinyl siding with little or no trim at these setbacks would look almost slum-like. The higher degree of architectural elements to pull off higher density developments cost - plenty, not to mention a full front porch.

Planning is the ultimate bait to win lucrative work from a developer. It is that first step needed after land is secured. In the suburbs it's more likely that the engineering consultant will get the lucrative engineering work by offering planning services (typically that cookie-cutter subdivision where all homes are at the exact same setback). In the suburbs homes are often layed out by draftsman at affordable prices (which is why many suburban developments lack architectural character).

In urban settings where streets are already built and land is to be redeveloped, architects reign supreme. In New Urban settings Architects also hold the rod and reel to lure the developer in, as New Urbanism is more of an architectural exercise than a planning one to successfully pull off. This means that not only are the homes and businesses much more architecturally elaborate, but built into the home price could be huge architectural fees for the design that the suburban home lacks. The result will be a New Urbanist cookie-cutter design where every home is at the same (short) setback but with much nicer architecture than the burbs. It's no wonder that Architects strive for New Urbanism, and many engineers today still don't even know it exists!

Another factor is that the suburban streets do not have alleys, where New Urbanism does. Often New Urbanist designs propose narrow streets that get wider as the developer wins that much needed approval. The results are often wide suburban streets which are expensive to build and rear alleys increasing the cost even more, not to mention a significant increase in maintenence costs (especially in snow country).

Just some more thoughts for your article Wendell!

Old neighborhood streets are almost impassable

Having tried to drive down some streets in Indiana that were laid down in the 1910s and 1920s on can not go faster than a walk, since the street is barely 3 cars wide, and two of these are parked on the side. You go about 10 mph down the street. Now obviously way back then 1 car was about all a family had, but now its 3 or more. This is why newer subdivisions have wider streets, but of course that is giving into the evil evil car, the source of all urban evils. (Some of these streets also had alleys and the garages opened onto the alleys but there were the cars on the streets as well.
Of course the new urbanists think they have the right to dictate to everyone how they should live because they have a the bright ideas. Tell that to teenagers where the family can afford a car for the teen to avoid hauling the teen around.

Who are you to dictate that

Who are you to dictate that cars should be given unhindered movement and speed at the cost of public safety?

Sounds like social engineering to me, just the opposite argument. In fact, the bevy of municipal codes that dictate its built environment in any typical suburban area is enough to decree it social engineering heaven.

It's not about telling people how to live, it's about options.

Current suburbia living does not afford options for a teenager to walk to school or practice. That's the whole point -- the hypothetical parents want to give their kid a car because that is their only option for mobility and relief from being their chauffeur.

I would also like to inform the parents wanting to hand their kids the keys to a new car that car accidents are the leading cause of death to teenagers. Not drugs or gangs. But that's another argument and another day...