FARE-talk is to provide an enduring conversation about contemporary topics relevant to food, agricultural, and resource economics.
Examining the Relationship Between Land-Use Regulation and Affordable Housing - November 17th, 2016
[00:00-01:14]
[music fades in]
Brady Deaton: Welcome to FARE talk where we set out to provide enduring discussions on contemporary topics relevant to our economy with particular emphasis on food, agriculture and the environment. My name is Brady Deaton Junior of the Department of Food, Culture and Resource Economics at the University of Guelph. I will be your host. [music ends] Today is November 17 and we will be speaking to Emily Hamilton about her research on land regulation and its effect on affordable housing. Emily is a policy researcher at the Mercatus Center at George Mason University and she has written on this topic widely and we will actually be looking at a paper that she and her co-author Sanford Ikeda have written. A link to that article will be made available to you on the FARE Talk website. For those of you listening in, we will be talking because we are doing this podcast with Emily in a land economics course at the University of Guelph. Emily welcome to FARE Talk.
[01:14 - 02:25]
Emily Hamilton: Thank you very much for having me.
Brady: Emily, I just want to begin, a lot of the listeners may not be familiar with the issues that we're going to talk about today and part of our challenge is to kind of work through them, but if you got in an elevator with someone you didn't know and you had let's say three floors and they said ÒWhat's your research about? What's this paper that you've written about?Ó What would you tell them in general?
Emily: Sure. I'd say that a lot of well-intentioned regulations such as our minimum lot sizes and maximum density roles as well as newer smart growth regulations like urban growth boundaries or green belts all restrict the supply of housing over what we would see in a freer market, and the effects of this supply restriction of housing is felt most harshly by low income people and in our research we look at the regressive effects of these regulations, how they hurt low income people and how they reduce income mobility.
[02:25 - 03:23]
Brady: Alright, now sometimes I get in an elevator and I might be with a planner and if I've said something like that my guess is the pushback would be, ÒWell, but land-use planning is important, it stops conflicting land uses, it helps perhaps planning for urban infrastructure in those areas and it raises values because it makes places better to live in. What's you're kind of general, now you're going down the elevator and you've got two floors.
Emily: Yeah, I would say that there are plenty of justifications for many of these types of regulations. People need places to park their cars, so planners require that landowners set aside areas for parking. Plenty of these regulations have benefits, but their costs are often not considered or not considered sufficiently, so in this environment we tend to see overregulation over what we'd see in an environment where planners consider the costs of these roles in addition to the benefits.
[03:23 - 04:59]
Brady: Alright I should say we are going to be talking about affordable housing, most of your examples take place, in the paper that you've written, most of the literature you're reviewing are examples that take place in the United States, in Canada we might define affordable housing as spending about 30% of your or 30% or less of your income on housing. Is there a similar definition apply in the United States or is it?
Emily: Yes, that is a widely considered rule of thumb in the United States and when housing is required to be affordable for a certain income level, the 30% rule is what cities use to define affordable housing.
Brady: And in terms of thinking about this differences among income groups, do you have a general sense of say what the of the poorest 20% pay in terms of housing versus say the richest 20% or?
Emily: So typically in the US when city planners are looking at whether or not housing is affordable they look at what's called the Area Median Income and so that's the median income defined typically at the ZIP Code level so it varies very widely of across parts of the US and across cities, so in some places households earning over hundred thousand dollars per year would be eligible for affordable housing because their income level is low relative to others in their immediate neighbourhood.
[04:59 - 06:05]
Brady: I was looking at some of the data on this in Canada, just kind of preparing and I found, and I'll provide a link to this as well because seems quite high, but the Global News was reporting that, and I think I'll get this about right, that the poorest 20% in Canada pay more than 50% of their income on housing and of course there's a drastic difference for the reasons you mention in terms of the wealthiest 20% pay about 16% of their income on shelter, so the issue affordable housing and the effects that we're about to talk about really do matter perhaps differently to different groups.
Emily: Definitely.
