Saturday, May 21, 2011

Did Zoning Ever Conserve Property Values?

Over at Recivilization, which has a lot of fascinating content in non-blog format, there's the following nugget under the entry for zoning reform:
"Zoning's purpose was supposed to be preserving investments and neighborhoods, and yet over 70 years our massively zoned cities have seen the greatest wave of decay in urban history. There is no evidence, from anywhere, that zoning has given any declining neighborhood an extra minute of time before its doom arrives.
Let's think back for a moment to the purposes which justified the spatial separation of uses and densities in the earliest zoning codes.  These are listed on pages six and seven of the 1926 Standard State Zoning Enabling Act, including this entry on conservation of value:
"Such [zoning] regulations shall be made with reasonable consideration, among other things, to the character of the district and its particular suitability for particular uses, and with a view to conserving the value of buildings* . . . .(*Footnote: 'Conserving the value of buildings': It should be noted that zoning is not intended to enhance the value of buildings but to conserve that value -- that is, to prevent depreciation of values such as come in 'blighted districts,' for instance -- but it is to encourage the most appropriate use of land.)"
In the Euclid v. Ambler decision, Justice Sutherland attempted to justify zoning's exclusion of high-density residential uses from low-density residential areas:
"With particular reference to apartment houses, it is pointed out that the development of detached house sections is greatly retarded by the coming of apartment houses, which has sometimes resulted in destroying the entire section for private house purposes; that in such sections very often the apartment house is a mere parasite, constructed in order to take advantage of the open spaces and attractive surroundings created by the residential character of the district.  Moreover, the coming of one apartment house is followed by others . . . ."
The arrival of "apartment houses" in a neighborhood, of course, typically signifies an increase in land values in that neighborhood.  Sutherland is describing the ordinary process of urbanization, proceeding according to the highest and best use for each parcel of land as demand and value increase.  The new residents of the apartment building may sometimes be of lower economic status, on average, than the individual owner of the home that was replaced, but collectively, the economic productivity of the land (in the form of rental income and/or property taxes) has dramatically increased.  Homeowners may object to the presence of the new building, or possibly the presence of its residents, but they are nonetheless the beneficiaries of the increased land values should they decide to sell. 

This also addresses the argument that zoning provides a reassurance for investors: since an appearance of new or denser uses in a neighborhood indicates investment and is usually associated with increasing values, not falling values, what good do the exclusionary codes actually do to secure profit?  If a residential area desires to maintain its form, at least for a while, the option of temporary deed restrictions always remains.

In the absence of zoning, unchanging form is the mark of a stagnant or declining area.  When a neighborhood's land values fall, new investment, and therefore new buildings, will be rare or nonexistent.  In this scenario, single-family homes may "filter down" to lower income populations, but this will not involve any change in the physical form or residential use of the house -- the things that zoning governs.  When demand falls so far that rental income fails to cover basic upkeep, homes may be boarded up or abandoned altogether, or become victims of arson.  Again, zoning will be useless here.  The vacant landscape of portions of inner Detroit has retained its vestigial low-density residential zoning, which the 800-page Detroit zoning code dutifully recites is "designed to stabilize and protect the essential characteristics of the district," even after virtually all the structures once present have been burned, demolished or abandoned.

A regulation which prohibits the construction of multifamily dwellings, or the subdivision of land for additional single family homes, can limit an increase in land values, but can do little or nothing to prevent the decline in the second scenario.  The justification for zoning might have been more accurately put this way:  "It should be noted that zoning is not intended to depreciate the value of buildings but to constrain that value -- that is, to prevent appreciation of values such as come in 'urban districts,' for instance."  

The negative effects of artificially limiting supply, on the other hand, have been well documented: surburban sprawl as new development is pushed to the fringes, as Michael Lewyn has shown; increased property taxes leading to tax cap backlashes leading to still more exclusionary zoning; low-density neighborhoods close to downtowns making no-development "suicide pacts," as Chis Bradford describes in downtown Austin, just to name a few.


  1. Best blog post I've read in a very long time.

  2. Your brush is overly broad... what happens when a tannery is opened? Or a papermill? Or a drop-forge?

    Do the land values of the residents within smelling/hearing distance somehow come out ahead?

    Anyway, your argument doesn't apply to all zoning restrictions, even then, zoning has mostly been used to enforce stability.

    Land values are a poor argument that people use to describe what they really want... stability.

    1. ill applied zoning indeed does damage to neighborhoods, it can create a target for continual conversions of single family homes into multiple family dwellings which do not foster a sense of community and are more often than not poorly maintained.

      The stability you speak of is cannot be forced. Suppression and constraint to achieve stability in the end only create catastrophic events that exceed the minor instabilities that would have occurred along the way if events followed their natural course. Zero tolerance for forest fires proved this out remarkably well, if the natural cleansing order of fires was not allowed to take place the overgrowth that resulted created massively destructive fires when it did happen, however infrequent. When the fires came they could not be controlled. The same applies to heavy-handed dictatorial regimes etc.

  3. A tannery? A drop-forge? What are these ancient vestiges you speak of? Manufacturing is on the decline in the US, and I'm pretty sure no up and coming entrepreneur is planning on making his fortune in the tanning business.

