Allowing density does not lead to greater affordability without requiring it as a condition of “upzoning,” according to this UBC professor.
ON MAY 26, THE VICTORIA CITY COUNCIL, in a close 5-4 vote, returned Mayor Lisa Helps’ “Missing Middle” housing proposal back to city staff for further consultation with city voters [this is up for potential reversal on June 9]. Here are a few things that Victoria residents may want to know at this important juncture. My modest contribution to this impasse takes the form of the following imaginary conversation.
What the heck is Missing Middle anyway?
The term "missing middle" is a term made popular by North American planners and urban designers, as a shorthand way to call attention to the rarity of building types between high density towers on the one hand, and low-density single-family homes on the other. Many North American cities, particularly in the US, have relatively few middle density options such as townhouses or “three-storey-walk-up” apartment buildings. Canadian cities, including Victoria, tend to have more of this “missing middle” housing stock than their American counterparts; however many argue that middle density housing options are still deficient in Canada, and ways should be found to encourage more of this form, particularly by retrofitting some or many parcels in predominantly single family areas.
Why do many people argue that this is a good idea?
Adding new density to existing neighbourhoods has many obvious benefits. New residents add vibrancy to neighbourhoods, city services can be delivered more economically as population grows, commercial services can thrive, schools can stay full, more taxes can be gained, smaller families can be accommodated, and transit systems become more viable. Recently, due to the extreme inflation in home prices experienced in Victoria, proponents argue that using the missing middle strategy to add density to existing neighbourhoods will lower prices by adding much needed new housing supply.
How will adding new housing supply lower cost?
Proponents argue that, as in all things, the price and availability of a commodity is a simple function of supply and demand. If demand goes up prices go up. If prices stay high, the market will ordinarily come in with more supply until the market is in balance. This is a familiar “law” taught in any Economics 101 class, and is the most elemental principle informing the opinions of most North American mainstream economists.
If that's a law, why are we not seeing supply come into the housing market to reduce home prices?
This is where it gets a bit complicated. Proponents of adding density to existing neighbourhoods argue that the reason supply does not match demand is because municipal zoning and development restrictions block the natural tendency of free markets to match supply with demand. They argue that if zoning limits on density were eliminated, new supply could more easily come into the market and prices would drop—or at the very least stop rising so fast.
That makes intuitive sense. Does that work in practice?
Well this is where it gets even more complicated. Those who research this question have come up with differing results. Some results show that adding supply has some positive influence on mitigating price rises, but other research in other cities shows the opposite: adding new supply increases the price of existing homes nearby in a process called “gentrification.” In either case the effects seem modest and insufficient to overcome the double-digit price rises that we are now seeing annually.
If restrictions on supply are not the cause of home price increase, what is?
Well this is where an explanation has to leave behind the world as described in Economics 101. During the past decade or two we have seen urban real estate prices rise much faster than inflation around the world, especially in attractive world class cities like Vancouver and Victoria. And it doesn’t seem to make much difference if a city is adding supply or not. Prices seem to be rising in either case. So, it’s pretty safe to say, first off, that this is not a problem of restricted supply of new buildings. The evidence seems to suggest the restriction is really on the supply of the dirt to put buildings on: i.e. serviced urban land.
What is the evidence that the supply of land is the problem then?
Well, during the past 15 or 20 years the value of the land under a home has really taken off. In Vancouver for example, where buildings and land value are separately appraised, the value of the land has shot up by 500 percent in 16 years. And this inflation is not just in Canada, its all across North America, particularly as I mentioned, in globally attractive cities like San Francisco, Seattle, Los Angeles, even Boise, Idaho. And it doesn’t seem to help if you add new density to the land hoping to dilute the “land share component” of the purchase price of the new home. Vancouver evidence clearly shows that as density goes up, so does land price. No advantage is gained for the purchaser or renter.
That still does not tell me why land prices are out of control.
Well, those who still hold firm to the Economics 101 school of thought argue that land prices go up when new density is added because we are simply not releasing enough land supply. For them it comes back to the limits on new construction imposed by zoning. If we would just get rid of zoning, land would not be so scarce and prices would drop.
Well, that seems fair. Isn't that true?
