New residents are willing to pay significantly more for additional housing than it costs to build it. They could compensate existing property owners for the reduction in prices caused by new construction and still gain from moving to the city. Such a compromise is possible until the point at which new construction reduces the value of existing homeowners’ property by an amount greater than the value it affords new residents. Allowing incoming residents to compensate homeowners would help cities grow to their ideal size, at which the cost of adding one more resident is equal to that resident’s benefit to the city’s economy.
This sounds like a Coasian problem. Malani’s solution is to charge new residents an above-normal property tax rate and to return the proceeds to affected residents in the form of lower property taxes, while getting rid of the regulations that inhibit new development in order to protect incumbent residents. My thoughts:
1. In theory, this is sound economics. By replacing quantity rationing of new development with price rationing, you reduce deadweight loss.
2. In our area, developers are charged by the local jurisdiction for the costs they impose on infrastructure, so the basic mechanism is in place to include additional taxes. Then these taxes on developers would be passed on to the new residents.
3. In practice, it might prove difficult or impossible to eliminate the regulatory impediments to new development, so that high taxes on new residents (or on developers) would just be an additional deterrent to new construction.
4. In practice, it is likely to be very difficult to target the tax reductions to the most-affected residents. If you spread the tax reductions across many residents, each household only receives a minimal, meaningless amount. If you target only a few residents, then a lot of effort has to go into the process for determining who is most effected by the new development and how much they should receive.
My towns and treasures are at your command,
And stor’d with blooming beauties is my land
-Virgil
“In practice, it might prove difficult or impossible to eliminate the regulatory impediments to new development, so that high taxes on new residents (or on developers) would just be an additional deterrent to new construction.”
In his widely praised Unchecked and Unbalanced, Dr. Kling wisely counsels the decentralization of power through private homeowners and neighborhood associations (see pages 101-105). He offers a compelling vision:
“Today , in Montgomery County, Maryland, the decisions about neighborhood government services for nearly one million people are made by a central County Council consisting of nine members. Under a decentralized systeem, hundreds of neighborhood associations would make these decisions.”
The book cites 2004 research estimating that 17% of the population lives in a private neighborhood/homeowners assocition. Today, that figure is over 50% and more than 80% of new housing construction is within a homeowners association. A study has found that a house in an HOA is worth 15% more than a comparable house without the benefits. And HOAs have taken many forms from minimalist, low cost entities to higher cost arrangements affording luxury amenities.
At the time the book was written, there had not been much experience with creating HOAs in existing neighborhoods. Since then, while it is difficult, it is not impossible, and has been done. Experience is growing. Law firms offer advice on the process and as experience continues to grow, it should become easier and more routine.
Homeowners threatened by declining property values should consider talking with their neighbors to retrofit their properties with development covenants in the HOA form to protect against deleterious zoning law changes. Such covenants could take the form of payments to other members of the HOA. Private ordering may offer a more satisfactory alternative to centralized command and control.
On a completely finished piece of land that required no work, permitting in Howard County was going to cost us $125,000. It’s slightly less in surrounding counties but not much. Including the cost of the land, it would have been $488,000 before we even tried to build a house. There were some cheaper plots of land but not much, at least not much without the land needing lots of expensive work before it would be acceptable enough to pay $125,000 in permitting.
This wasn’t a zoning issue. This was in pretty middle of nowhere Western Howard County farm country.
Some of the large developments from the big builders probably get some discounts on land/permitting, but based on the construction costs we were shown it seems that land/permitting is still a big part of their expenses.
An average house in Maryland is only $289,000. So permitting would be almost equal to half that.
If there is pent-up demand to build and occupy many units on a particular property, but that building is prevented by law, then wouldn’t that tend to artificially lower the price of the properties owned by incumbents? That is, if you remove the restriction, the property will likely be able to generate higher total rents, the value will probably spike, and the incumbent owners will already capture the gains.
The first single family owner to subdivide their property probably reaps the most reward, but the remaining single family dwellings on the block will face either decreased value or decline in future growth relative to a comparable non-mixed neighborhood.
