Sunday, August 24, 2014

What is zoning good for?

I've been extremely critical of zoning in my posts, so at one point, I had to ask myself: zoning, what is it good for? (no, the answer I've come up with isn't "absolutely nothing!")

This is a reflection on zoning from the ground up meant to provide for a coherent understanding of zoning, what it does and does not, what worthwhile objectives, if any, zoning might have that justify it.

First, what zoning isn't

Often, zoning is portrayed as something necessary to provide the adequation between the different needs of communities, places to live, places to work, places to provide goods and services, etc... So zoning supposedly could make sure that cities are better built. When pointing out how many zoned cities are anything but that, that they tend to be massively unbalanced cities with huge single-use zones, some will say that it's simply the planning authority being incompetent.

The reality, I think, is pretty obvious, zoning has nothing to do with trying to build an efficient city. I mean, you can try to do it, and if you go for strict zoning, you should definitely try to do it. But still, zoning is not a positive tool but a negative one. By that, I mean that it's not because you zone someplace for a certain type of development that it will happen.

Zoning isn't about telling what will be built in a place, it is about forbidding any different type of development from happening in that place. When you zone an area to be residential, you're not really saying "residential developments will occur here", maybe they will never come, what you're really saying is "all developments apart from residential developments are banned here".

Furthermore, in relation to economic efficiency and to cities' needs, since zoning can ever but ban uses, by default it would mean that zoning reduces efficiency and reduces a city's adequation of its many needs.

Why is that?

Banning inefficient uses of space has little to no effect as they tend to be weeded out naturally, bans are only ever meaningful against EFFICIENT uses.

Let's make an analogy, let's say you are a dictator and saw someone walking on his hands for a few steps on a sidewalk and you thought: "What an inefficient and uncomfortable way to get around!". Then you decide, "I know! I will ban people from walking on their hands on sidewalks, so no one does this inefficient, useless thing!". You pass a law forbidding people from walking on their hands on sidewalks, it's now illegal... but who is going to be affected by this? Everyone knows that walking on one's hands is a stupid way to get around, that's why no one does it.

So you don't need to ban it, people won't do it anyway, maybe a few people for fun will try it once in a blue moon. So how effective is the ban? Utterly ineffective, you'd waste more resources enforcing the ban than you'd save society by banning this inefficient practice.

But if you were an insane dictator, you saw the same thing and thought "If everyone walked on their hands, they wouldn't need to wear shoes and socks, and their feet wouldn't stink anymore, BRILLIANT!!!" and passed a law forcing everyone walking outside to walk on their hands, that law would change things a lot. It would make things a whole lot worse, because people's first desire of doing the smart thing and walking on their feet would be banned. But the resulting situation would be utterly inefficient and a terrible waste of time.

It's the same thing with zoning. For instance, if you have a transit station with vacant lots around ready for residential development, you don't really need to zone the area for high-density housing, because high-density housing generates a lot more revenue per square foot of land than low-density housing. So if there is a 600 square meter lot (6 000 square feet), that a multi-family developer could build 8 units on it for a total of 400 000$ in profit while a single-family developer could build a single McMansion on it for 150 000$ profit, the first developer will be willing to pay the land far more than the second one. If the land is sold for 200 000$ after bidding, the first developer could still buy it and make 200 000$ on the lot, while the latter would lose money if he bought it for his McMansion.

So in that case, zoning the area for high-density residential developments and banning low-density housing is absolutely meaningless. If you didn't zone anything and let people do whatever they wanted, the high-density housing would still win out. Zoning only has an impact if you do the opposite and ban high-density developments, then, deprived of the more efficient and profitable avenue for development, the land will likely be cheaper, cheap enough to allow the McMansion to be built at a profit.

Even in built-out areas, zoning has the effect of preventing efficient use of space and buildings. If some place lacks a corner store but has too many houses, it is possible that someone would buy a house and turn it into a corner store, if it is more efficient than just another house. But not if zoning bans it.

