Selling Smart Growth

When choosing where to live, households often make trade-offs between housing and transportation costs: urban fringe areas have cheaper housing but more expensive transport, and urban neighborhoods have cheaper transport and more expansive housing. Do experts provide comprehensive information on these trade-offs? Apparently not. Although there is growing discussion of the relative merits of urban and suburban home locations, they often overlook significant benefits and perpetuate myths about the disadvantages of city living.

My newest report, Selling Smart Growth [pdf], explores these issues. It identifies various direct benefits to residents, businesses and local governments if households, by choosing to live in a Smart Growth neighborhood, can reduce their transportation expenses and spend more on housing.

This is a timely issue. Surveys indicate that a growing portion of consumers value urban features such as accessibility and multi-modalism, but face various obstacles that discourage them from choosing Smart Growth locations, including myths about the dangers of urban living, and policies that favor sprawl over urban housing. Providing more information about Smart Growth benefits can help some, possibly many, households to choose home locations that best serve their long-term needs, and leverages additional indirect benefits to businesses, local communities and the environment.

Household Benefits

A basic principle of urban economics is that location decisions often involve trade-offs between housing and transportation costs. Many studies have examined these trade-offs, and new tools can help apply this information in a particular situation. For example, the Housing and Transportation (H+T) Affordability Index integrates housing price and transport expenditure data to provide neighborhood level information on housing and transport costs.

To meet basic mobility needs, sprawled areas require that most adults own a personal automobile and drive high annual miles, which typically costs $6,000 or more annually (at $3.50 per gallon a 20 miles-per-gallon car driven 15,000 miles costs $2,625 annually). Inner suburbs provide better, and Transit Oriented Development (TOD) provides the best, accessibility and mobility options, allowing households to reduce vehicle ownership and use, and associated costs. In a typical situation, a household can choose between an urban fringe house that requires spending 25 percent of income on housing and 20 percent on transportation (two cars); an inner suburb that requires spending 33 percent on housing and 12 percent on transport (one car); or a Transit-Oriented Development (TOD) that requires spending 40 percent on housing and 5 percent on transport (car-free) for a TOD house. Each option has the same total housing and transport costs (45 percent of budget), so in the short-run they seem financially equal.

Comparing Typical Housing Expenditures

Conventional real estate sales practices often highlight that households can obtain better value, they pay less per square foot, with urban fringe housing, and common banking practices, which only consider housing costs and ignore transport costs, tend to favor the urban fringe house, described as "drive till you qualify."

Real estate sales analyses often compare costs per square foot, as illustrated in the following figure, which generally implies that sprawled, automobile-dependent areas provide the best value, although this ignores other economic factors, such as transport costs. Households can often save overall by choosing a house in an accessible, multi-modal neighborhood due to their transport cost savings.

Comparing Price Per Square Foot By Urban Area

However, since housing tends to appreciate and vehicles rapidly depreciate in value, their long-term household wealth impacts differ significantly. Accounting for other costs (transportation, maintenance, insurance, property taxes and utilities), a typical $60,000-annual-income household can afford $10,783 in annual mortgage payments in an urban fringe location with high transport costs. With a $100,000 down payment this can purchase a $251,975 house. After a decade the household will have paid off $83,263 in loan principle. If the same household chooses a Transit Oriented Development (TOD) with lower transport costs, it can afford $19,044 annual mortgage payments. With the same down payment this can purchase a $368,405 house that in a decade pays $147,053 toward the loan principle, building $63,789 more equity than the urban fringe location.

Housing also builds equity by appreciating in value. Current demographic and economic trends are causing real estate values to appreciate must faster in city centers than in suburbs, as illustrated below.

The figure below illustrates the combined effects of increased urban housing investment and appreciation on long-term household wealth for the housing options described in Table 2, assuming that property values appreciate 1 percent annually at the urban fringe, 2 percent annually in inner suburbs, and 3 percent annually in TODs. The dashed lines show house values and the dark lines show net equity (house value minus mortgage debt). Starting with the same total budget and down payment, after 25 years the TOD house accrues $771,358 in equity, 2.4 times the $323,141 equity of the urban fringe house.