People have bought into areas zone single family for their own reasons but very few if any in anticipation of reaping a windfall from a zoning change. People who want the advantages of single family neighborhoods and will pay a premium for them will discount the value of homes in mixed zoning areas as well as areas zoned single family because they can no longer anticipate zoning remaining stable. Rezoning for limited windfalls does not create the sort or area many people would like to live and so they will move elsewhere. What will be next? A Motel 6 on every block? It is already bad enough with short term rentals that many communities are being prompted to attempt regulations in that area.
Builders build multi-family unit communities as well as single family residence communities in order to appeal to various market segments, often times in the same development but rarely immediately adjacent to each other: the single family units go in one area, the multi-dwelling units in another. Why would someone pay a large amount for a single family dwelling on a single family block if they knew the lot next door could overnight could sprout a multi-dwelling? Developers take pains to prevent this in order to maximize values.
The campaign to achieve the libertarian utopia of human life reduced to the existence of termites in a mound by stripping local authorities of the power to control zoning, will, paradoxically, likely produce a more tightly ordered regine of private regulation that may decrease overall housing availability, as homebuyers substitute de facto zoning by homeowner associaton covenant.
To solve for this equilibrium, maybe economist need to throw in traffic and cost of the street as well as increase traffic and congestion is what the average fears most by increased building than immediate home price reductions. So honestly your area is going after what residents care about more in the short term.
As reasonable as this system sounds we merely moving the higher housing cost to a different ledger though so I am not what this really changes here.
Doesn’t Prop 13 in CA already effectively do this? Assessed values reset on sale, so newer owners are always paying higher property taxes than longstanding owners. That does not seem to have reduced the resistance of existing owners to new construction. My admittedly anecdotal experience is that that resistance is not based on fear of lower property values. What they want is to preserve their “neighborhood character” and whether you think that is a segregationist euphemism or not, it is not something that can be easily offset by lower property taxes: the “harm” of a new resident is non-financial.
+1 on Prop 13 and my parents pay exceptionally low property taxes as they lived in the same house since 1983.
Again, in the SoCal the main complaint about new housing construction is ‘More Traffic!’ as most neighborhoods are not that old around here.
Most insiders simply dislike further development and don’t trust local governance to address congestion effectively. Therefore, insiders would require more compensation than Anup Malani reckons. Then there are all of the implementation problems that Arnold Kling identifies.
Over at EconLog, Bryan Caplan argues that lobbying by developers is the main mechanism for countering insiders’ anti-development bias:
“If the construction industry were not tirelessly clawing for the right to build homes and offices, regulation would have long since choked off development. Psychologically normal people cotton to virtually all complaints about new construction. ‘Traffic!’ ‘Noise!’ ‘Harm to the environment!’ ‘Hurting property values!’ ‘Crowding our schools!’ ‘Not in My Backyard!’ Only lobbying from builders counters this mad populist negativity, allowing the creation of the structures in which we all reside. Thank you, business.”
Here is the link to the blogpost:
https://www.econlib.org/big-business-on-crony-capitalism/
Then why do all developments around here seem to be in the form of the HOA covenant communities that Bryan hates so much? Once the place is built, they pretty much cut of all additional building. And they often have a bunch of regulations about how to use your property.
And they don’t seem to hate regulation (they never push to repeal building regulation, which would put all builders on equal footing, they only try to get exceptions for themselves). I don’t see them pushing to end having $125k per plot in permitting costs, only that their permitting costs for their developments should be lower.
The net effect is that all new construction comes from a handful of humongous building companies that slap down identical mass produced HOA communities in suburbs/exurbs priced at the slightly above middle class level and up.
I thought libertarian economist in theory love HOA style of self-government in general. I think it is one of those in theory HOA work well as self-government, but one of the realities of self-government tends to mistrust outsiders. (I still say the housing deregulate underestimate people dislike of Traffic more than housing values. In our area, the potential Wal-Mart hasn’t be built for 8 years because of everybody wants the roads expanded.)
However, almost everybody I know in Southern California all dislike their HOA. Except the Real Estate agents who tend to dominate the boards.
Yes, regulatory capture is a serious problem. But lobbying by developers might nonetheless in practice be the main counterweight to homeowners’ entrenched bias against more construction. It’s a 6th-best world out there!