Well, it does seem fair. I used to believe that. Most of my early work was based on that idea: add density and housing gets cheaper. But constant failures for that to happen have forced me, reluctantly, to change my view. Mostly my change of mind has to do with living and working in Vancouver where I have observed this problem carefully. No other centre city in North America has approved and built more new housing units per capita than Vancouver. Vancouver has increased housing units by 66 percent since the 1980s, moving our residential density from 3,300 units per square kilometre to 5,500 in those 4 decades. This makes Vancouver the highest density city in Canada. If high housing prices could be solved by adding supply to an existing land base, Vancouver should rank among North America's most affordable cities. Instead it is the most expensive.
OK. But it still doesn’t tell me why all of a sudden the price of urban land is an intractable problem.
Well, it’s not really all of a sudden. We have seen this problem before. Not in our lifetimes but certainly during the “gilded era” and the “roaring 20s.” Back then urban land prices were pushing housing out of reach of middle class wage earners similar to what they are experiencing now.
OK then, not a new problem. What, if anything, was done about it in the past?
Well (clearing throat) economists dating back all the way to Adam Smith and all the way up to Nobel Prize winning economist Joseph Stiglitz have tried to explain why land, and urban land in particular, doesn't conform to the laws of supply and demand. The famous quote from Adam Smith shows his true feelings:
“As soon as the land of any country has all become private property, the landlords…love to reap where they have never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come…to have an additional price fixed upon them.”
What this suggests is that the lucky owners of land, and urban land in particular, will naturally increase the asking price, or its “rent” up to the point where the price of land becomes a crushing burden both on the wage earner and the entrepreneur. And many, including Joseph Stiglitz, say that this is what is now happening.
OK, so what if anything can we do about this tendency of urban land prices to go up and up until it crushes us all?
That’s a really good question. Most of these economists, going back to Smith, say you should put a heavy tax on land instead of on income and capital, and use that money for social benefit. This will drive down the price of land and shift taxes to the only one of the “three elements of production” (land, labour, capital) which is unproductive, i.e. land. Ideal would be a tax on land equal to its amortized yearly value, or about 8 percent.
Oh great, now you want to propose a huge tax increase on everyone's home. I can just imagine the outcry.
So can I. Property taxes on urban land are typically about 1 percent of value. So no one will get reelected proposing a 700 percent increase in that tax.
So, really, I guess I can thank you for wasting my time. It sounds like there is no helping this.
Well, hold on! There is something easy to do, and it has to do with the thing we are talking about: Victoria’s missing middle proposal. It seems that your council is narrowly divided, with proponents saying this will lower cost. Well, as we’ve discussed, this won’t happen. If they just upzone the whole city, according to Smith, Stiglitz and a bunch of others, it will just put more money into the already overstuffed pockets of land speculators. But if Victoria does like other cities do, notably Cambridge Mass, and only gives new density in return for affordable housing that can stabilize land values by lowering the land value “residual” (after computing monthly return on the project and how much thus can be offered for the land) and provide permanently affordable housing at the same time. The only loser is the land speculator.
That sounds too easy. It can't be that simple.
Right it’s not. Nothing is. You would need to enlist some people, not mainstream economists who worship in the church of supply and demand, but those who really understand the land price issues we have discussed. They can tell you how much affordability you can “leverage” based on a presumably stable land price, average household income, management and construction costs, etc, to come up with a target for affordability. Cambridge set it at 100 percent which I think is great. I have been promoting a 50 percent target in Vancouver which is, I think, certainly reachable. Victoria may be able to do even better. Getting your nonprofit and co-op providers at the table to hash this out would be crucial. There are many ways to insure permanently affordable housing units, including things like housing agreements and land trusts. The menu can be diverse. But the very worst thing you can possibly do is to upzone for missing middle units without any affordability requirements. If your hope was that new supply would lower costs I guarantee you will be disappointed. Very very disappointed. And land speculators will be laughing all the way to the bank.
Patrick Condon is a professor in School of Architecture + Landscape Architecture at UBC. He has over 30 years of experience in sustainable urban design: first as a professional city planner and then as a teacher and researcher. At UBC, as the James Taylor Chair in Landscape and Liveable Environments, he worked to advance sustainable urban design in scores of jurisdictions in the US, Canada, and Australia. He has also led the Sustainability by Design project by the Design Centre for Sustainability. He is the author of a number of books including Five rules for tomorrow's cities. and Sick City.