Zoning's achilles heel: hard to change to fit an evolving city

The biggest problem with zoning in terms of efficiency is that it doesn't allow for easy tweaking or changing urban fabric. Zoning sets in stone a decision made at one point in time, at that moment, it may have seemed the proper use of the land, and it may well have been. But mankind advances through trial and error (even the so-called "wisdom of the market" is merely trial and error and the application of the simple truth that "what cannot go on forever must eventually come to an end"), so when an error is made, or when context evolves, how easy is it for the mistake to be corrected?

Without zoning, or with lax zoning, it can be corrected very quickly. A promoter may smell an opportunity from an area marred with bankruptcies or low value and sweep in to provide for what he believes is better suited to the needs of the neighborhood, which will yield him a better profit margin. But zoning doesn't allow that, not without first modifying zoning, which is notoriously hard to do for many reasons, and if the zoning was made too recently, it may also run against the ego of the local planner. Many people in authority have trouble ever admitting they were wrong, changing zoning made less than 10 years ago, or even 20 years ago, is like telling the planner or the planning office that they screwed up. It doesn't help that people get ahead thanks to their reputation, publicly admitting they have been wrong, though a sign of humility and competence, may instead taint a professional reputation.

So even zoning that is well-made for economic efficiency faces problems in the future by making it much harder to change course to fit evolving situations. What might have been efficient when the zoning was made may no longer be efficient 20 years afterwards. One example of that is subway stations that were built in built-up areas subjected to zoning. Often, even 20, 30 years after the subway station has come, the area still remains 80-90+% the same as when the station was built, even if the station could support much higher density housing, or large-scale commercial developments or offices.

For instance, here is Station Sauvé, a subway station in Montréal, that opened in 1966, nearly 50 years ago, as seen from the sky:
Station Sauvé, seen from the sky
Rue Berri, right next to the station
The area is notably low density, with graveyards around the station and single-family houses that have stood for decades. Despite nearly 50 years of presence of the subway station. no high-rise residential housing has sprouted, no office building or commercial area has been built. Zoning keeps the area frozen, as if the subway station had never happened. Prior to the subway station, it may have been an efficient use of space as the area is pretty far from downtown, but nowadays, the area is severely under-used, and it's not the only station in that situation. Montréal's metro is one of the most used in North America per capita, but it has almost nothing to do with TOD, as little to no TOD has actually occurred, and all with the really dense streetcar suburbs it has been built in, and the strong downtown.

If zoning is maintained, it's clear to me that it needs to be dynamic, to change as the area changes, rather than static and set in stone until efforts are undertaken to change it. I've already written about how this could work in another article.

So, zoning only leads to inefficiency, is it completely useless?

If the only thing that mattered was economic efficiency, zoning would likely be completely useless, all that planning would actually involve would be providing public infrastructure to orient development. For instance, providing wider streets to attract businesses and offices alongside it, building transit lines to attract density around them, etc... People who would try to build any development attracting or generating a lot of trips in an area devoid of proper transport infrastructure for it would shoot themselves in the foot and so they wouldn't do that.

However, there are other things than economic efficiency in life. For one thing, there is the issue of externalities, impacts of an economic transaction or decision that affect people other than those directly involved in it. For instance, building an heavy industry factory near to housing is actually economically efficient for the owners of that factory and for employees as it reduces transport distances and increase the pool of people they can employ, but heavy industry brings along a lot of truck traffic, of noise and air pollution. So it impacts the entire residential area. In this case, what is economically efficient for the economic actors isn't actually what we would consider socially optimal.

We could also point out certain land uses which don't really contribute to economic activities, or at least not so much as to be profitable. For instance, parks, especially neighborhood parks, could rarely be profitable on their own, yet still serve to increase the quality of life of people. Even private parks in the past generally only survived through the support of rich private supporters who would subsidize them in a way, putting money in them with no expectation of direct returns on that money. However, such problems can be solved by governments merely using public money to buy land and run it. You don't need to zone land for parks if you simply allow government to buy land directly and hold it as a park.