A good way to test for whether arguments have a prima facie valid shape (that is, represents an instance of the consistent application of principle instead of reflecting a double-standard) is to switch around the words in and see whether it still works or comes to sound absurd, revealing an underlying weakness or need for some kind of additional qualification or justification. (This is popular in political writing with ‘white’ and ‘black’, though watch out, because Twitter will totally ban you forever in the blink of an eye if you try it.)
So, let’s try it with Caplan’s argument:
Well, that seems a little off, doesn’t it. It might seem more plausible if you imagine the Chinese government telling some state-media author to write it. Frankly, I can totally imagine Caplan biting the bullet and agreeing with it, as the question of which state of affairs really results in the most social welfare is all a matter of costs vs benefits, Coaseian bargaining, a little tort law, etc.
(In practice, pursuing such claims in tort law is not feasible or practical and most people think that justifies some kind of regulatory regime as the default with torts being the exception, as with the case of the mandatory auto insurance system)
But this argument works because we treat “the ability to breathe clean air on my real estate” as both a kind of durable property right and public good. When people buy a house where the air is clean, we say they have every right to expect that the air will continue to be clean into the indefinite future, as that was a critical characteristic of what they thought they were buying, and they reasonably relied upon that expectation in making their purchase. If some plant emits pollution which messes with that, they can both sue for compensation, and expect the state to crush them.
Yes, the state can overprotect which is inefficient. And yes, if the state decides to abandon the homeowners and let the chemical plant owners do whatever they want, those people are screwed and arguably the victim of unlawful use of the eminent domain condemnation power – an uncompensated taking and transfer. But it is generally considered reasonable and legitimate for people to organize politically to make sure the state has their backs on this matter (at least up to the level of efficiency) and doesn’t screw them, like the Chinese state is free to do to the Chinese people.
Now, we all know the first three rules of real estate: location, location, location.
But why? Because ordinary long-term housing real estate transactions are much more about buying the neighborhood than buying the plot’s acreage or the structural improvements.
And my point is that neighborhood quality is like air quality, and people think they ought to be able to buy a right to stable expectations of both as part of the package.
What does neighborhood quality mean? It means the critical attributes over which someone will have no control after committing and putting down roots: everything from what kind of neighbors you are likely to have, what you can expect from them, the quality of the local schools (however defined), the safety and security of the area and the crime rate, aesthetic quality, traffic and congestion and infrastructure, the quality of local amenities both public and private, tax rates, the quality of local government and other services, all kinds of opportunities for interaction, commute times, and so forth. It’s a long list of important and legitimate interests and concerns, and part of ‘the bargain’ people think think they are making.
People can’t face a complete unknown when buying neighborhoods, and choosing a place to live – especially for a long time – is almost sui generis when it comes to economic analysis not just because of the outsized importance and value of stable expectations regarding these factors (the ‘why’ behind location, location, location), but also because the legal system does not provide any good way to protect the interest in stable expectations (for instance, through ordinary causes of action) besides political regimes regulating real property in terms of building, zoning, occupancy, and standards.
Hence the HOAs, the zoning, the covenants and encumbrances, and so forth.
Now, getting back to air pollution, if the plant absolutely needs to be located near the homes for some reason, and produces so much value that it the benefit from polluting exceeds the harms from the pollution, then the answer is for the the plant – the nuisance which came to you – to just buy all the homeowners out at pre-plant FMV (or maybe 110 or 125% or something, to compensate for the trauma.) The bargaining and transaction costs tend to be too high to reach efficient outcomes, so one would need a kind of neighborhood condemnation / eminent domain power to get it done (though note as in Kelo Libertarian legal experts are generally opposed to such activities, at least in terms of claiming they are inconsistent with the proper interpretation of the Constitution.)
Note also that if the pollution is only a little bad some distance from the plant, then the neighbors can stay if they want to by buying their old properties back from the plant at a discount after they got their 125% FMV, the net gap being their compensation for the new bad air conditions.
