Summary/Background: The planning department has been exploring issues regarding growing constituent concern over development in the region. Homeowners are concerned about the effects that new development will have on their property values and they are advocating for more restrictive zoning regulations. This is also known as downzoning in which land-use regulations are passed in the form of ordinances to reduce the number of housing units being built. Developers in the region have asked for the city’s support to promote development and for the addition of new units or upzoning.
That is the reduction of land use restrictions to allow new development. Homeowners are concerned that upzoning will reduce the property values of their homes, while developers argue that new units will increase their land value. This staff report will analyze the “Zoning Paradox” which sheds light on how land-use value becomes more valuable during upzoning and downzoning for developers and homeowners, respectively.
This memo will look at the effects of downzoning and upzoning on land use value (value per square feet) and housing prices.
The memo will examine: how upzoning and downzoning increase land values, the concerns of constituents and developers, the effect that upzoning and downzoning has on land values and home prices, how this relates to consumption, and the report will finalize with recommendations on future development and density in the region.
The land use value can increase in the case of both upzoning and downzoning. For the developers, upzoning allows them to build more and, thus, the land value for them increases.
If a developer is building more, the total cost of building more units would increase, but, so would the residual revenue generated by the building of more units. Whereas, the land use regulation or control on development may lead to underutilized land. This means that the supply of housing would be limited. As the population of cities and growth overall is increasing, the quantity demanded housing continues to be very high and will continue to rise. This gives homeowners a chance to increase the rental prices of the already available housing units.
The units that did not have much value a few years ago will also enjoy a hike in the value of their lands. This gives us an idea about the Political Economy of the Land Use Regulation- the aim of local government entities through zoning regulations is to utilize the land most ethically and efficiently. But sometimes the land use or the zoning laws can either favor the homeowners or the developers by decreasing or increasing the supply of housing due to political feasibility and opportunity.
During downzoning, zoning laws restrict the number of units that can be built or, in other words, how tall a building can go (how many floors a building can rise) and it may also restrict or reduce the land area dedicated for housing. This further adds to this housing shortage which means there will be less supply of housing and the demand for rental houses would go up. Because of this shortage of housing, the value of the existing homes would increase and would benefit the homeowners. This holds for not only recently built houses but also for the units that are very old and not well maintained. The homeowners can ask for high rentals for the properties which otherwise have a less structural or architectural value. Hence, this is why homeowners are advocating for increased land-use regulations (downzoning).
To summarize, land values for developers would increase as they can utilize the land for additional residential and/or commercial purposes. This would increase the overall supply of housing units. As the supply of the housing increases, the rent of housing units would go down, thereby, reducing the benefit of home property values for homeowners. In short, the homeowners would benefit from the downzoning and the developers would benefit from the upzoning.
Additionally, it is important to distinguish the effect on land values and the effect on home prices in both upzoning and downzoning. As was mentioned previously, upzoning increases the land-use value and reduces housing prices because the housing supply increases. However, this is the case up to a certain point. The marginal revenue, the revenue gained by producing one more unit of a good, will reach a point where it equals the marginal cost, the additional cost to produce one more unit. This will be the maximum profit a developer can reach from the construction of new units. Once a developer reaches their maximum profit, their land-use value will begin to decrease over time. Upzoning allows markets to reach a point of equilibrium. So although housing prices could decrease with upzoning, once developers seize development due to the risk of losing profits after reaching profit maximization, housing prices would shift back upwards to an equilibrium price.
In the case of downzoning or caps on development, this causes a reduction in the housing supply and, thus, the price of housing increases. Since there are already many land-use regulations put in place against increasing development, developers are rarely able to build up to levels of profit maximization. This means that with existing land use regulations, developers would see a reduction in land use value because their residual value is still approaching profit maximization. However, after profit maximization, the total cost starts approaching total revenue, and eventually surpasses it. Once again, the residual value (the value after deducting the total cost from the total revenue) will begin decreasing, along with the land use-value.
If the supply of housing does fail to increase to accommodate the growing population and demand to live in the region, housing prices (rents) would see a significant rise. Promoting upzoning policies would be the best solution for providing an increase in housing supply for consumers because this would add new housing to the market. Upzoning would lead the market to shift, which means that land parcels would be seen beyond the purpose of just as an investment. The affordability of the housing units would increase as the increased supply of the housing would bring down the pricing of the properties. Owning or renting a residential property would become more affordable.
Our proposition for your policy towards the density is to promote upzoning, as the value of the land lies in the ability to build and/or utilize the land. But the upzoning land-use regulations should have a balanced approach as upzoning may lead to an uneven distribution of housing densities throughout the region. Also, as we outlined above, upzoning does not necessarily result in the reduction of housing prices or increased housing affordability. It can and may still lead to developers building more luxury housing. This could result in exacerbating the existing affordable housing crisis.
Therefore, our recommendation would be to have Inclusionary Upzoning with equal distribution of the infrastructure. It is important that an “inclusionary housing measure” is taken while upzoning. This measure would require the developers to set aside a percentage of housing units for low-income residents. Upzoning with inclusionary housing would make way for the developers to build more units and would be incentivized to build low-cost housing units through this policy. The upzoning should also include equal distribution of infrastructure and amenities throughout the city so that population density is not concentrated only in certain areas, but is spread throughout the city. This measure would uphold the land value for the homeowners as well because this zoning law would ensure the surplus of housing units is not concentrated in one area.
We understand that every policy decision, especially the decisions related to the housing market, has direct fallout on the elections. As the housing crisis continues to grow, the honorable council member must take into consideration the various stakeholders at hand on this issue: the developers, potential renters/consumers, homeowners, and businesses. Adopting Inclusionary Upzoning with equal distribution of the infrastructure policy throughout the city would result in the appeasement of all stakeholders, especially the homeowners and the developers. This policy decision not only has a mass appeal but also helps to solve the massive affordable housing crises, maintains the pricing of housing relatively high for existing homeowners, and encourages developers to continue economically investing in our region. Additionally, it also serves as means to preserve the character of the city and environmental protections for constituents. This will serve as a well-rounded platform for the city and the council member.