In a previous section, we looked at a practice city, Affordaville.
Now we’re going to look at Affordaville’s twin city, Restrictia. In Restrictia, the residents are wary of new development and have imposed a strict zoning code. Like most places, zoning in Restrictia imposes density restrictions on housing. A density restriction limits the amount of housing that can be built per acre. There are dozens of ways that zoning codes impose these limits: minimum lot sizes / lot widths, maximum heights, maximum floor area ratios, minimum “site areas”, etc. Which particular combination of density restrictions a zoning code uses can be very important for how a neighborhood looks and feels, but for the purposes of the discussion on this site, it doesn’t really matter.
Let’s redo our supply-demand chart for Restrictia. In this figure, Restrictia has continued to allow single-family homes as well as mid-rise apartments on the high-traffic streets. This is a “neighborhoods and corridors” approach like that taken in Austin and many other sunbelt cities, where dense mid-rise apartments (sometimes vertical mixed use with retail on the ground floor) are allowed on high-traffic corridors ringing neighborhoods of low-intensity single-family homes.
The effect of the zoning limitation is to give Restrictia’s supply curve in solid blue a much sharper stair-step shape. Between 170 and 400 units, where new units are being supplied by single-family homes, each new unit can be supplied at roughly the same cost per unit, just as in Affordaville. But once all parcels are built out as single-family houses, housing supply is perfectly inelastic and prices rise sharply. An increase in demand on D2 translates into a sharp increase in prices without any increase in supply. In Affordaville, increases in the demand quickly result in low-rise apartments replacing single-family homes as the dominant type of new housing — substituting slightly higher construction costs for slightly higher land costs. In Restrictia, though, there is no new outlet available for the new demand, so it all gets incorporated into the price until the price is high enough to profitably build mid-rise buildings.
Let’s look at our two cities when the demand matches curve D3.
- Affordaville houses more people, at lower cost.
- Much of Affordaville’s housing stock is in “gentle density” or “hidden density” construction types — granny flats, duplexes, small apartment complexes. Much of Restrictia’s housing stock is in taller, denser mid-rise construction.
- Some of the housing stock in Affordaville and Restrictia is the exact same, but it costs more in Restrictia because there aren’t inexpensive new-build alternatives.
Again, it is not technological constraints that cause neighborhood supply curves to go vertical — it is zoning. Switching from detached single family to duplexes does not require a change in technology: the same low-rise, wood-frame construction will do just fine. Likewise, going from the duplex to the four-plex does not require a change in technology, even if the four-plex is slightly more expensive per square foot to build. It is in fact possible to use low-rise, wood-frame construction to build accessory dwelling units, duplexes, triplexes and fourplexes, row homes, courtyard homes, manor homes, dingbats and other low-scale housing types. Most of these cost more to build per square foot than detached single-family homes, but they are cheaper than mid-rise construction with concrete elevator cores. Where zoning prevents low-density, low-cost multifamily techniques from being used, land prices rise until higher-density, higher-cost techniques are profitable.