The same logic could be applied to “neighborhood pollution”. You want to change a neighborhoods character, you can always buy everyone out (maybe one could set a legally arbitrary radius of half a mile), with an option to repurchase at auction. If property values go down, the homeowners get compensated. If property values go up, the homeowners weren’t being protected from (literal) neighborhood effect externalities (like air pollution), they were being protected from pecuniary externalities via regulatory price suppression, and there is much more general agreement that such protection for owners exceeds the bounds of legitimacy.
This is trying to make Kaldor-Hicks operational rather than just theoretical.
I predict it will not work.
Taxing existing property more seems to prevent this problem from developing in the first place, in places like Texas.
On the other hand, much of the cost of development seems to be wasted on queuing, so if added permitting taxes were paired with much shorter queues, it seems like it would be a case where new taxes could be raised without creating new deadweight loss. But, it seems like it would just continue to bake in monopoly rents to urban housing markets rather than getting rid of them.
Nicholas Weininger wisely beat me to mentioning California’s Prop. 13 which tends to shift local tax burden onto new residents. Since Prop. 13 is only partly congruent to Malani’s plan it doesn’t really prove whether his scheme could be made to work, but I think the weight of the Prop. 13 experience suggests Malani’s basic plan would fail.
Like several other commenters, I think that current property owners value their local amenities a lot. To buy most of them off you would have to pay them enough to replace those amenities with comparable amenities– say by buying a new house in another neighborhood which is not targeted for slumification.
Suppose a homeowner enjoys parking his boat trailer on the street for free. If his neighbor’s house were replaced with a quadplex many new residents would compete for street parking, forcing the homeowner to pay to park his trailer off-street far away. Now, Malani suggests new residents should compensate the homeowner with cash (perhaps indirectly). But the homeowner had some cash before and traded it for the amenity of convenient parking. He doesn’t want cash, he wants a parking spot. To compensate him for the loss of that parking spot, new residents would have to pay him enough to replace it– which means, in effect, enough to move to another house with convenient parking.
Worse, our homeowner will reason through all of that and realize that even if he gets so much compensation and uses it to move, his next neighborhood will soon be invaded by annoying new residents. The merry-go-round would stop when newer residents could not afford to compensate older ones for destroying their amenities, but at that point the “price of housing” would be higher, not lower!
The real solution to the “housing crisis” in places like the San Francisco Bay area is to remove suburban growth restrictions. California, for example, has millions of acres of empty land on which development has been forbidden at the behest of local governments that don’t wish to lose tax revenues, big developers who control land inside the current growth boundaries, and politicians who leverage high housing prices into campaign issues such as rent control and “affordable housing” subsidies (with generous rake-offs to campaign contributors), policies which would have no appeal at all if housing prices were not forcibly inflated. Some homeowners realize that competition from new construction would “reduce their property values” but many don’t think that deeply. Since growth at the urban fringe (i.e., outside current neighborhoods) does not threaten neighborhood amenities, most homeowners would not react very strongly against it. Malani should try to think of ways to get rid of suburban growth boundaries rather than schemes to promote neighborhood transformation.
I know Southern California better and housing is more deregulated than NoCal but where is this millions of acres of empty land on which development? It is crowded in California coast.
One reason why fires are increasing in property damage in our state is because the number of houses in ‘Potential Fire Areas’ has greatly increased.
Read all about it:
Lots more at that link, including links to Census data sources, etc. The problem really isn’t lack of density, it is too much forced density. Randall O’Toole explains it all to you, and for free!
I read this confused about what the author is looking for in California. Our problem with housing is how to make it cheaper to live in the dense areas, San Diego, LA, and Orange county, not the less dense areas as Imperial county. So it is impossible for a working class service worker to live in Orange County and we need more housing there. However this would require dense living with higher building sizes not filling a bunch empty land. And the author was complaining about dense living but that is the reality of coastal cities.
Yes there are loads of empty land in Imperial county.
It makes you wonder if they are even looking at the building trends around them.
As far as I can tell there is a lot of building in the exurbs, but mostly on flat land near highways with 30-45 min commutes (with traffic may increase). They do this because its flat undeveloped land they don’t need to knock anything down to make.
But if you look at what they are charging (and add $100-$200k versus what they advertise on Zillow for a realistic final price) its clear this housing is middle class and up.
They don’t build way out there (what would be the point, no jobs) and they don’t build in the city (because it means knocking things down, which is hard to do).
