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Zoning Laws Transfer Wealth in the Wrong Direction

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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Since the huge crime drop that began in the 1990s, cities have become a more attractive place for young and high-income people to live. At the same time, the shift of the economy toward knowledge-based industries has made cities more important to the economy, since ideas and workers can easily move from company to company within industrial clusters. These factors, combined with steadily increasing U.S. population, have increased demand for urban real estate. But supply hasn’t kept up. Zoning laws and other restrictions make it hard for residential developers to build more densely in cities and the immediate suburbs.

When demand increases and supply doesn’t keep up, price tends to rise. Thus, it is no surprise that rent has been going up faster than the overall cost of living in the U.S. Here is a graph of the rent urban consumers in the U.S. pay on their primary residence, divided by the overall consumer price index:

As you can see, rent has outpaced other costs for the past three years. In cities such as San Francisco, where demand is especially high and development restrictions particularly severe, housing has eclipsed almost every other economic issue.

But the politics of housing is fraught. Easing development restrictions -- the preferred solution of a growing number of thinkers calling themselves “market urbanists” -- isn’t a straightforward populist position. Many of the homeowners who benefit from zoning restrictions are not rich, but middle class and upper-middle class. Even after the housing price collapse of 2008, many still view owning a home as the essential path to prosperity -- the classic American Dream.

Development restrictions thus prop up the wealth of many middle- and upper-middle-class households. Steve Randy Waldman, who blogs at Interfluidity, explains that these restrictions themselves form a kind of wealth:

The customary property rights surrounding homeownership...include much more than the use of a square of earth and whatever is built on it. Existing homeowners bought into particular neighborhoods in large part because of their “character”, which includes nice-sounding things like walkability or “charm”, as well as not-so-nice-sounding things like access to exclusionary education...“Zoning reform” is…an expropriation of those customary rights. It amounts to diminishing residents’ ability to preserve or control the evolution of their neighborhoods.

Waldman is right about the economic facts. The value of my house depends not just on the house and the land, but on who and how many people live nearby. If I’m upper-middle class and a large apartment complex filled with working-class people goes up at the end of the street, my property value will go down. The neighborhood will be more crowded, the schools will have more working-class kids, crime may increase. Perceptions about the quality of life in my neighborhood will diminish, driving down the price of my house.

But when it comes to the ethics of the matter, I’m not sure Waldman has it right. The wealth homeowners derive from their quiet, low-density neighborhoods doesn’t just materialize out of thin air. In a way, that wealth is taken from those who are excluded from the neighborhood. Working-class Americans, shut out from neighborhoods by development restrictions, are forced to live in worse neighborhoods as a result -- decreasing their own wealth. If expensive neighborhoods are also close to the city center, it means poorer residents are forced to commute for longer times -- a punishing penalty that costs money, stress and time.

Income Inequality

A new study from Michael Lens and Paavo Monkkonen of the University of California-Los Angeles provides confirmation. They find that government restrictions are causing income segregation in U.S. cities. In particular, the wealthy are being separated from the upper-middle class, who in turn are being isolated from the working class. The more zoning a city has, the more segregated it is.

The study also sheds light on which kinds of government policies are the most pernicious. Somewhat surprisingly, “open space” restrictions, which set aside land that can’t be built on, turn out not to be that important. Instead, the most effective way of restricting housing supply is to simply require more levels of approval for new development. The authors generally conclude that local governments are of critical importance in determining housing segregation: When governments try to restrict overall population, it’s the working class and poor who get pushed out, but when they work to increase housing supply and boost growth, income segregation is lower.

I believe that our obligation to provide economic opportunity for our nation’s working class outweighs the implicit promise that our upper-middle class thought they were getting when they bought houses in quiet, low-density neighborhoods. Yes, it will reduce existing home values somewhat if city governments encourage more intensive land use and denser development. But the benefit to the rest of the nation, especially to the economically vulnerable, will be worth it.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net