So the main justification of zoning is the control of externalities. Some may think that even this is going too far, that the courts could serve to control externalities by allowing individuals to sue others for nuisance caused by their use of their own land. I personally am not convinced, especially as courts are extremely expensive to resort to, so leaving it to the courts would mean the rich could protect their quality of lives easily, the poor... would be forced to take it and stay silent. At least zoning has the advantage of protecting, theoretically, the poor and the rich in equal measure. Working through courts is also a reactive process, nuisance becomes visible in many cases only after it has occurred, forbidding someone from building a factory in a residential neighborhood is one thing, letting someone build that factory then shutting it down for "nuisance" is quite another.

The issue of "externalities" can also be quite large. The issue of air pollution, noise and smells is a very easy one, the nuisance is quite evident. But what about the person arguing that a taller building is blocking his access to the sun?
Equitable building in New York, the height of it and lack of setback prompted the city to adopt regulations to limit building height to protect access to the sun, source of the image
Or that a "pop-out" building is breaking uniformity and making the area uglier, at least as some people see it?
A "pop-out" townhouse some wish to ban in Washington DC
Or that a building is made from a façade of unusual material or colors, again making the area uglier according to many?
The so-called "ugliest house in Queens" has many neighbors seething with rage
In all these cases, certain zoning codes have regulated buildings to placate people opposed to such buildings, with height limits and control of materials on the façade of buildings.

Where do we draw the line? It's clear that more than just direct nuisance, zoning may be a way to tackle certain issues to preserve certain social objectives deemed worthy by the local community, even mere aesthetic objectives.

So, to sum up, zoning exists mainly to sacrifice economic efficiency for the sake of reducing externalities and to preserve certain social objectives seen as desirable by planning authorities and the public at large. Which places us in an ambiguous position, how much economic efficiency are you willing to sacrifice for social goals? Is it okay to limit height for instance in order to keep an uniform street front, with buildings all of the same height? Is it okay to keep buildings far from the streets to preserve an uniform building line?

Many of these objectives are also often locally desired, but not desired by society at large. For example, much of America's zoning in suburbs and small towns was designed with the goal of "keeping the ni**ers away". Much of residential zoning in North America is even now based on the goal of socio-economic segregation, to keep poor with poor, middle-class with middle-class, rich with rich, by keeping the housing types each group desires (or can afford) separated in their own neighborhoods.

The current status quo is often an extremist approach which throws economic efficiency out of the window and gives priority to local social objectives of maintaining "harmony", uniformity and socio-economic segregation, keeping neighborhoods "as is" and preventing change. It's clear that it doesn't work. If there is a proper balance between economic efficiency and externalities/social objectives, that balance can vary from person to person. One interesting approach is a mainly form-based zoning code, which doesn't control uses much but mandates certain building forms like height controls, setbacks and the like to preserve uniformity and avoid neighbors clashing over "ugly houses". This keeps some flexibility with regards to land use to be more economically efficient, an objective that is often ignored by traditional euclidean zoning.

Limiting land value: could it be worthwhile?

One of the impacts of zoning that restricts density and uses is to limit land value, at least until an area gets built out and a land shortage occurs. For instance, to return to the example of the condos versus the single-family house, if condo-builders might accept a 200 000 $ lot but the house-builder only tolerates a 100 000$ lot, if you can build both on every lot, the result may be that all lot owners will demand 200 000$ for their lots as it's what they see others like them get for their lots. The impact would be to price out houses from the area if lot owners are willing to sit on their property long enough to get it, or at least houses would have to be smaller on smaller lots or be more expensive. But if zoning intervened and banned condos, then as the amount of money people are willing to pay for lots come down, the land value would also fall.

