Increasing Supply in High-Demand Areas
The first and most immediate effect of this approach will be to increase the supply of housing in the places where it is in highest demand. There are many reasons to believe that high land value areas are good places for additional residential entitlements to be added. The land value may be driven by location-dependent amenities such as proximity to transportation networks, parks, or commercial centers; it may be driven by particular on-site amenities like high-quality street frontages or views; and it may be driven by distance from disamenities like industrial sites or highways. Building more housing in these locations will directly benefit those newly able to access these amenities. In addition, it will indirectly benefit the city as a whole by limiting spending needed to provide similar amenities in other locations.
Land values in the city of Austin.
Image courtesy of Tyler Markham. Land values and sizes via Travis Central Appraisal District. The darkest red areas in this map show areas of highest land value. They are concentrated in central Austin and along traffic corridors with high-density permitting.
The Land Value Trigger’s graduated up-zonings would eliminate the odd stair-stepped shape of the housing supply curve, giving it a smoother shape. Neighborhoods would display a continuum of housing types rather than sharp transitions from single-family to mid-rise construction. Five-story apartment buildings would seem like a natural progression of existing density rather than an abrupt shift. More housing could be built at lower cost, and fewer people would suffer sudden price shocks.
Zoning as practiced today features long periods of entitlement stasis. Changes to entitlements are rare, difficult-to-predict, and politically-charged. Homeowners who buy property typically expect the area to remain unchanged. Many will fight to protect their expectations even when those expectations no longer serve the city well (e.g. central areas when other parts of the city have transportation difficulties). This cycle is never-ending: as generations of new residents move into an area, they move in under the expectation that they, too, will benefit from zoning’s protective umbrella. These expectations encourage the organization of NIMBY groups which not only fight against the relaxation of zoning regulations but agitate for further restrictions. Expectations of land use stasis thus perversely create feedback loops that increase the risk that land use regulations will remain restrictive. Put differently, the expectation that entitlements will not change is not merely a result of rigid land use regulations; it is itself a cause of land use rigidity.
The highly-politicized process for changing zoning also creates tremendous mistrust as people correctly or incorrectly read malign intentions into the opaque political decision-making which decides which neighborhoods receive rare entitlements changes. More commonly, zoning simply fails to change despite potential benefits to residents and the city in the form of lower infrastructure costs.
The land value trigger mechanism provides residents an objective mechanism for updating expectations about neighborhood change. Although residents will not have at hand the detailed tally of housing units and land prices necessary for the calculation, residents and real estate agents will be able to gauge the likelihood of a mandatory up-zoning by observing the land prices of typical properties. Local politics will be less strained as some of the most contentious decisions will be made on a fair, objective basis.
Reduce Costs of Shelter
Home prices are obviously a function of the supply and demand of homes. Increasing the supply of homes in a high-demand area will lower the price of new homes (although it will not necessarily lower the value of land). But home prices are not merely a function of current supply and demand. They reflect expectations about the future supply of housing. Indeed, the expectation of tightly constrained supply may itself induce price increases. When people buy homes, they pay a “hedge” premium against the possibility of future price increases locking them out of their desired location. This premium will obviously be larger in a desirable neighborhood with fixed supply. Expectations of tight supply trigger price premiums. Simply announcing a credible future upzoning could reduce prices as homeowners are no longer willing to pay a premium to lock in access to a location they know they will have access to later.
Relaxing zoning restrictions will also allow the filtering process to work better — or in some cities, to work at all. Filtering is the well-understood process by which high-quality housing over time filters down to cheaper submarkets. Almost all decently priced, unsubsidized rental housing is old or aging housing. New apartments naturally deteriorate with age. It becomes increasingly expensive to keep them in tip-top shape. Rents naturally decline with the condition, and as the affluent chase the latest new thing. “Naturally” is the key word here. When there is a shortage of pricey apartments, landlords have an incentive to make the extra investment to keep their aging units in shape to fetch the highest rents. Units that should have filtered down don’t. Or, worse, units actually filter up.
Filtering is a surer path to naturally-supplied affordable housing in markets with ample housing. Restrictions on the supply of new units have been shown to lower the supply of affordable units in part because the increases in the demand for higher quality units raise the returns to maintenance, repairs, and renovations of lower quality units, as landlords have a stronger incentive to upgrade them to a higher quality, higher return housing submarket.
Giving homeowners the proper incentives
One of the greatest virtues of the Land Value Trigger is that it gives homeowners the incentive to embrace — even to advocate for — both targeted, large-scale up-zonings and broad, low-key up-zonings. The Land Value Trigger creates incentives for homeowners who wish to preserve the character of their neighborhood to push for an increase in the supply of housing somewhere in order to hold down average land value per unit. Homeowners, for example, might support the up-zoning of corridors to drastically higher densities in the hope of creating hundreds or thousands of units with relatively low land value per unit. And because the Land Value Trigger is based on the ratio of land value to existing units, neighborhood residents have an incentive to agitate for realistic land use regulations that make new development likely rather than phantom zoning capacity that is unworkable or uneconomic in practice.
