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Zoning Drives up Housing Costs

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In earlier years, if Boston proposed a tax increase, the wealthy living in mansions may have just moved to another town. That can’t happen anymore because of zoning. With zoning, the wealthy might be stuck paying the tax for lack of available buyers. Zoned single-family residential, they couldn’t sell their homes to developers for conversion to duplexes or apartments, they could only sell to persons of comparable or higher income. Marginally speaking, they would likely have to take a loss, as the buyer would want to offset what he’d be paying with the newer, higher taxes. The buyer would also be likely to find a better value on a nice home in a jurisdiction that doesn’t have such high taxes.

In that situation, housing prices would drop. However, a number of national and regional studies have concluded zoning leads to higher housing prices. Fischel points out that normally happens only when two conditions are met: excess demand and limited supply. “Housing prices do not rise much unless there is a shift in demand to locate in particular metropolitan areas.” Many land use plans and zoning ordinances, after all, went into effect to stop development. As a general rule, though, regulation comes with costs of compliance.

Fischel cites work by Ganong and Shoag that shows housing inflation not only made people less mobile; the nation’s poor were hurt most. Fischel insists this is not racist, though some early zoning practices unquestionably were. Housing makes up a greater share of low-income budgets, so zoning locks those beginning with little opportunity out of more opportunities. Government attempts at remediation have a way of backfiring. Fischel is among many who see rent controls as promoting slums, as developers must recoup losses from below-market rents.

Fischel correlates hyper-regulation of housing with the long period of inflation beginning in the 1970s. Housing, for the first time, was seen as a low-risk, high-return investment with many other advantages over stock and bonds. “It is not a diversified mutual fund; it is a single firm, and the firm makes only one product in a single location. It has a great upside in that its returns are almost entirely untaxed under federal and state income tax laws, and it insures you against rent increases by the landlord. But its asset value is subject to a multitude of risks. Not least are those from the neighborhood and the single municipality in which the firm is located. Bad events next door, down the street, and the school district, and in city hall can put your life savings in a tailspin.”

When housing became the repository of the bulk of homeowners’ investments, people became super-sensitive about threats of bringing down property values. The environmental movement and judicial actions only fortified the defense, giving homeowners a reason to not look so selfish. Zoning, which habitually puts single-family residences at the top of the pyramid, is billed as protecting property values. Fischel says the perception that zoning begins top-down is likely incorrect.

Therefore, one thing that could be done to reduce excesses of zoning would be to change federal income tax rules that essentially subsidize investment in housing. Something that could be done at the local level would be to separate property taxes into land and improvement taxes, putting more weight on the land part. For one thing, the land isn’t going anywhere. For another, lowering assessments on buildings would not make it cost-prohibitive for a business to expand or a homeowner to add another room. What’s more, property values would suffer less impact when buildings of other sizes move into the neighborhood. This method of taxation has been applied in Pennsylvania, but it is proving unpopular. Voters don’t like big houses getting taxed about the same as small houses; not realizing this system makes it easier for little houses to become big houses.

Another way to reduce the regulation would be to knock off all the bartering and negotiating that takes place among developers and planners. In many places, developers must go through multiple phases of review. Fischel describes this as giving planners double-veto powers, or worse. He further tells of how taking a municipality to court might be the end of a developer’s career in that city, but other lawsuits only represent a starting point for further negotiation.

Fischel talks about all the dirty tricks developers and planners play, as they’ve all been done before. One gets the impression everybody knows it’s all a game of money except for members of the general public. It is not unheard-of, for example, for cities to hastily draft and approve special ordinances to stop an unwanted project. Moratoria may be imposed to buy time. Developers often start with ridiculously large projects so they can appear to appease as they scale back, and planners play along. It is practically assumed that developers will help balance municipal budgets through extortions, rather known as impact fees, exactions, community benefits, etc.

Simplistically, developers proposing externalities that disrupt existing establishments should be able to negotiate a price, paid to the affected neighbors for their imposition. The same should apply when land-use ordinances take away property holders’ options, except government doesn’t operate like a business; government would likely get the money it would use to buy its takings by increasing property taxes. A funny thing happened in Oregon when compensation for takings was proposed. 7000 claims were filed, but only one person received payment. The other applications forced government to backpedal on its proposed regulations.

The book is replete with case studies of good intentions that ended up working against prosperity, the American dream, and other causes government champions. When all is said and done, though, controversial projects usually pass with no earth-shattering repercussions.

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