Here is the second of my statements of principles for the New Year.
1. The Property-Rights Principle: Government should not regulate land uses except to prevent trespasses or nuisances.
People should be allowed to use their land in any way they see fit provided their use does not harm others (such as through air, water, or noise pollution) or violate contracts they have voluntarily agreed to. Any regulation beyond this “for the greater good” puts someone’s subjective notion of social values above individual rights.
Even if it could be proven that such regulations would benefit society more than they would harm individual property owners, government should not have this power because it invites abuse. If the social benefits are truly greater than the individual costs, then society should be willing to compensate the property owners.
Corollary 1a: The Fifth Amendment provision, “nor shall private property be taken for public use, without just compensation,” means private property shall not be taken for private use at all and shall be taken for public use, either by regulation or eminent domain, only with just compensation.
The Supreme Court, in a slippery slope of decisions beginning with Euclid and extending through Berman and Penn Central to Kelo, has changed its interpretation of the Fifth Amendment from the above to “private property may be taken for public use through regulation without compensation and for private use with compensation.” Notably, every one of those Supreme Court decisions relied in part on the government having written a land-use or economic development plan, suggesting that hiring a planner is all that is needed to overturn the Constitution. Would a plan make it okay to censor half the words in a newspaper, shut down half the houses of worship, or deny people the right to assemble in half the meetings they wanted?
Of these decisions, the worst was Penn-Central, which some writers believe to be one of the twelve worst Supreme Court decisions made since 1933. The Euclid decision was at least based on the idea that some uses of property would impose nuisances on others. Under Penn-Central, the government can impose any regulation it wants for any reason it wants so long as it leaves some value to the property. (Not much, apparently, as by the time the Supreme Court made its decision, the Penn-Central had gone bankrupt trying to make use of the property in question.)
In effect, the Penn-Central decision allowed government to declare open warfare on any private property owners it didn’t like. This justified, for example, plans that prevented rural landowners from developing their lands on the grounds that those lands were “open space” enjoyed by the urbanites who make up the majorities in most states.
Corollary 1b: In the absence of government regulation, private landowners will successfully deal with any or all land-use conflicts on their own.
The Coase Theorem–one of two ideas that won Ronald Coase a Nobel Prize in Economics–holds that, if there are no transaction costs, people will be able to make bargains over property rights that will lead to an efficient outcome regardless of the original allocation of rights. Instead of regulation, the role of government should be to insure that transaction costs are low so that such bargaining can take place.
One way developers have prevented conflicts is by putting covenants on the land they sell for various uses. Giving homeowner associations the right to readily change those covenants over time will allow land-uses to evolve as needs and tastes change. Allowing people who live in areas that don’t have covenants to form homeowner associations and write their own covenants (as is allowed in Houston) is one way to reduce those transaction costs.
2. The Housing Principle: Homeownership is valuable and government should not get in the way.
Around 65 percent of households around the world own their own homes, and in some countries the share is much higher. Numerous studies show that homeownership benefits the homeowners and their families in many ways.
The benefits to society are more questionable, which suggests that subsidies to homeownership are not necessary or justifiable. But the government should not get in the way of people who want to own their homes.
Corollary 2a: In the absence of government interference, the median price of housing in a metropolitan area should be about twice median family incomes in that area.
The 1970 census found that median home prices were about twice median family incomes in almost every state and urban area outside of Hawaii (which began regulating land uses in 1961). While prices may have been higher in some areas (such as San Francisco) than in others (such as Houston), those differences were mainly due to differences in median incomes and reflected the fact that homes in the higher-priced areas tended to be larger or more luxurious than in the lower-priced areas.
Corollary 2b: Most people prefer single-family homes.
Both surveys and preferences revealed by actual decisions repeatedly show that most people prefer to live in single-family homes. Claims by some planners that the nation is headed for a surplus of single-family homes and a shortage of multi-family housing are based on a misreading of the data.
Even if preferences do change, developers unhampered by land-use regulation can quickly respond to such changes. In the meantime, zoning for and/or subsidizing the construction of more multi-family housing is not a way to make housing “affordable.”
Corollary 2c: The housing affordability principle applies equally to retail, commercial, and industrial development.
The Bureau of the Census, Department of Housing and Urban Development, and other agencies have developed excellent data regarding housing prices. While data are not as extensive for most other land uses, land-use regulation has similar impacts on those uses.