    Increasing density does not undermine stability. Neither does mixed-use. A good form-based code can keep loud "public nuisance" industrial uses separate from residential areas.

  4. Sorry, didn't mean to bring up real world examples that now don't exist, because 100% of industry is now overseas.

    Oh, you say there are cities in other countries too? Oh, they also have issues with planning and how to channel growth?

    So, if you have a "good form-based code", I'm not seeing how that would preclude noxious uses. Most of the historic buildings that have been repurposed in the last 20 years were initially built for industrial use.

    So, then we're back to zoning...

  5. The tannery/steel mill arguments are moot in this day and age with pollution controls and other regulations against noise and other obnoxious activities. Even so, if a grungy industrial use can afford to move in to a residential area, then that residential area has much bigger problems already. Zoning itself won't help, since you can still have a large industrial park located next to a large residential zone. Buffer zones and air sheds are completely different animals than simple single-use zoning.

    I agree with the original post that limiting the use of a piece of land actually lowers its value since it can't be put to its highest and best use. However, there's another side to that coin. Low density zoning creates an artificial scarcity of (for example) housing. This is even more acute in desirable areas, for obvious reasons. So by artificially limiting the supply of housing, it inflates prices. While many people say that zoning protects property values from "evil" higher density development that's considered a blight, it's also a case of simple supply and demand economics. If more supply is allowed to be built, it lowers the demand, and thus lowers prices. Anyone who's already bought-in to the neighborhood will want to limit further development to maintain that scarcity and the artificially inflated prices. It's all about resale. Anyone who's actually invested in staying in the neighborhood long-term should welcome stagnant or even declining home prices because it will result in lower property taxes and insurance premiums. Alas, few people are in it for the long haul.

  6. Stephen and Dave - you guys are too kind. Thanks.

    I'll address the industry issue in another post.

    Jeff – good points, thanks for the comment. One thing though. You mention that "anyone who's already bought-in to the neighborhood will want to limit further development to maintain that scarcity and the artificially inflated prices," but an upzoning, at the moment it occurs, will greatly increase the values of the properties of all homeowners in the neighborhood. If land is upzoned enough, existing building values may actually become negative, since the highest and best use will require demolition in all cases. But the increase in land value will outweigh the loss in the value of the building such that homeowners will come out way ahead.

    By way of an example, my old neighborhood in Nashville had a block where single-family zoning abruptly changed to multifamily (but not especially high density) along a rear alley. Land values on the single-family side are $300,000 per acre, with lots of .2 acres apiece. Land values on the multifamily side: $1,700,000 per acre, same size lots (originally it was all zoned as single-family). The typical house (building only) on the single-family side is assessed at $150,000. If the single-family area were rezoned for multifamily, even if building values fell to zero, land values would more than make up for that difference (as single family $60,000 + $150,000 = $210,000; as multifamily = $340,000 + $0 = $340,000.) That should not change greatly no matter how many new units are built in the neighborhood.

  7. I assure you, flood hazard zoning preserves property values by restricting the uses of the land. Any zoning control that prohibits auto junk yards in a residential neighborhood will tend to conserve the value of that neighborhood for residential use. Your brush IS too broad and your argument simplistic. Not to mention that zoning, as stated in "Euclid", is to facilitate public health, safety, and general welfare, not value.

  8. That's a fair point Charlie. The problem in both circumstances is that there's no state of equilibrium in the short term so it's difficult to predict results. Low density zoning causes an imbalance in supply versus demand, and upzoning a small area can create a huge demand response since it has nowhere else to go. Neither situation is balanced. If the whole metro area was upzoned significantly, it might be a different story, but of course it will still take years if not decades to see what happens.

    All that may be irrelevant since cities are dynamic places, and equilibrium may not even be achievable at all. So the question becomes how to best manage growth and change rather than trying to codify some inflexible ideal.

  9. Low density zoning causes an imbalance in supply versus demand, and upzoning a small area can create a huge demand response since it has nowhere else to go. Neither situation is balanced. If the whole metro area was upzoned significantly, it might be a different story...

    I completely agree. We could speculate on the effects on land prices if density limits were significantly relaxed citywide (presumably low density neighborhoods close to downtown or transit would benefit, far suburbs would decline), but as is you're dealing with greater or lesser amounts of distortion in the market. Still, in theory, a supply which is highly constrained by regulation should create an even stronger incentive for some low density neighborhoods to leverage that distorted market into profit by upzoning. The more constrained the market, the bigger the upside will be.

  10. I think we have to respect the urge or desire that created zoning. Then, we can think of a solution to those original problems, which doesn't have the same negative effects as zoning.

    There are two basic drivers of zoning as I see them today:

    1) The desire to live in a place with "peace and quiet" and which is favorable to children and families, which, in practice, means as little automobile traffic as possible.

    2) The desire to live away from poor people, especially poor black people, because, in addition to their money issues, a lot of them are plain unpleasant.

    In the past, factories were an issue because they were rather unpleasant to live near, and potentially dangerous in no small part due to various forms of pollution not limited to the endless coal soot pouring from their smokestacks. This is not so much a problem today, because factories are a lot cleaner than they used to be, and also the big, stinky ones are now situated very far from most cities.