Brady: What we're going to do now is I'm going to turn the questions for the remainder of this podcast over students and we're just going to try to walk through initially just understanding some of the specifics. One of things that I really enjoyed about the paper was all the specific examples of land regulation and zoning and so I'm going to turn it over to the students who will ask a question, there will be time for a follow-up and we'll just proceed like that.
Emily: Great.
[06:05 - 07:33]
Student: Hi Emily. In your paper you mention exclusionary zoning. Could you give us a bit of an example or a background on what this is and its effect on housing affordability for low-income households?
Emily: Sure. Exclusionary zoning is a term that people use to describe zoning rules that are implemented with the intent of limiting who can live in a neighbourhood. So for example rules that prevent any multifamily housing like apartment buildings being built within a neighbourhood could be considered exclusionary zoning if households can't afford to rent or purchase a whole house then they'll be excluded from a neighbourhood entirely. Other types of exclusionary zoning rules include minimum lot sizes and this was probably the first type of exclusionary zoning rule that was labeled as such and New Jersey townships have been some of the most studied areas for minimum lot sizes and some townships they are actually implemented minimum house sizes that were larger than the current average house size, so they're basically saying in the future only people who are on average wealthier than we are here are going to be able to move in, preventing low-income people from moving into the townships with those rules.
[07:33 - 09:50]
Student: Good morning Emily. I was interested in your discussion of inclusionary zoning. Could you briefly explain and describe what inclusionary zoning is and your findings regarding its capacity to address affordable housing challenges?
Emily: Yeah. Inclusionary zoning is a policy that's in the US has been tried in many different types of municipalities and it varies how it's implemented, but in general developers are either incentivized to provide housing that's at a below market rate by either subsidies or changes in regulations that allow them to build more housing if they include inclusionary zoning in their project and what it does is it sets a price cap on the cost of housing, but only for some units within a development. So for example an apartment building of 100 apartments might be required to have 20% of those apartments affordable to people who are earning say 50% of the Area Median Income. And inclusionary zoning sounds like a great idea because it's making housing more affordable to people who make less money than many of their neighbours and it also can make neighbourhoods more diverse than what they would be in a completely free market, which many people argue benefits everyone to have a diverse neighbourhood, but the problem with inclusionary zoning is that it changes what type of housing is going to be built. So if 20% of the apartments in a new building have to be rented at a lower than market rate the other 80% of those apartments are going to tend to be very expensive luxury apartments so that the developer can subsidize the below-market apartments with those high rents on the other apartments. And another problem with inclusionary zoning is it typically provides very few units of affordable housing so inclusionary zoning alone is certainly not enough to address the affordability problem in many expensive cities.
[09:50 - 12:23]
Student: Hi Emily. You touched already a little bit on minimum lot size zoning. Is there any way that you can explain exactly what minimum lot size zoning is and how it affects housing prices and specifically housing affordability?
Emily: Great question. So a minimum lot size rule might say that for example every house in a neighbourhood has to be built on at least a quarter acre of land, so that's setting of a floor on how much housing how much land must be dedicated to each house. So, if land is expensive it's going to directly make housing more expensive as compared to allowing houses to be built on say in eighth or a tenth of an acre of land.
Student: Morning Emily. I found your discussion on the effects of parking requirements to be thought provoking. Could you give us a brief summary of your findings as well as the research pertaining to it?
Emily: Sure. So in the US the vast majority of cities and municipalities require developers to build a certain amount of parking with their development whether that's housing, retail or commercial development, and the justification for this is that when automobiles first became common there really wasn't any accommodation for where people would leave them when they left their car, so big cities started seeing problems with double parking and people just leaving their car in the street when they went inside a store to run an errand, so obviously that was impeding movement and causing a lot of traffic problems. The problem is that many cities require parking to be built above what we would see in a free market and these requirements have big costs for developers that are then passed on to renters or home buyers. Donald Shoup is a professor at the University of California in Los Angeles and he has done an incredible amount of research on the effects of parking regulations and he found that within Los Angeles parking requirements can add over $100,000 to the cost of a condo in Los Angeles, so that's obviously a very substantial cost to home buyers or renters that could be lessened if apartment buildings or condo buildings were allowed to be built with less parking than what's currently required.
