Does density raise prices?

Michael Lewyn's picture
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In For A New Liberty, libertarian intellectual Murray Rothbard writes that leftist intellectuals had raised a variety of complaints against capitalism, and that "each of those complaints has been contradictory to one or more of their predecessors."  In the 1930s, leftists argued that capitalism was prone to ‘eternal stagnation", while in the 1960s, they argued that capitalist economies had "grown too much" causing "excessive affluence" and exhaustion of the world's resources.  And so on.

It seems to me that density-phobia involves a similar litany of contradictory complaints.  Traditionally, low-density zoning has been based on a desire to exclude so-called "undesirables" and thus keep property values high. 

 But now that compact neighborhoods are becoming more desirable (and thus more expensive), the argument that density leads to poverty and plummeting property values can no longer be taken seriously. 

But Not-In-My-Back-Yard (NIMBY) activists now have a new argument: that far from reducing property values, density increases them too much, by making the neighborhood too desirable.  At first glance, this argument makes no sense: if a neighborhood that once had 20 apartment buildings now has 40, the supply of apartments is increased, thus keeping the price down instead of up. 

 But the NIMBYs notice the housing booms of New York City, Vancouver and some other compact cities, and thus conclude that density must mysteriously raise prices.

Why is this argument flawed?  First of all, density and high prices have not always gone together.  In 1950, New Yorkers spent about the same amount of money on housing as other Americans (about 25 percent).   Thus, it is probably the case that high housing prices in New York are the result of pro-NIMBY zoning policies: according to Edward Glaeser's book Triumph of the CityManhattan allowed 11,000 building permits per year between 1955 and 1964, but only 3120 per year in the 1980s and 90s. 

Second, there are plenty of dense places that are more affordable than New York (such as Philadelphia) and not-so-dense places that are as expensive (such as San Diego and Sillicon Valley).     At the end of 2011, the median sale price in New York City and its suburbs was $414,000- but the average sale price in Santa Clara/San Jose was $549,000.  (See http://www.realtor.org/wps/wcm/connect/210258804a1865779a1aff7f116f4bb7/REL11Q4T.pdf?MOD=AJPERES&CACHEID=210258804a1865779a1aff7f116f4bb7 )

Third, the high price of new housing does not  cause housing as a whole to become less affordable.  If consumers prefer newer housing to older, the newest housing will always be the most expensive- but if the new housing causes an overall increase in housing supply sufficient to surpass demand, the price of older housing may decline (as has occurred in the Rust Belt, where suburban sprawl has led to declining property values in some urban neighborhoods). 

Michael Lewyn is an assistant professor at Touro Law Center in Long Island.

Comments

Comments

Economics AND historianship vital for "city" analysis

Michael, you have good intuition - you are picking the right lines of analysis.

Every city is different, and it is necessary to work out what evolutionary forces are at work and at what stage they are. Some cities have high density cores that predate the automobile. Very few cities that largely post-date the automobile, have achieved increases in density anywhere, including their urban cores, that comes close to the pre-auto cities. A post-auto city is on the back foot right from the start.

I claim that LA is possibly the only example in the USA of a post-auto-growth city that DID achieve surprising increases in density in some zones during its strong growth period. But this correlated to urban land being low in price, along with a relative absence of regulations and NIMBY obstacles to increasing density. Once LA began to practice growth containment, especially at the fringes, driving up its urban land prices, it was the end for increasing density in the right places, i.e. more central locations.

As I have been trying to explain on various threads on Planetizen, inflated urban land prices are an obstacle to INCREASES in density in the RIGHT places. Urban land price curves do slope up towards the most central and most desirable locations. But when the entire curve is deflected upwards at the fringe (by serious "discontinuities" in land rents across regulatory boundaries) the prices also rise across the entire city simply because of the way real estate markets work. The result of this, is FEWER potential buyers at each zone apart from the fringe (which is where people "priced out" elsewhere are deflected to - actually to both there and "beyond" the fringe).

You have also done well to start thinking seriously about why there is all sorts of random relationships between land prices and density, in different cities and at different times. The most important part of the answer is simple. Are people moving OUT of the dense areas, or moving IN?

An outwards movement of population from a dense pre-auto central area will be accompanied by extreme "affordability" in that area. There will probably also be "blight" and a vicious circle of social problems, especially as the people leaving are the ones with the most enterprise and skills.