House Value and Equity Appreciation

The following figure highlights differences in equity between the urban fringe and TOD houses. Due to its higher initial value and greater land value appreciation, after one decade the TOD home gains an additional $63,789 in equity, after 25 years it gains an additional $448,217 in value, and if, starting at age 25, a household consistently chooses more accessible homes with lower transport costs and invests the savings in real estate, they can retire with approximately $1.8 million in equity at age 65, approximately one million dollars more than the urban fringe house. 

Urban Fringe Versus TOD Equity Appreciation

Living in a more accessible and multi-modal neighborhood provides other direct household benefits. It reduces the travel time residents must spend accessing services such as shops, schools and parks, and by providing convenient alternatives to driving, it gives non-drivers more independent mobility which reduces drivers’ chauffeuring burdens. This helps residents age in place, that is, continue living in their communities as they grow older and become limited in their ability to drive. Smart Growth is particularly beneficial to physically and economically disadvantaged people. It tends to increase their integration (they are less geographically isolated), economic opportunity (they have better access to education, employment and services), and Smart Growth also tends to significantly increase traffic safety and improve public fitness and health, due to the combination of reduced driving, lower traffic speeds, improved travel options for higher-risk drivers (youths, seniors, and people impaired by alcohol or drugs), and more walking and cycling.

This is not to ignore other factors that households should consider when choosing home locations. Some people are poorly suited to urban living because they own large pets, are anti-social, or uncomfortable with cultural diversity. However, some commonly-cited objections are either based on inaccurate information or are self-fulfilling prophecies. For example, many people believe that cities are dangerous. Although some urban areas (particularly commercial districts and areas with concentred poverty) have higher crime rates, a law-abiding person’s risk of being a crime victim are comparable in cities, suburbs and rural areas. Some crimes, such as vehicle assaults, thefts and vandalism, tend to increase with vehicle ownership, and Smart Growth neighborhood design features that increase passive surveillance tend to reduce crime rates. Cities are safer than suburbs overall, considering both crime and traffic risks. Similarly, some impoverished neighborhood schools perform poorly, but other urban schools perform well, and such problems tend to decline as urban neighborhoods become more diverse. Safety and school quality concerns should rationally affect which urban neighborhoods a household should consider living in, but do not really justify choosing sprawl over more compact neighborhoods. The table below lists various advantages and disadvantages of living in urban neighborhoods that households should consider when making location decisions.

Advantages and Disadvantages of Living in Compact Urban Neighborhoods

Smart Growth has various advantages and disadvantages to consider when choosing home locations.

Businesses

Smart Growth benefits many businesses and industries. Real estate agents earn higher commissions and developers can earn greater profits if their customers spend less on transportation and more on housing. In this example, the $368,405 TOD house provides a 46 percent larger commission than the $251,975 urban fringe house. Developer profits also tend to increase with the higher housing demand and prices. This does not mean that real estate agents or developers should expect all households to choose Smart Growth neighborhood homes even if they truly prefer urban fringe locations, but they have good reasons to encourage home buyers to consider housing in neighborhoods with lower transportation costs and to explain the various benefits they can enjoy, as previously described.

[pdf] increase regional economic activity in several ways. More compact and accessible development increases the number of jobs available to potential workers and the pool of workers available to businesses; increases total jobs and property values in an area, reduces transportation costs, increases infrastructure efficiencies and reduces parking facility costs, and provides agglomeration efficiencies. Residents of compact, walkable urban neighborhoods tend to shop locally, increasing local business activity and helping to create more attractive commercial centers.

As a result, real estate and development industries, business organizations, and economic development agencies all have good reasons to encourage households to choose homes located in more accessible, multi-modal neighborhoods where they can spend less of their budget on transportation and more on housing, and support Smart Growth development policies that help create such neighborhoods.

Local Government

Smart Growth can provide fiscal benefits to municipal and regional governments by reducing costs and increasing revenues. Smart Growth development typically reduces public infrastructure construction costs by a third and ongoing public services costs by 10 percent.