[12:23 - 13:50]
Student: Emily from what you've already said I'm kind of getting a sense of what you mean by possibly over regulating in some areas. One of the last places that we're interested in looking at which we're actually experiencing around the Greater Toronto Area is this idea of urban growth boundaries. Could you talk about the urban growth boundary around Portland, Oregon and what that effect is?
Emily: Yeah. So the state of Oregon requires that all cities create urban growth boundaries and what these boundaries do is preserve land at the outskirts of cities as agricultural land that can't be developed for housing, and several studies have been done on the Portland area because that's the most famous and most binding urban growth boundary in the United States and they found that land outside the boundary sells for less than land inside the boundary, so that finding means that the boundary is making land inside the boundary that can be developed for housing more expensive than it otherwise would be, in turn driving up the cost of housing and I believe that Toronto's greenbelt works pretty similar to the Oregon urban boundary requirements.
[13:50 - 15:50]
Student: Hello. In your paper you cite a study in which the authors claim that a reduction in zoning regulations in three cities, New York, San Jose and San Francisco could increase GDP in the United States by 9.5%. Could you explain the relationship between zoning regulations, labor movement and economic growth?
Emily: Sure um yeah. So this study that you mention is by economists Hsieh and Moretti and has been widely cited and a very influential study within urban economics and as you said what they do is they look at what would happen if the three most productive cities in the US, so San Jose, San Francisco and New York City reduce the burden of their land-use regulations down to the level of the median city in the United States, so they're not looking at what would happen if these cities got rid of zoning entirely, but just reduce the effect of their current zoning rules and allowed more housing to be built, and they find that if that happened in their alternative universe that many more people would be moving into these most productive cities to pursue jobs where they can be more productive and earn higher incomes and in turn this would result in a, as you said, 9.5% increase in US GDP and that's huge, that comes out to I believe about $1.5 trillion each year and it's important to note that not all of the benefits of that higher GDP would be going to the people who live in those productive cities, but it would be shared with all Americans and with people in other countries also because as people in those most productive cities are able to produce better products, new software and other types of new innovations everyone would benefit from those innovations not just the people who are able to get those higher income jobs in those cities.
[15:50 - 17:56]
Student: I'm Bridget and I was really interested in your point on historical designations. In your paper you mention that historical designations are correlated with the higher housing prices but also that it's difficult to determine if the designation causes the higher prices or if the houses in wealthier neighbourhoods are just more likely to be designated as historical and given this uncertainty I was wondering you would say that these regulations are a significant factor in restricting affordable housing?
Emily: Great question. So what you mention is what's called an endogeneity problem, so economists have a hard time figuring out whether or not historical preservation causes higher housing prices or whether higher housing prices drop people who are likely to fight for historical designations for their properties. In many cases in say small cities in the US historical preservation probably has a very minimal effect on housing prices, but in some of the most expensive places it probably has a large effect. So within Manhattan I believe over a quarter of properties are designated as historically preserved properties, what's called landmarked in New York City so that's taking basically a quarter of the land off of the island and saying this is the amount of building supply that's going to be available forever it's never going to be able to increase with demand so in that case it's pretty clear that historical preservation does have an effect on house prices and some studies in New York City specifically have been able to find that result empirically, but in many other places where just a few buildings are preserved and perhaps those are the buildings that generally have the greatest historical significance it's probably having a very minor effect.
[17:56 - 19:30]
Student: Hi Emily. I actually have a very similar question with I guess just more of a broader scope. I was wondering about I mean you mentioned that there's problems inferring causality between the relationship between high levels of regulation and high house prices so I'm more interested just in general without pertinence to the historical preservation sites, how do you deal with this problem that it might be high housing prices and the residents of those houses that may cause high levels of regulation rather than the other way around like you argue?
Emily: So there have been a couple of very clever research designs that have looked to address that question. One example is the economist Edward Glaeser looked at land sales in the Boston area and he found that he adjusted for land qualities to try to compare apples to apples among land that is already approved to have housing on it versus land in a very in the same neighbourhood that's the same size that doesn't have any approvals in place and he found very substantial price differences indicating that having those approvals in place causes land to be more valuable than land that doesn't have those approvals in place, so he's attempting to create a natural experiment there and that's one of the convincing studies on causality.