An inwards movement of population towards a city centre in our own era is SELDOM accompanied by "affordability" for a variety of reasons. LA managed it briefly. Any city wanting to reverse the outwards trend from their inner cities and offer affordability in the process, is going to have to focus on measures that bring prices DOWN, not force them up. NOT having an urban growth boundary, is a MUST. This sounds contrary, but it is the truth. People in NUMBERS, need to be attracted by the affordability of the centre, not by "amenity" that few can afford. And you CAN'T force up the prices at the fringe without also forcing them up at the centre. It is better to have prices as low as possible everywhere, and make the centre the "cheapest" option. Any city with an urban growth boundary, has unaffordable housing everywhere, with the "least unaffordable" being at the fringe. This is the wrong way around to achieve increases in population at the centre.

Making the centre an affordable option requires that "property rights" and NIMBY rights at that location are not allowed to present an obstacle to affordability.

Vancouver and New York City do not have "housing booms", they have price bubbles. There is a difference. They COULD have affordable housing IF they really did have a "building boom" in affordable housing. But they don't. The only building that is going on, is small quantities of eye-wateringly expensive property.

Re "new versus old" housing prices; you need to disaggregate the land price component to be able to make meaningful comparisons between markets. It is mostly not so much a question of "demand" for old or new housing, but of "supply" of land, period. Location premiums are reflected in land prices, not the prices of structures. Land prices tend to slope up from fringe to centre, while structure prices tend to slope the other way due to age and depreciation. Therefore, when LAND prices are inflated, the relationship between the price of the lot and the price of the structure, changes. It is common in affordable markets, for older depreciated homes to cost a lot LESS than new fringe McMansions. But in unaffordable markets, the price is all about location, location, location. This eliminates the one-time favourite option of young first home buyers; of the older home needing a bit of work, but closer to CBD jobs than a fringe McMansion as well as being slightly CHEAPER. No longer, in land-price-inflated cities.

Lastly, mandates for large lots have a far lesser effect on housing prices, than urban fringe constraints. If you look at the Demographia surveys and compare long-term affordable cities with long-term unaffordable ones (leave out the volatile price ones like Vegas and the outliers like Detroit) you will find that new lots in the unaffordable cities are both SEVERAL TIMES SMALLER AND SEVERAL TIMES MORE EXPENSIVE in outright dollar terms, than lots in the affordable cities. The most stark contrasts will be observed in international evidence, such as comparing the size and price of new lots in Vancouver, Sydney, Auckland, London, LA, and Portland; with the size and price of new lots in any one of the 200 odd long-term affordable US cities. Then observe the differences in prices of "CBD" apartments, to see what I mean about the centre being affected by the inflation of land prices throughout the city, even though the planners intended to constrain the FRINGE.

New York is an interesting case in that its Manhattan core is almost unique - not every city can have global finance sucking bucketloads of "clean" (I mean carbon-free) money into its economy. I still suggest, though, that Glaeser's point about Manhattan's limits on height and numbers of new buildings, is not the whole story, and that there is some effect occurring, of prices throughout the whole metropolis being elevated "from the fringe inwards". There is also the factor of "site assembly" and the "power of holdouts" when one is trying to build MORE skyscrapers in a location like Manhattan. Glaeser stops short of advocating "eminent domain" so as to get the extra buildings he wants in Manhattan, and seems to avoid discussing these realities.

Real estate values and demand.

activists now have a new argument: that far from reducing property values, density increases them too much, by making the neighborhood too desirable.

This is anything but new.

Nonetheless, I had this discussion after a presentation I gave this week, wrt walkability and home values. I showed a demand chart for walkability and explained that when the demand is met walkable neighborhoods will be priced like any other. It is as simple as that.

Best,

D

Density and Property Values

As you describe, the relationship between density and property values is not simple nor linear. Some concepts you might discuss here are allowable density and market density. An increase in legally-permitted density will increase the value of a property (vacant or not) if its market density is higher than the permitted density. This happens a lot in gentrifying, redeveloping areas, particular those near a downtown or university that are conducive to high market densities.

Additionally, the cause and and effect are messy, but if anything, it is higher prices that increase density, not the other way around. Higher real estate prices can stimulate production (since much land is banked or at least a lag time). It also puts a premium on space for end users making it more financially desirable to buy less space (land and building). Both of these phenomena lead to increased density. I think this is where the argument comes in from the critics to whom you are referring. Demand is essentially created from some combination of economic base and natural/social/cultural amenties. Supply is a combination of physical/legal possibility. If demand is constant or growing, you can legally limit supply to increase prices and thereby increase market density. So, the argument isn't really that density increases prices, it is that legally-constrained land development increases prices which in constant or growing demand places leads to increased density. What is limiting additional density in expensive places like Silicon Valley are the NIMBYs and of course that there are so many built-out 70s low-density neighborhoods that can't be easily retrofitted.

I think this also explains why there are sparse places that are expensive, but few, if any, dense places that are cheap. For the most part, density came after the expensive part, in relative terms.

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