The Economics of Land Markets
Edward J. Dodson
[1998]
SPECULATION, DEVELOPMENT AND HOUSING AFFORDABILITY
Every study prepared and commission report issued on the decline of
housing affordability identifies regulation (e.g., low density zoning)
and other delays in obtaining development permits as primary culprits.
What we see across the country is widespread concern, particularly in
suburban and rural communities, over the potential problems of
environmental degradation, worsened traffic congestion, increased
property taxes for schools and the cost of infrastructure expansion,
and loss of open space.
Responding to citizen concerns and sometimes having development
proposals rejected because of them does add to the cost of housing
development. But, what must be understood is that even should such "anti-growth"
resistance be substantially reduced, housing will not become more
affordable without other very specific public policy changes. A brief
examination of how communities develop reveals why even the potential
for changes in regulation will exacerbate rather than help make
housing more affordable.
The earliest suburban communities spread out from the rail lines
linking those communities with the urban center. As public
infrastructure was extended beyond the cities, farmland became
increasingly more developable for residential, commercial or
industrial use. Developers and land speculators bought out many
farmers (who often took their profit in increased land values to
purchase much larger farms in more distant locations). The developers
obtained approval for large subdivisions of homes, and the speculators
waited for the price of land to rise ever higher.
Beginning in the 1950s, state and Federal subsidies for highway
programs expanded accessibility into areas not served by "mass
transit." New communities sprang up seemingly overnight; and,
because many speculators continued to hold their sites off the market,
development was forced to more and more distant locations absorbing
farmland and open space. During the 1950s and 1960s, the cost of
suburban land for housing, although increasing, was still relatively
inexpensive; and, people wanted space between themselves and their
neighbors, a luxury few enjoyed as city dwellers. As a result, minimum
acreage or lot size zoning was adopted to protect the character of
suburban communities. Ironically, a secondary reason for this type of
zoning was to reduce the potential for overdevelopment. However, as
vacant land disappeared (or was being held for speculation), the price
of land was driven up considerably and developers were forced to ever
more distant farming areas to find land on which they could build
houses people could afford.
The tendency for land to increase in value does have limits.
Widespread unemployment and recession cause land values to fall like a
house of cards hit by a stiff wind. Even when economic conditions are
favorable, land prices are subject to downward pressures that include
the household income of potential homebuyers, the market rate of
interest charged by lending institutions for mortgage loans, the costs
associated with actual construction of housing units, and the impact
of public policies such as zoning and taxation. When a developer makes
an offer to a farmer, speculator or other landowner for a site, zoning
and other development costs are important components in determining
the maximum price that can be paid while still looking forward to a
reasonable profit. If land prices are rising and the present owner is
under little financial pressure to sell, the developer may be forced
to pay much more than the development plan can absorb.
One way to change the financials is to apply for a zoning variance
that would permit a more intensive use of the site (i.e., higher
density or high-rise development). When such variances are approved,
however, all other landowners will thereafter capitalize this
potential for higher density development into their asking prices.
Another public policy with direct and normally negative impact on
housing affordability is the property tax. Most communities do a very
poor job of assessing undeveloped land to reflect increases in market
value. Housing, on the other hand, is heavily taxed, taking
homeownership out of the reach of many families who might afford a
basic mortgage payment but cannot afford the extra $100 to $300 a
month in property taxes. If the annual cost to landowners of holding
land equated to its annual increase in value, far less land would be
held for speculation and the price of land would stabilize and
gradually decline. With more landowners offering their land for
development, the costs associated with site improvement (i.e.,
bringing in streets, utilities, sewer and water lines, etc.) would be
absorbed by landowners in the form of lower prices. Herein lies the
key to housing affordability.
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