If households spend less on transport and use the savings to purchase more valuable homes, they pay more total property taxes, as illustrated below.

Annual Property Tax Payments

Summary of Direct Smart Growth Benefits

The table below summarizes various Smart Growth benefits identified in this report. Our challenge is to communicate these benefits to appropriate audiences using concepts and terms that they understand.

Smart Growth provides various benefits to households, businesses, and local governments.

Critiquing and Improving Information Resources

Many professional and advocacy organizations promote Smart Growth, but they primarily consider a public policy perspective, and tend to focus on a limited set of impacts; few provide information oriented toward consumers making household location decisions. For example, the About Smart Growth and Smart Growth Online websites describe how Smart Growth can provide infrastructure and transportation resource savings, and livability benefits, but there is no information oriented toward consumers making location decisions concerning the increased wealth generation of shifting household expenditures from transport to housing, economic resilience from having more affordable transport options, or traffic safety benefits.

Some popular real estate advisors recognize some benefits of urban living, such as improved neighborhood walkability and reduced commute travel time, but ignored many of the benefits discussed in this report. For example, a recent MoneySense article, "City or Suburbs: Where Can You Afford to Live?" compared advantages and disadvantages of urban and suburban living, including shorter and cheaper commutes in urban areas, and cheaper homes and larger yards in suburban areas, but overlooked most benefits of choosing an urban location identified in this report, such as increased household wealth generation and resilience, increased safety and health, and improved mobility for non-drivers.

To discuss Smart Growth benefits it is necessary to overcome some myths. Some people assume that Smart Growth requires all households to be carfree and live in high-rise apartments, with no suburban development. In fact, in most cities (those that are not geographically constrained), most benefits can be achieved with moderate densities (10-20 residents per acre), with most households living in a single-family home with a car. Smart Growth is not anti-suburb: compact suburbs with good walking and cycling conditions, good bus services, diverse housing types, and an attractive downtown or commercial street, can achieve most Smart Growth benefits.

Many people assume that urban living is dangerous, based on maps which show crimes concentrated in urban centers. They are generally wrong. Although crimes tend to concentrate in commercial centers (where commercial crimes occur), entertainment districts, and high poverty neighborhoods, urban residents tend to be safer overall, considering both homicide and automobile crash risks.

Conclusions

By creating more compact and accessible communities where residents drive less and rely on more affordable modes, Smart Growth can provide direct benefits to households, businesses, and local governments. These benefits are often overlooked or undervalued. As a result, advocates can increase support for Smart Growth by providing better information about these benefits.

Households can generate significant long-term wealth by shifting their spending from transportation to housing. In a typical situation, a sprawled, automobile-dependent urban fringe location requires the household to spend least 20 percent of its budget on transport, but if the same household locates in a central, multi-modal urban neighborhood, it can spend 5 percent or less of its budget on transport. Using standard investment guidelines that households devote no more than 45 percent of their total budgets on transport and housing combined, a $60,000 annual income household can afford a $251,975 urban fringe home or a $368,405 TOD home. The TOD home accrues an additional $63,789 equity (wealth) after ten years, $448,217 after 25 years, and $1,016,561after 40 years, indicating that an average-income household can retire with an extra million dollars simply by choosing homes with low transport costs and spending the savings on real estate or other investments with 3 percent annual returns.

Smart Growth neighborhoods provide other benefits to households, businesses and local governments, including reduced commuting time, increased economic resilience and opportunity, improved mobility for non-drivers which reduces drivers’ chauffeuring burdens, increased safety and fitness, increased local business profits and employment, infrastructure cost savings, and increased tax revenues.

Many current real estate marketing practices tend to favor sprawl over Smart Growth. Houses are often compared by cost per square foot; measured that way, urban fringe homes often seem better investments than TOD, since they offer more space per dollar, although they actually build less equity over the long run. Similarly, simplistic crime analysis implies that urban areas are dangerous, although cities actually tend to be safer and healthier overall. More comprehensive and accurate information can encourage households to choose more accessible, multi-modal neighborhood.

Smart Growth is a great product. Our challenge is to better answer the question that many stakeholders ask, "What’s in it for me?"