[19:30 - 21:07]
Student: Hello. In your opening pitch you mention that the benefits of zoning to the local community often considered without the costs to people either in that community or outside of it. Are there any situations though in which the net effect of zoning regulation can result in an improvement in well being for that community by the reducing congestion in which in situations in which someone's land-use might negatively impact their neighbour?
Emily: That's certainly an argument that's made in favour of zoning and Houston is a famous example in the United States of a city that doesn't have any Euclidean style zoning which has roles that say only housing can be built in this neighbourhood and only industrial uses can be built in a separate area of the city and people argue that Houston suffers because there are cases where say you have a bar near a school or something on where they say that the world would be better off if these uses were further apart. I haven't looked specifically at cases where the benefits of zoning might outweigh the cost but I will say that Houston has been very impressive in its ability to increase its housing supply as demand for housing has increased there maintaining housing affordability and also it's become much denser so people are building more apartment buildings and smaller single-family homes to accommodate the large number of people because of the regulatory flexibility that they have there.
[21:07 - 23:28]
Brady: You mentioned Euclid zoning. Where does that term come from?
Emily: It comes from the town of Euclid, Ohio and what Euclid, Ohio had done is they implemented rules that said this area of the city can only be used for single-family housing and a developer who owned land that was designated as single family housing had been planning to build I believe an apartment building on on that spot and so he sued the city and said that the rule that he couldn't put that land to what he saw as its highest value use was what's called a regulatory taking, so the city was taking away his property value by limiting what he could do on it. The case ended up going to the US Supreme Court and that's where the term Euclidean zoning comes from, from that Supreme Court case and the court held that under cities' police powers they are allowed to designate certain types of land as only permitting certain types of uses.
Brady: I want to just take a pause for a minute and see if students have other questions about the particulars of zoning. We're to move on Emily and start to have a discussion about the policy issues that you raise in your paper but first let me just take a break and look around the room and see if there is anybody that would like to ask follow-up question in this category or Emily I don't know if you want to add anything about particular of zoning use that you think is important for listeners to think about that we haven't touched on yet.
Emily: I think that the questions have already covered many of the most important rules that we discussed. I would just point out that these rules interact with each other, so looking at Portland's Oregon urban growth boundary for example it's not the case that developers can build anything they want inside the growth boundary, but rather there's this growth boundary and then there are also parking requirements and minimum lot sizes and other rules about how much housing can be built, so we can't look at just one rule in isolation but we have to think of them as interacting.
[23:38 - 25:13]
Brady: Alright with that I'm going to turn it over to the next student to ask a question.
Student: Hi Emily. Your paper suggests a number of policies that communities might support to augment the supply of housing and thus lower prices. Could you explain one that you think is the most promising?
Emily: Yeah, the one that I think is definitely the most interesting and perhaps the most promising is a policy idea developed by David Schleicher who is a law professor at Yale and he has an idea for what he calls Tax Increment Local Transfers or TILTs and his idea is that when a large development is built it is going to increase the city's property tax base. So if you go from a block of single-family homes to a block that's covered and huge apartment buildings the total amount of property value that cities are able to tax is going to increase substantially and the difference between that new value and the old value when it was just single-family homes is called a tax increment and Schleicher suggests that because that new denser development is going to impose costs on people who live near it because the new apartment residents will be causing much more traffic perhaps the single-family homeowners nearby just don't like looking at big apartment buildings that part of this increment could be shared with the property owners who live near the new development. So in a sense this would be like buying off the single-family homeowners' opposition to new development and it would also be compensating them for allowing denser development in their neighbourhood.
[25:13 - 26:25]
Brady: Is any location actually trying that right now? Has that been tried?
Emily: No I don't believe it's been tried at all so at this point it's just a purely theoretical idea. Some cities do require developers to provide community benefits that act in some ways similarly, so for example if a developer is approved to build a new apartment building they may also have to put money toward a new park or swimming pool in the neighbourhood, but there's an important difference between TILTs and these community benefits because while both buy off opposition to the new development the community benefit acts as a tax on the development so it will result in fewer housing units being built because the developer has to pay for that extra benefit, whereas the TILT would be coming from the city tax revenue so it wouldn't tax development but it would benefit people who are opposed to new development.
