Does Density Do Anything?

 

This is in response to an article written by Patrick Condon, the original can be found here.

First off, this is an excellent article at getting at many of the problems we face with urban economics – for any who are not aware of the works of Henry George, I would highly recommend giving it a read. George was alarmed by the inequity created by simply gaining wealth by owning land (without any improvement being made), this kind of situation is known as economic rent and is typically seen as not ideal. George promoted a land value tax, but unfortunately at the time (as it is now) many of the neo-wealthy had made their fortunes and continued to make their fortunes from appreciating land values “while they slept” – thus he was met with fierce opposition.

I can’t find it for the life of me now, but a post along a similar argument as the one being made here by Condon was made about a month ago by a UBC prof. Both essentially argued the same thing, that as soon as the property is subdivided, the value of the land increases, erasing any potential savings from densification.

However, my fear is that many will take this conclusion that density (on its own) may not help affordability, and take this to mean that density does not help. 

Before I get into discussing the why of this, I want to highlight that Condon (the writer of this article) at the start lays out many of the benefits of densification, even if prices do not drop – in addition to the benefits Condon lays out, as we are on the precipice of a climate crisis, and governments are facing an increasing budget crisis (not to mention the housing crisis, etc.), the greener nature of dense building (with adequate green space and parks that we don’t see here in Langford) coupled with the cheaper cost to provide services, is a step In the right direction for many of the problems we face.

Ok, so then why – Why is it that when a parcel is subdivided, the values shoot up? The big explanation (as far as I have been able to tell) is due to restrictive zoning. Restrictive zoning is only a by-product of the last 100 years or so (less in some cities) and is by far and large a racist, and colonial response to planning with many restrictive covenants and zoning bylaws being put into place to limit the ability for certain undesirables (non-western-European immigrants) to be able to access a given area – this, sadly enough, is why cities like Toronto abandoned low rise apartments (the so-called missing middle) in favour of Single-Family Housing (SFH) almost 100 years ago.

So other than the overtly racist undertones in the history of zoning – why does it create this problem?

It creates the problem because it takes the standard market for housing and then through regulation and laws, separates it into multiple smaller markets for housing. Because of this, you get oddities in some areas where the cost of commercial buildings can run significantly cheaper than the cost of residential buildings, even if they are side by side (this is not the case here as we also have a lack of commercial space).

The reason we see this is because you have very different people competing for real estate for living versus for commercial purposes, the result, the land that is “ear-marked” for commercial can go for significantly less than if it was “ear-marked” for residential, simply because there can be less demand for this space.

The same occurs within residential zoning – Imagine an entire city zoned for single-family housing (SFH). There are lots of people looking for a house and want to buy, but as the whole city land is used up for SFH, there is nothing available for them, so values start to rise as they try to out-bid each other for the few houses available. Clearly more needs to be built, but (A) there is no more land within city limits, and (B) zoning only allows for SFH to be built.

Let’s suppose, that as a trial, the city decides to allow a certain parcel to be subdivided, or allows the zoning to be changed to allow denser housing to be built – what happens? All this pent-up demand from people looking for housing (and unfortunately speculators looking to make a $) all rush in to purchase this newly made available land, thus further driving up the price. The trial appears to have been a failure.

The problem with it is that you just created a momentary market for a single good that a lot of people wanted – of course, they piled on and bid up the price. As long as the city continues to sub-divide or allow densification on an ad-hoc, one-off basis, this will continue to happen as each time this becomes available the pent-up demand will rush in, bidding up the price, until equilibrium is met.

It has thus been argued that if the city were to significantly relax their zoning requirements – IE, instead of setting areas as only SFH, they can set them as a “residential” blanket allowing a degree of density, this would eliminate the gold-rush mentality and help to stabilize land prices – If memory serves, Vancouver attempted this a few years ago to a limited degree on one street and still saw prices balloon – why? Because it was still done on a limited scale with people believing (rightfully so) that this was a one-time, one-off event, and while on a slightly larger scale, was still a land gold rush.

In my opinion – to help alleviate this, one needs to adopt a two-pronged approach – (A) conduct a complete overhaul of zoning laws to make them less restrictive and allow densification across the board. (B) adopt taxes as first promoted by George and re-iterated again in this article by Condon.

Such a tax allows – as proposed by George – much of the gains from this land appreciation to be recaptured by society, not the few landowners and developers, and thus can be utilized by the government to provide increased public infrastructure and services.

Unfortunately. like in Georges's day, the idea of increased taxation on land will be highly unpopular as in his day we have a massive class of neo-wealthy who would be negatively impacted by such a tax, and thus would be more than incentivized to speak out and disprove the effectiveness of it.