One exception in at least some areas is multi-family housing. Some regions have deliberately sought to increase multi-family housing in place of single-family, either through zoning; fast-tracking of multi-family housing projects; or subsidies to developers of multi-family housing. Portland, for example, has set a target of reducing the share of households living in single-family homes from 65 percent to 41 percent. This may keep multi-family affordable, but it does little to meet the demand for the kind of housing most people prefer.
3. The Cost of Growth-Management Principle: Growth management–meaning restrictions on development in some areas in order to force development into other areas–makes the cost of housing and other development both less affordable and more volatile.
By effectively giving cities monopoly or oligopoly power over development, growth management makes development more expensive not just through artificial land shortages but by allowing cities to impose lengthy and uncertain permitting processes and high impact fees. The cities then often respond by imposing affordability mandates, which actually make most housing less affordable.
Impact fees and affordability mandates increase the cost of new housing which leads sellers of existing homes to raise their prices, thus raising the cost of all housing. Artificial land shortages created by urban-growth or urban-service boundaries steepen the supply curve for housing, meaning increased demand leads to rapidly increasing prices.
Most insidious are the lengthy and uncertain permitting processes that not only steepen the supply curve but put demand and supply cycles out of sync, so that builders cannot make housing available when demand increases but then have surplus housing on the market when demand decreases.
Corollary 3a: Value-to-income ratios in regions that write and enforce growth-management plans quickly rise above 3 and, if the plans remain in effect for several decades, can rise above 10.
There is not only a strong correlation between growth-management planning and price-to-income ratios, there is a strong correlation between when the growth-planning plans went into effect and price-to-income ratios started to climb. This can make homeownership unaffordable to all but a few residents of the area who do not already own homes.
Price-to-income ratios remain around 2 in many states and rural areas. Price-to-income ratios exceeding 3 are strong evidence of rural land-use regulation.
Corollary 3b: The increased volatility stemming from artificial land shortages and lengthy and uncertain permitting makes homeownership a liability rather than a benefit to families.
Volatility results when restrictions on home construction steepen the supply curve for new housing, meaning small increases in demand lead to large increases in home prices while small decreases in demand lead to large declines in prices. This volatility is exacerbated further by speculators who see rising prices and buy homes hoping to take advantage of further increases–but make no mistake, it is the land-use restrictions, not the speculators, that make prices volatile.
Many people have little say about when they move into or out of an area due to family, employment, or other needs. When this uncertainly is combined with highly volatile swings in housing prices, too many people end up losing money on their homes.
One measure of the liability of homeownership in regulated areas is unemployment. In unregulated areas, unemployment tends to be lower in neighborhoods with high home-ownership rates. In regulated areas, unemployment tends to be higher in neighborhoods with high home-ownership rates because it is too costly to move to a job in another region.
Corollary 3c: Compared to the high costs of growth management, the benefits of such planning are negligible.
The benefits claimed for growth management are often actually negative side-effects. For example, some cities claim that growth management has attracted a “creative class” of high-income workers. In fact, by making housing unaffordable, what it has often done instead is force low-income families to leave the area. Planners also claim that growth management relieves congestion by reducing per-capita driving, when in fact congestion is worsened because large increases in density are needed to obtain small declines in per-capita driving.
4. The Housing Affordability Principle: The key to keeping housing affordable is to have a large reserve of relatively unregulated land in the region.
Zoning of cities alone has a measurable but small effect on housing affordability and development costs. For example, housing in Dallas (which has zoning) costs about 5 percent more, relative to incomes, than housing in Houston (which has no zoning).
But city zoning alone does not significantly impact affordability or increase volatility so long as developers can go outside the city to find unregulated land. Though Dallas may zone, counties around Dallas do not; so Dallas keeps regulation minimal so as not to drive developers outside the city.
In such cases, the zoning that exists tends to be responsive to market demand. Developers built for the market and cities zone to keep neighborhoods safe from intrusions of unwanted uses. By contrast, with growth management, cities do not hesitate to impose unwanted uses (such as higher-density housing) on neighborhoods in order to accommodate population growth without allowing more rural development.
Corollary 4a: Growth management results when cities gain control of rural lands.
Several states have passed laws mandating growth-management planning, but such laws are not the only way growth-management may take place. If cities can gain control of rural areas, they are likely to impose growth management on those areas even without a state law.
Corollary 4b: States with the most affordable housing do not require, and in some cases do not allow counties to zone.
Texas is one state that does not allow counties to zone, and it has some of the most affordable housing in the nation despite having some of the fastest-growing metropolitan areas. States that want affordable housing should not only repeal growth-management laws, they should either repeal laws allowing counties to zone or pass laws allowing landowners to opt out of zoning if they instead write protective covenants for new developments or existing neighborhoods.