[26:25 - 28:36]
Brady: It will be interesting to see that play out. All of these students can research the effects of the.
Emily: Yeah.
Brady: Next student.
Student: Yeah so as we continue to consider alternatives to bring it back to this idea of the urban growth boundary around Portland, Oregon and then as you brought up the Greenbelt around Toronto, what are some alternatives to urban growth boundary zoning policies, still to protect prime agricultural farmland?
Emily: Yeah well one thing that both the US and Canada have in common is that we have tons of open space in our country so that's a great benefit that both of our countries have and it might be worth considering whether a shortage of farmland is really a policy issue. I should caveat that I am much less familiar with Canada I don't know how far North within Canada is considered farmland, but within the US at least we really have plenty of farmland so preserving farmland around urban areas is not necessarily a policy goal that we need to be concerned about in the US, but at the same time policymakers who do want to preserve farmland near cities could look at the regulations they have in place that are preventing cities from becoming denser so if there is a high demand in a city for high-rise housing or simply smaller single-family homes that take up less space or have smaller yards allowing that type of denser development to be built would reduce pressure for cities to expand outward so that's one thing that Houston is really demonstrating is that over time it's becoming denser and it is certainly growing outwards also, but part of its population growth is being absorbed into a denser city.
[28:36 - 29:56]
Student: Maybe to follow up on that idea one of the benefits of being close to the city for farmers is the access to the market. Is there value in looking at more diffusive developments, so possibly instead of developing large metropolitan areas shifting some of that development into other cities?
Emily: There certainly could be benefits to having farms close to cities, that's really not a topic that I've looked at in any depth at all, but I would say that policies that try to shift people from one city to another can have many consequences in terms of allowing people to live in the labor market where they can be most productive so jumping back to the Hsieh and Moretti study on productivity that we talked about a little earlier if you're preventing people from living in the highest productivity cities and instead requiring them to live in lower productivity cities that's going to have costs in terms of output and income mobility and economic growth over time.
[29:56 - 31:04]
Brady: I think that many would agree with your assessment of how much open space and how much farmland there is. I always use this idea that if you go to Pearson Airport and you fly west you're gonna be mostly looking down at a lot of open space but the majority of people and the disconnect I think between how much open space there is and perceptions of development the 80% of the people live in these urbanizing areas at the fringe of where development is taking place and so that's always there is this general tension we run into here at the University of Guelph between what the numbers look like in farmland let's say over the last 10 years and people's perception of that transformation zone.
Emily: Right and access to open outdoor spaces is certainly a benefit to be considered of policies that do require some sort of open space, whether that's parks or agricultural land having that close to cities certainly has benefits as well as the costs that we've talked about.
Brady: A couple of the questions, students might have just a follow-up or a general interest question, let me move to one student.
[31:04 - 33:28]
Student: Hi again Emily. Sorry so as we are talking about policies you had a policy recommendation for addressing historical designations, which was a quota on historical designations. I didn't really see a whole lot of detail, of course that's not the sole focus of your paper, but could you maybe explain like how you might set that quota or how you think it would work in practice?
Emily: Sure, so that's another idea that came from Ed Glaeser and as far as how to set the quota that's certainly a question that would have to be debated and would have to vary depending on the size of the city and the historical importance of the city in question, but as we talked about earlier some cities like to take Manhattan as an example have just a huge number of buildings that are preserved and many of the preserved buildings are similar to other buildings that are preserved and they're perhaps not that historically important, so if we have a million townhomes that are preserved perhaps we could do with fewer of those townhomes being designated as landmarked, so what he suggests is say just to make up a number say that the number of landmark buildings is going to be capped at half of what it currently is and that cap would force both policymakers and historical architecture experts to work together to say which of these buildings that are preserved are really the most important. So Grand Central Station in New York City that's not going to be up for demolition that's very important architecturally and historically, so we definitely want to keep that one on the rolls, but maybe some of these apartment buildings from the 20s we have hundreds of them preserved so let's just preserve the best examples of that architectural style and allow the rest to be redeveloped to meet housing needs. So basically the landmark Just forces those trade-offs to be made rather than saying that as much can be preserved as could possibly have historical benefit.