    Thus, I see 1) less automobile traffic as a major motivator today. This coincides with the addition of automobiles to the 19th Century Hypertrophic city, particularly beginning in the 1920s. Before then, the streets of say New York City were very wide indeed, and mostly empty except for a few wagons.There were no traffic lights because nobody needed them. Today, these same streets are packed with endless traffic, a nuisance to anyone who lives in Manhattan, even those in very expensive neighborhoods.

    At the same time, commercial areas (shopping, offices etc.) started to grow huge parking lots, for obvious reasons, and also immense roadways to shuttle people to and from these huge parking lots. And who wants to live near that? The old fashioned retail on ground level and apartments above isn't going to work when both retailer and apartment-dweller both want loads of parking. I see suburban zoning as a way to eliminate commercial-related automobile traffic from residential areas. This is motivated in large part by the desire to have a place that is reasonably comfortable for kids, which is no longer the case for either the 19th Century Hypertrophic City+Cars or the Suburban shopping center type area. I think this also explains the aversion to apartments, since more people means more cars and more parking lots, all the "congestion" ()this is a code word for automobile traffic) issues that people moved to the suburbs to escape.

    Second, a lot of poor people are plain unpleasant, so people want to maintain zoning to limit residents to those of a certain income, namely those who can afford a quarter acre and a pair of cars.

    This is one reason why I think that all attempts to basically recreate the 19th Century Hypertrophic City are doomed. We already tried that, and it was a failure. We have dozens if not hundreds of 19th Century Hypertrophic Cities already, many of them wasting away and abandoned.

  11. Another blogger had already nailed it:

    "These laws don't simply need to be tweaked. They need to be repealed wholesale and replaced with very thin regulations closely tied to genuine requirements for providing urban services."

  12. In terms of formulating effective anti-zoning arguments, I think it's especially important to have hard data showing how land values are raised, rather than lowered, by more intensive development -- as in Charlie's comment of May 23, 2011 (4:47 p.m.).

    Also important (as others have already pointed out) is 1) to see how destructive zoning can be; 2) to better understand and address the reasons why zoning has become so entrenched in our society (which was a nice part of the original "Recivilization" post); 3) to recognize any legitimate concerns that zoning may address; and 3) to formulate a practical alternative to modern day zoning codes (since zoning does seem to be here to stay).

    - - - - - - - - - -

    Here are a few thoughts on each of these:

    Regarding 1):

    I think one of the generally unrecognized culprits in the fall of the "South" Bronx (or at least parts of it) may have been zoning. Significant parts of the South Bronx seem to have been heavily built up, pretty much "all at once," with monotonous apartment houses AND with commerce apparently zoned out of many areas (and put onto a few, rather far apart side streets). Commerce is also famously zoned out of much of the Grand Concourse -- supposedly the Bronx's [sans commerce] Champs Elysee.

    One result is that there were many large dull "dead" areas (which were also vulnerable to crime) just waiting to be abandoned once the area began to show its age.

    - - - - - - - - -

    Regarding 3)

    While I agree that more intensive development is likely to raise, rather than lower, property values, it seems to me that people may also have the following concerns:

    i) While more intensive development may raise property values in general, is this true for all properties, or are some properties likely to be left out (and suffer a loss instead)? For instance, what about a single-family home right next door to the party wall of an apartment house? What about houses on various scattered left-over sites that might not be suitable for other more lucrative uses?

    ii) What if there's a rush to build apartment houses in an area (and it doesn't have to be a bubble) and the area becomes "overbuilt" (meaning there isn't enough of a solvent market for the product being built).

    iii) While it seems unlikely that a rational builder would built a factory, etc. on an unsuitbale site, there is always the possibility that an "oddball" developer might build something unsuitable -- or build out of spite etc.

    So even if people accept the idea that more intensive development raises property values, it seems to me that the above issues would have to be somehow addressed.

    - - - - - -

    Regarding 4)

    In terms of finding an alternative to present day zoning, I think a great candidate (at least in NYC or other large cities) would be a slightly "tweaked," updated version of . . . NYC's original 1916 zoning code. From what I've seen of it, it was simple, minimal and dealt with basic issues. Plus it's "tried and true" -- much of the modern day New York that people know and love was built under this zoning code.

    Benjamin Hemric
    Saturday, May 28, 2011, 5:10 p.m.

    P.S. -- It should also be pointed out that people don't always see things in "economic" terms -- so increases in land value may not matter to the degree that it "should."

    Along these lines, a book that I think helps greatly explain why people cling to zoning is the children's book, "The Little House" by Virginia Lee Burton. (Walt Disney also made a cartoon version of it.)

    Personally, I love it when you find a very old country house in the heart of a city. Perhaps we need someone to put together an alternative version of this book -- at least for future generations!

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  15. The borrower benefits if the interest rate falls but loses if the interest rate increases.

  16. Dont know what 2012 will bring, but banks still holding onto their money, not lending it.

  17. Rates will rise IMHO Sept/Oct 2012 in the UK

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