Analyst Phil Hayward of Wellington, New Zealand provides a provocative perspective on why urban intensification (densification in the urban cores) is incapable of compensating for the huge house price increases attributable to urban containment boundaries. Writing on Making New Zealand for Urban Planning that Works, he notes that “planners and advocates and politicians and even economists, are making an assumption that urban intensification is a potential route to housing affordability.”
The assumption involves changing zoning so that “X number of housing units” can be constructed in existing urban locations “instead of X number of housing units” on pristine ex-urban land. The latter is assumed to be an evil to be avoided, and that the former is a perfect substitute in terms of “sufficient housing supply to enable affordability.
Hayward continues:
Common sense tells us that there are quite a few potential problems with this assumption. For example, NIMBYs will obstruct the intensification and reduce the rate of housing supply so the policy will fail. Therefore, what we need is the removal of NIMBY rights of protest and appeal, and the policy will then work.
Hayward’s analysis suggests that:
And generally, the data runs in that direction - not only does intensification within a regulatory boundary "not restore affordability", it seems that the more density you “allow”, the higher your average housing unit price gets. The correlation runs the opposite way to the assumption.
Indeed, “Paul Cheshire and his colleagues at the London School of Economics believe this is due to the ‘bidding war’ at the margins of each income-level cohort of society, for ‘slightly more space,’" according to Hayward. “But when a market is allowing people to consume "as much space as they want", which has only really occurred in the automobile era, the “bidding war” effect is absent.”
Boston and Atlanta provide powerful examples.
…(The) difference is that Boston has de facto growth boundaries / green belts while Atlanta does not. The ironic implication is that fringe growth containment pushes median multiples up less, when there are severe restrictions against density – otherwise Boston should be the most expensive city in the data, not Hong Kong. The evidence suggests that this is because there is a total absence of “bidding war for slightly more space” - everyone has "more than they want" already. The median multiple of 6 rather than 3, represents the effect of demand for "living in Boston", period, and they simply don't provide enough houses to keep the median multiple down like Atlanta does (in the face of staggering population growth in Atlanta, by the way).
Perhaps the most important conclusion is that “there is no evidence that any city anywhere in the world has ‘freed up intensification processes’ enough to result in floor space being built faster than site values inflate.
The bottom line is a mistaken impression that high density housing “will remain available as a substitutable option to suburban family housing even if the latter is forced up in price deliberately by central planner's policies. The lesson that needs to be learned urgently, is that this is impossible; the two things are inter-related.”
But when a market is allowing people to consume "as much space as they want", which has only really occurred in the automobile era, the “bidding war” effect is absent. The evidence supports this, with most median-multiple-3 cities being from 600 to 2500 people per square km. Another interesting case study would be Liverpool; it lost approximately 50% of its population from the 1950's to the 2000's (similar to Detroit) - yet its median multiple is over 7. And its density is still 4,400 per square km (presumably it would have been double this, or more, in 1950). This is prima facie evidence that 4,400 people per square km within a growth boundary, are still going to be dissatisfied with their living space, to the extent that they will be engaging in an unwitting bidding war against each other for a little more of it. Of course under these conditions, the lowest socio-economic cohort is denied all options other than crowding tighter and tighter in rented accommodation or even illegal “living space”. In UK cities, rental advertisements include options like a ¼ share in 2 rooms, with communal access to kitchen and bathroom shared by even more tenants in further rooms. In median-multiple-3 housing cities, the same real rent would apply to a whole house of reasonable size and standard.
There might be other policy mixes by which housing supply within a growth boundary could be made the means of keeping housing affordable, but publicly and politically, the debate is nowhere near tackling the complexities involved.
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The "development potential" effect on prices and affordability
Another NZ economist has given me an alternative way of describing how upzoning worsens affordability, contrary to assumptions. The "bidding war for more space" effect suggested above is especially pronounced in cities where the density is already too high for normal human choices. But why do cities with lower density experience house price inflation, undersupply, increased speculation, and reduced opportunity of home ownership, consequent on enacting fringe containment policies and then upzoning? The housing stock mostly consisting already of "oversized" properties (due to large-lot mandates), there cannot be a "bidding war for more space" effect.
Site values are, however, elastic to allowed density under these conditions, and combined with other factors such as the costs of redevelopment, the price per-unit of redeveloped, higher-intensity housing units is seldom significantly lower than the lower-density units that they replace. For example, in Auckland, NZ, typical suburban houses on a sub-dividable lot have inflated in price to $700,000 plus. Redevelopment with 2, 3 or 4 units in place of the original single family home, seldom results in per-unit prices much below $600,000. The extent to which site value inflates, represents a kind of "constant dollar value" economic rent "per unit" able to be "extracted" from buyers in the face of a prevalent shortage.
Because developers have to bid for sites, the inflated value representing "development potential" is mostly incorporated in the payment "up front" to the property vendor - and the developer has to carry much higher costs than historically normal, through the term of the development, and still sell finished units at prices that are stretching potential buyers ability to pay. Developer margins are reduced, risk increased, and industry attrition through bankruptcy is increased. At the same time, property owner / investor incentives are in favour of "holding in anticipation of still greater capital gains".
Decades of experience in UK cities, shows that planners assumed "housing supply" through upzoning "creating potential" for redevelopment, is always far too optimistic. Plan after Plan that upzones more and more aggressively "to make sure this time", merely results in ever-more chronic shortfalls. But meanwhile, even though relatively few properties are actually redeveloped, the prices at which they sell, incorporating "development potential", set the market price expectations for all similar properties included in the upzoning. The number of properties thus inflated in price, always greatly exceeds the number of new, smaller-size housing units being brought to market at a lower price (and not that much lower anyway). Ergo, the upzoning caused the average or median property value to rise significantly, and affordability to decline.
Therefore, NIMBYism preventing upzoning, is not something that should be blamed for "worsening unaffordability". Upzoning actually makes things worse, when the underlying cause is the growth boundary or some proxy for it, which converts the entire urban land market into a "rent extractive" one, from a "differential" one (differentials being premiums over and above rural land prices, due to transport cost savings relative to more central urban location and amenities).