See Scott Sumner’s blogpost:
https://www.econlib.org/an-epic-example-of-wealth-destruction/
Scott is awfully presumptuous. I won’t deny that there might be regulations in N3 (who knows), but they aren’t why people aren’t building a city there.
Seasteading has always been THE BIG IDEA for libertarians. Regulation is the cause of all ills, so if we just build an island a bit off the San Fransisco coast in regulation free international waters it will become Galt’s Gulch.
And it never goes anywhere. In fact it seems to me that cities just don’t seem to appear wherever one or a few people decide they should logically be.
Rather, they grow organically. Based on the needs of a million uncoordinated decision makers in a particular time and place built slowly over time and guided by previous history and existing conditions.
Around here there is no shortage of growth on open land far from the city. Ryan Homes is slapping down a new housing development on every scrap of the exurbs. But they aren’t slapping down cities. They are slapping down HOA housing communities for people to commute to the city. Because that is what they can credibly sell with a high probability of successful profit.
Who is going to build a skyscraper out in the exurbs? Nobody. How many articles do we need about how rural America is dying before we decide that building a skyscraper in the bumblefuck rural mountains of CA isn’t and investment people are likely to make.
Did he even look a the map. Look at those mountains. Does he not realize how hard it is to develop in such terrain? There are no existing roads to speak of. How are people going to commute from there? According to Google maps it would be a a 1.5 hour 60 mile trip to get to Palo Alto (not even SF). Whose going to do that? Even Ryan Homes doesn’t build that far out in the exurbs, and never on mountains. And can you imaging the commuting costs (run the math on a 120 mile roundtrip five days a week).
The staggering ignorance. These people are a broken record. EVERYTHING boils down to NIMBYS AND IMMIGRANTS!!! Scott Sumner thinks the government is stopping him from plopping cities in mountainous terrain in the middle of nowhere. Bryan Caplan goes to Spain and his comment is that the government must be over-reporting its sky high unemployment and therefore more immigrants are needed. Alaska decides to return tax dollars to its citizens instead of funding state universities and the “libertarian” Tyler Cowen says this amounts to “giving up on the future” and the solution is millions of immigrant Visas targeted at Alaska.
You people are INSANE!
Yes we can have cheaper housing in this area but it is also going to be one way a 90 minute commute. That is 40 miles of semi-mountain driving. (And note that area would potentially in a fire risk.)
Requiring new homeowners to compensate the existing ones would be like charging newly licensed taxicabs for the reduction in value of existing medallions: that is, the value being lost is a parasitic oligopoly gain which the existing homeowners were never entitled to have in the first place, since they didn’t own the unbuild land from which it came.
But what if I just bought a medallion last year for FMV? Hardly fair.
That’s what the BFP rule is for. If I’m an innocent purchaser of legally-valid property who did everything right according to the rules, then whatever beef you may have, you have to take it up with whatever fellow upstream did you wrong, and I still get all my rights, to include the right to compensation if you lower the value of my property (which, in my opinion, should include all ‘regulatory takings’, which are, after all, said to be done in the name of a public good which exceeds the private harm, and thus the public should pay for it.)
So, the question is who is the bad guy upstream? The usual answer is the guy who received the unjust windfall. Maybe the original medallions were just handed out free, in which case you could try to claw back the value from the estates of those original beneficiaries (and good luck with that). Maybe the government sold them, in which case, the public fisc is liable, and if the government reneges on the deal, it should at least pay out refunds.
However, we’re probably all better off if we just swallow the bitter pill of past injustices, put them behind us, and move on, leaving all the old unjust windfalls alone – say, anything established more than 20 years ago – and deeming the de facto state of affairs as valid de jure as well, because the implications of taking the principle totally seriously are truly radical and devastatingly disruptive. Consider: most welfare benefits are windfalls too.
Plenty of schools are far, far bigger than the multi-dwelling units people object to.
And the traffic before school and after? And the noise from that traffic, and from the kids themselves? The bells and whistles? Sports teams cheering?
There’s something disingenuous about the people who say that one kind of density is unacceptable if they’ve accepted the existence of some really massive schools in the same suburban street.
+1