[33:28 - 34;56]
Student: Just a follow-up on that question: how do you think defining that cap would go about? I'm hoping that it wouldn't just be an arbitrarily defined number such as half of the existing preservations right? So how would be a good way of actually defining that where to cap the amount of historical sites?
Emily: I don't have a good answer for how to set that cap. British Columbia in Canada did a regulatory cap that might be an example to look at for people who are interested in historic landmarking caps and I believe what they did was they set a cap on the total number of rules that could be in place and wrote and set a one in one out policy that would be the same for a landmarking cap. So if a new building is landmarked then something that was landmark previously would have to go off the landmarked list, but determining the exact number of buildings that could be landmarked it's something that I think would just have to be determined politically and through political debate.
Brady: I didn't know that and I Just want to say I'm learning a lot in this podcast. We're coming near to an end but that's a great point one that we will definitely be looking at in future Land Econ classes.
Emily: Great.
[34:56 - 36:31]
Student: Hello again. You've mentioned how a lot of these policies came to be. I was just wondering if they reduce the benefits or net benefits for a community why do they have so much a staying power?
Emily: These policies have a ton of support typically from community residents because it's often the current property owners who are benefiting from these rules. The economist William Fischel at Dartmouth calls this constituency that's in support of these rules home voters, so they're homeowners in a city who vote in the interest of preserving their home value. Now this is completely rational and it makes sense why homeowners tend to be very concerned about their home value since it's a huge part of their wealth typically, but because the only people who are voting on whose interests are represented in land use policy discussions already live in the community obviously where they're able to vote the people who don't live in that community aren't represented at all. So for example San Francisco land-use policy reflects the interests of current people who live there, but it takes into account none of the interests of all the college graduates all around the world who would want to move to San Francisco to pursue jobs in the tech industry if they were able to afford housing there.
Brady: I think we have time for about two more questions.
[36:31 - 38:22]
Student: Hi. I imagine there is a great deal of uncertainty associated with the implementation and commitment to zoning in any community. Do you have any thoughts on the extent to which uncertainty surrounding zoning practices may influence housing supply and the associated prices?
Emily: That's a great question. It's not something that I have looked into but there certainly is uncertainty when these roles are implemented in that people may not foresee their long-run effects, so for example parking requirements are often set based on standards that come out of an organization called the Texas Transportation Institute here in the US and they just come up with general suggestions for this is how many parking spots a house needs, this is how many parking spot each apartment needs within a development, or this is how many parking spots a fast food restaurant needs and cities then implement these rules and may end up with tones of excess parking so in plenty of areas in the US if you drive by a strip mall you'll just see a sea of parking that is never fully occupied. So when the rules were implemented planners probably thought you know we're just doing what's right and creating enough parking, but it's not until time passes that they are able to see the unintended consequences of their rules, so I would suggest that uncertainty should give planners reason to regulate perhaps less than they think they need to at first to see how that level of regulation plays out.
Brady: And our last questioner.
[38:22 - 39:58]
Student: Hi Emily. I would be interested to know how you became interested in this relationship between zoning and housing prices and what inspired you to become a policy researcher in this area?
Emily: Yeah, when I was in college I worked as an intern in the planning department of my hometown in Colorado and I just took that internship because it was available not because I had any underlying interest in urban planning, but through that internship I was exposed to the work of Jane Jacobs who's written some very famous books about cities and how land-use policy affects urban development and I became very, very interested in the topic and ultimately went to graduate school to study urban economics and want to just continue working in this area as much as I can.
Brady: Emily Hamilton thank you for sharing your thoughts and doing the research that you're doing. We really appreciate it.
Emily: Thanks you very much. It was a great discussion.
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Brady: Thanks for joining us at FARE Talk. We hope you will continue to check our website for updates and the latest podcasts.
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