So land value, absent shortage, is often dependent on how much profit can be expected from the development of it. The result is that on land where high-density development is allowed and viable, land value is likely to be very high as lot owners would price their land for this kind of development. It may actually cause problems when developing certain TODs. I've heard that this has been hurting Houston in its quest to build TOD around LRT stations, lot owners price their lots for high-rises, but much of the areas around LRT stations are currently parking wastelands with little to no urban fabric.
Bell station in Houston, 1 kilometer from downtown, surrounded by a wasteland of asphalt and parking
What Houston needs here is to fill up the area quickly, high-rises can wait, they could build thousands of housing units and hundreds of shops around their LRT lines all with low-rise buildings, or even mid-rise buildings, filling up the area, building an urban fabric much faster than they're doing now. Zoning here could perhaps be useful to keep land prices down and allow the area to build up much faster, with density limits being relaxed over time as the area gets built up.

One alternative to that is the land value tax proposal, where property taxes are reduced while the tax rate on land value is significantly increased, making speculation on land much more expensive and prodding land owners to sell their land much faster.

Conclusion

Though zoning has its uses to deal with externalities and to preserve certain social objectives, it is crucial to understand that, by definition, zoning hurts the efficiency of urban areas, notably by increasing distances to travel and making car use necessary rather than optional. Indeed, zoning can only effectively ban efficient uses of land, inefficient uses of land tend to be weeded out naturally because they don't tolerate high land value. So even if we accept some zoning, we have to be mindful of this effect and to consider whether the trade off is worth it.

Currently, we are going much too far with zoning, to avoid any friction, we gladly sacrifice economic efficiency totally and preserve areas in formaldehyde. We need to understand the costs of the way we are doing things and to revisit the way we regulate our cities from the ground up if we want to build better, more sustainable and economically dynamic cities.

3 comments:

  1. Regarding the advantages of zoning for reducing land value to a point to prevent speculative hoarding, another approach is to have land value taxation.

    One way to implement land value tax for a number of lots of similar value would be to tax them at a rate that depends on the number that are owned (so a very low rate if a small minority are owned and a much higher rate if a large majority are owned). If there are a sufficient number of lots, the market can figure out the value of the land at any given moment and all this value gets taxed away. (There would be fine points to work out like how to figure out which lots should be of similar value when no two are identical, and whether the tax rate for the first lots should increase immediately when later lots sell or gradually, but the system would react to market conditions and create the right incentives. Lots could be public parks until they sell).

    It would be hard to implement in Houston, because everything is owned already, but it is what I would do if I was starting a moon colony, probably replacing the revenue of more anti-urban taxes like income tax and sales tax, which discourage division of labour.

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    1. I entirely agree about land value taxation. A land value tax punishes speculation and forces owners to sell their unused or under-used land to developers quickly.

      I think it would be easier to implement than you think. A few cities in Pennsylvania have implemented it relatively quickly, prompting important renewal of their downtown areas. The thing is that most cities actually already appraise land value as part of appraising property value. At least I know that in Québec they do so, the appraisals are open to the public and I've consulted a few, all of which differentiated between the land value and the building value.

      In Pennsylvania, the cities that implemented LVT simply created two tax rates: one for the land value and another for the "improvement" value. In general, there is a single property tax that is applied both on land and building equally. In Pittsburgh, they made the tax on land nearly 6 times higher than the tax on improvement (building). I don't have the exact rates, but it means for instance that if the property tax rate was 1% before, it has been split into, say, a 3% tax on land value and a 0,5% on improvement.

      Another approach is a "street frontage" tax, where there is a levy proportional to how wide the lot is, which is useful to represent that the cost of providing public service like roads and sewers is proportional to distance. Again, that's a tax that ignores the actual value of the building and thus falls more on the shoulders of under-used lots than on those of high-value buildings.

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  2. Thank you for this detailed article about zoning. Your analogies made the otherwise complicated topic much easier to understand. I’ve picked up some good points through your post, and I’m sure that people who’ll read this will pick up a lot of new things to learn. Keep it up!

    Daniel Roberson @ MarkBentleyPA

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