Density or Exclusion: the Perils of Local Zoning

In my last post, I suggested that while we like to think of housing as an investment, it’s really more like a crappy savings plan, potentially redeemed by the fact that you can live inside the piggy bank. Land can be a profitable speculative investment, but allowing land to appreciate and drag the cost of housing upward in real terms is fundamentally incompatible with housing being affordable.

Economists (including Adam Smith, David Ricardo, Thomas Paine, Henry George, Thomas Friedman, Joseph Stiglitz, and Matt Yglesias) have highlighted the negative impacts of allowing land owners to collect monopolistic “ground rents” but nobody seems to care. So now tens of trillions of dollars worth of real estate in the US is predicated on the idea that landowners get to retain these speculative gains. Barring a glorious Georgist Revolution, this is probably the arrangement we have to work within.

Build, Baby Build!

Luckily, in a city with increasing land values, where property owners get to keep all of those unearned financial gains, there’s an All American Capitalist Solution™ of sorts, which can potentially keep housing affordable, even when land is expensive: build more housing on less land. By building densely, high land costs can be shared across more households, reducing the overall impacts of expensive land, and allowing home buyers & renters to pay primarily for housing instead of land.

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What is Housing in the US?

Housing as an Investment

There’s a powerful cultural narrative in the US that says when you buy a home, you’re not only securing a place to live, you’re making an investment.

When I say “investment” I mean a thing that you can put some money into, and get more money out of later, in real inflation adjusted terms, net of the expenses associated with having the thing in the first place.  Houses — as in, physical structures that shelter human beings — are clearly not this kind of thing.  Anyone who has had to maintain an older home knows this. Roofs collapse. Pipes corrode. Walls need to be painted.  Like bicycles, laptops, and virtually all other durable goods, left to their own devices, houses are depreciating assets: they lose utilitarian value over time. However, we’ve done an incredibly good job of ignoring this as a society.  How do we fool ourselves?

We tend to ignore inflation. If you bought a house for $100,000 in the year 2000, and sold it in 2016 for $140,000, even if you didn’t put a single penny into maintenance, taxes, or insurance, you just barely broke even in terms of real purchasing power, if we’re talking about the house purely as an investment.

We tend to ignore the ongoing expenses of homeownership. In practice, you can’t avoid spending money on maintenance, taxes and insurance, but few homeowners record every property expense, and calculate whether they’ve come out ahead upon selling a home. Especially if the building is older “naturally occurring affordable housing”, maintenance costs can easily end up being a few percent of the building’s value each year. Property taxes and home insurance are also substantial expenses, typically less salient to homeowners than the purchase and sale prices of the home.

We can think of inflation and property expenses as cancelling out a fair chunk of any increase in the nominal value of a home. With 2% inflation, and spending 3% of the home’s value every year on maintenance, property taxes, and insurance, a home’s value needs to increase about 5% every year in nominal terms just to cover its own costs. In other words, if you bought a house for $100,000 in the year 2000, and sold it for $200,000 in 2016, you didn’t quite break even — again, if we’re looking at the house purely as an investment.

We tend to notice the accrual of home equity. Ideally, as you pay off a mortgage, the fraction of its value that is covered by your equity rather than the bank’s debt increases! Even if you just break even after accounting for inflation and ongoing expenses, you’ll hopefully have a larger chunk of change on hand to put into buying your next home. Continuing with the example purchase above (grabbing a mortgage calculator off the internet) if we assume a 20% ($20,000) down payment and an $80,000, 4%, 30 year fixed rate loan, after 16 years of payments, the remaining loan amount is about $49,000. So assuming you sell the home at the “break even” price, including expenses, of $200,000, you end up with $151,000 after paying off the loan. This is $131,000 more than you started with, which feels totally awesome!  You “invested” $20,000 and “earned” $131,000, more than a 650% increase!

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Overpopulation isn’t the Problem

Some folks in Boulder like to make analogies to exponential global population growth in discussions about our local land use decisions (see for example Frosty WoolridgeFrosty Woolridge again, Robert Baker, David Brandt, or the venerable Al Bartlett himself). These analogies are inappropriate in multiple ways.

First, steep declines in fertility worldwide have largely defused the population bomb. Second, even if the bomb were still ticking, the population changes we see in Boulder, and more generally the Front Range of Colorado, the US and the booming megacities of Asia aren’t about population growth per se, they’re about migration.  In the developing world, it’s migration from rural areas to cities. In the already rich countries, it’s mostly migration between cities, often from low-wage regions to areas with better jobs and higher quality of life. Or it would be anyway, if we actually let people build housing in those places.