The homeowners will also be incentivized to support small-scale up-zonings. Accessory dwelling units, under our formulation of the Land Value Trigger, would count as a single dwelling unit just like a single-family home. Generously liberalizing ADUs and encouraging their construction could dramatically lower the land price/unit ratio in the neighborhood. Likewise, residents of single-family neighborhoods might choose to target small areas for duplexes, three-plexes, and small, two-story apartment buildings. “Missing middle” housing would no longer be the scourge of single-family homeowners, but (in targeted locations), their best friends.
Regardless of what form it takes, the Land Value Trigger will encourage neighborhoods to support housing somewhere, and in doing so, it will undermine the neighborhood cartels that today are choking the vitality out of so many of our expensive housing markets. Zoning as practiced today creates neighborhood solidarity, encouraging (as Schleicher and Hills put it), “log rolling” coalitions: groups of neighbors reciprocally agreeing to oppose up-zonings in each others’ neighborhoods for the sake of preserving their own neighborhoods. As Schleicher and Hills shrewdly observe, meaningful land use reform probably involves developing schemes to pit neighborhood groups against one another.
Schleicher and Hills’ “zoning budget” may be difficult to enforce, however. Cities can simply create ostensible zoning capacity in areas where there the market for development can not support the zoned capacity. Nobody, a court included, can completely predict the complex effects of a major city’s numerous zoning laws, so courts will be forced to use more deferential rational basis-style enforcement. Even a balanced zoning budget is not guaranteed to increase the housing side of the ledger.
The land value trigger mechanism should be easy to enforce. The NPA land values are a matter of public record through the tax assessor’s office and simple for both courts and outsiders to recalculate. Landowners who wish to develop would be a straightforward, well-incentivized party with standing to sue. Courts would have clear, enforceable remedies to apply. The experience of the Massachusetts Comprehensive Permit Act does not suggest major difficulties with enforcement. The threat of court-enforced zoning will also give cities incentive to participate by developing tailored zones rather than allowing court remedies to apply.
Reduce gentrification and displacement
To the extent that residents of high-land-value areas are successful in getting city government to concentrate growth in areas where residents are lower income and less politically organized, the hardships of adjusting to growth fall on those least able to deal with them. Low-income renters whose landlord decides to redevelop may be unable to locate new housing, unable to locate new housing near their jobs or social networks, or unable to pay the costs of relocation.
Relying on political processes to distribute new residential entitlements is more likely to lead to cities placing additional residences in less desirable locations where zoning cartels have trouble forming: near disamenities like major traffic corridors, on the periphery of the city far from major amenity centers, or in parts of the city currently inhabited by poorer, less organized residents. In the Los Angeles area, for example, upzoning is least likely in neighborhoods with average or higher shares of homeowners coupled with desirable amenities such as proximity to the beach and high-performing schools. A parcel in a neighborhood with a high homeownership rate was about 96% less likely to be upzoned than a parcel in a neighborhood with a low homeownership rate. Moreover, within a neighborhood, more market-rate construction is associated with less displacement. The California Legislative Analyst’s Office concluded that high-construction census tracts in California had a 26% chance of experiencing displacement, compared to a 46% chance for low-construction census tracts.
Most high land-value neighborhoods have higher percentages of homeowners. Homeowners who receive new zoning entitlements, unlike renters whose landlords decide to redevelop, have the choice of whether and when to take advantage of those entitlements. Even renters in high land-value areas are more likely to be higher-income renters who will have the means to relocate more easily.
While under-zoning in US cities may have national effects, the actual land area it affects is very limited: a small percentage of land in a small percentage of cities. Many cities in most states are not growing rapidly or in high demand. In these cities, the LVT would simply fail to fire until and unless circumstances on the ground actually changed. In most places, it would never fire. The administrative burden required for these cities to establish NPAs as part of their comprehensive plan and calculate their average land values would be small. However, should small cities experience rapid growth, this law would be well-tailored to help them with the transition.
Within cities with high land values, this law again is narrowly tailored. The LVT, by acting on narrow NPAs, leaves most of the city unaffected: very few parts of any city are over the threshold. Even within high land value areas where the LVT fires, the tiered effects ensures that the scale of the intervention into city processes is tailored to match the size of the mismatch between land value prices and residential density.
The LVT can be calibrated to isolate high-priced neighborhoods from lower-priced neighborhoods. Homeowners rely on zoning to curtail abnormal or highly idiosyncratic uses. As economist Bill Fischel puts it, zoning mostly serves a “good housekeeping” function. Any legislative intervention that threatens zoning existentially as an institution will be doomed. It is simply too popular. But the LVT can be calibrated to leave most land alone. As the map of Austin above shows, the vast majority of land in even an expensive city has a low land value-to-unit ratio. In Austin, a LVT that targeted only neighborhoods with land value higher than, say, $200,000 per dwelling unit, would leave most single-family neighborhoods untouched. Much of the land shown in red above is land within very expensive single-family neighborhoods located in the very center of the city. Only a handful of neighborhoods in Texas’ most expensive city would face the prospect of a mandatory upzoning. It is doubtful that legislators representing rural Texas — or poorer neighborhoods in the state’s metropolitan areas — would have much sympathy for the objections of well-heeled neighborhood residents.