How we choose to build and rebuild cities to accommodate these migrations and humanity’s peak population later this century will largely determine our ultimate impact on the Earth’s climate and biosphere, and the quality of life that humanity has access to.  Contrary to many “population bomb” narratives, the main problem here as it relates to climate isn’t the impact of large numbers of poor people, because small numbers of rich people are responsible for the overwhelming majority of current greenhouse gas emissions.  How we accommodate those wealthy, high emissions populations makes a big difference, both directly, and through the example it sets for the rapidly expanding global middle class.

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Is profit driven affordable housing possible?

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Last week at the Better Boulder Happy Hour (B2H2) we tried to talk about affordable housing.  The little nook at the Walnut Brewery was so packed that it was hard to even have a face-to-face conversation with folks, let alone do any kind of presentation that didn’t sound like an attempt at crowd control.  Which is good I guess… but not exactly what we’d planned.  I think a good chunk of the attendance was due to all the buzz generated by last Tuesday’s City Council meeting, and the talk of a citywide development moratorium.  Anyway, it was a learning experience.  We want these events to be informative, but also to get people talking to each other, and have it be more fun and social and network-building than a brown bag seminar or lecture that’s mostly going to appeal to the Usual Suspects, who are already engaged.  We need to get more “normal” people to show up and engage on these issues.

In any case, Betsey Martens, director of Boulder Housing Partners (the city’s housing authority) got up and said a few words to the assembled crowd.  She made a point which is in retrospect obvious, but that got me thinking anyway.  The costs of creating additional housing in Boulder (or anywhere, really) can be divided up into three categories:

  1. Hard development costs — the cost of actually building the housing.
  2. Soft development costs — e.g. the financing and permitting costs, carrying costs associated with regulatory delay, organizational overhead, etc.
  3. The cost of land.

She pointed out that you can do all the work you want to reduce hard and soft development costs — using standardized designs, prefabricated buildings, streamlined permitting for affordable housing — but ultimately those optimizations just nibble around the edges of affordability.  The real driver of housing costs in a desirable place is the cost of the land, which is pretty irreducible.  If you’ve got a funding stream (as we do here from our inclusionary housing policy), then you can buy up a bunch of land and create housing on it, but there’s still an opportunity cost to be had for using the land inefficiently — the same money might have created more affordable housing.

The obvious way to attack this problem is to spread the fixed land cost across more dwelling units.  You may not be able to reduce the price of the land, but you can share it with more people, decreasing per unit costs, and increasing density.  Naysayers are quick to point out that all the density in Manhattan and Tokyo has not made them cheap.  A common response is that they’re cheaper than they would have been if they hadn’t been more densely developed, but I’m not sure this is really the right answer (even if it’s true).

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A Carbon Price for Colorado

In May of 2013 I gave a talk at Clean Energy Action’s Global Warming Solutions Speaker Series in Boulder, on how we might structure a carbon pricing scheme in Colorado.  You can also download a PDF of the slides and watch an edited version of that presentation via YouTube:

What follows is a more structured written exploration of the same ideas.

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Kevin Anderson and Getting to 2°C

A good seminar by Kevin Anderson (former head of the Tyndall Center for Climate Research in the UK), exploring the conflicts between our stated goal of keeping global warming under 2°C, and the actual energy and emissions policies that the developed world adopts:

The same basic information, in a peer-reviewed format Beyond “Dangerous” Climate Change: Emissions Scenarios for a New World, in the Transactions of the Royal Society.  Also in a Nature Commentary (paywall).

The basic point he’s making is, the assumptions that are currently going into climate policy discussions are unrealistic, with respect to what’s required to meet a 2°C goal, even 50% of the time.  They require global emissions peaks in 2015 and eventually negative emissions, in order to be able to accommodate the 3-4% annual emissions declines that the economists (which he likes to call astrologers) say is compatible with continued economic growth.  But a global peak in 2015 is at this point outlandish from China or India or Brazil or South Africa’s point of view.  To give them even a tiny bit of breathing room, and treat our historical emissions even somewhat equitably, the developed world has to peak roughly now, and decline at more like 10% per year for decades, and the developing world has to follow our lead shortly thereafter (maybe 2025).

None of this is compatible with exploitation of any unconventional fuels (tar sands, shale gas, etc.).  And, he argues, it also isn’t likely to be compatible with reliance on market based instruments, given that we need to implement drastically non-marginal changes to the economy.