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Density Is How the Working Poor Outbid the Rich for Urban Land

multifamily housing

The great failing of modern urban planning is the failure to allow the Market to determine the level of Density across cities. Let me explain.

Imagine you are trying to sell a property you own in a desirable inner suburban neighborhood in your town. The lot is 4,000 square feet and hosts an old 4,000 square-foot home. There is incredible demand for housing in this area; perhaps the schools are good, or the amenities are nice, or the neighborhood sits adjacent to a major jobs center, meaning that residents can walk to work. I’ll leave the reasons to you. Who do you sell it to?

You have at least two options: First, you could sell it to a wealthy individual, who would use the entire property as his home. He is willing to pay the market rate for single-family homes like this, which in this case is $300,000. Under current financing, he would likely have a monthly mortgage payment in the ballpark of $1,300. Second, you could sell it to a developer who intends to subdivide the house into four 1,000 square foot one-bedroom apartments, renting each of them at a market rate of $500 to service workers who commute to downtown. After factoring in expenses, her annual net operating income would be around $20,160. Assuming a multifamily cap rate of 6.0.%, this means that she could pay up to $336,000 for your property.

Based on this analysis, who do you sell it to? The answer is obvious: you will sell it to the multifamily developer who will subdivide and rent out the house, not necessarily because you’re a bleeding heart urbanist, but in order to maximize your earnings. As rents in the area rise, the pressure to sell to a buyer who would densify the property will only grow. The Prospective Mansion Buyer simply cannot compete with the service workers under these very typical market conditions. How cool is that?

This may sound like an oversimplification. As with all economic examples, it is. But at the end of the day, these very simple market dynamics play an essential role in guiding the spatial patterns of our cities. When demand for housing grows in urban neighborhoods, low-density uses will convert into higher density uses. This might often start smallhomeowners converting underutilized floorspace in attics and basements into additional housing units to earn incomeand under high demand circumstances might escalatetearing down single-family homes and constructing apartment buildings.

When my great grandmother, a grocery store clerk and single mother, migrated to Louisville from a small town in Kentucky in the 1940s, they shared a subdivided mansion in Old Louisville with multiple other working-class families. The opposite also happens occasionally: when demand for housing falls, high density uses may be converted into low-density uses, or demolished altogether. When Louisville’s population collapsed in the 1970s and 80s, the glorified tenement my grandmother grew up in was converted back into a mansion owing to lack of demand.

Thus, density is the key to ensuring that the incredible opportunity that cities offer is available to everyone. It’s the only sustainable way that the working poor can outbid the rich for urban land, and it’s naturally facilitated by markets under normal conditions. Density is what makes a room in an old mansion affordable to a grocery store clerk struggling to provide for her children. Density is what enables the apartment developer discussed above to outbid the prospective mansion developer for land, because in a sense what she is actually doing is pulling the resources of those working poor families.

Density controls, whether the result of zoning, land-use regulations, or subdivision regulations, break this system, effectively prohibiting the working poor from outbidding the rich for urban land. These policies come in a variety of forms: minimum lot sizes, single-family zoning, parking requirements, minimum unit sizes, etc. But they all require some minimum level of housing consumption—purportedly for the residents own good, in many cases—which means that residents who cannot afford to consume this minimum threshold of urban land cannot consume housing in this neighborhood at all.

Let’s return to our above example. If your property was zoned for single-family housing, the developer who intended to subdivide wouldn’t even bother to bid and the structure would remain a single-family home, despite high market demand. The four prospective tenants would have to look elsewhere, bidding up other scarce units and suffering longer than desirable commutes.

Or imagine if the city allowed subdivisions, but restricted apartments to 1,500 square feet. In this case, the developer could only divide the house into two units. Rents normally rise with floorspace and additional bedrooms, but they rarely double in price. If the developer could only earn $800 per unit on the market, she could only justify spending $268,000 on the project, meaning she would be outbid by the prospective mansion buyer. If she could squeeze out $900 per unit, she would barely outbid the prospective mansion buyer, letting in only two tenants, and only those who could afford a 45% increase in rents. The two other tenants would be forced out of the community. Other mandatory minimum standards like parking requirements and lot sizes work the same way, prohibiting density and pricing potential residents out of the community. Needless to say, this process falls hardest on the working poor.

Banning density, whatever the pretense, whatever the means, effectively means banishing the working poor from cities. As the urban planner Alain Bertaud has put it, the market is not an end or a construct, it is a mechanism. It is an emergent system for distributing scarce resources. Sometimes it fails and state actors or civil society must intervene. Sometimes it produces undesirable outcomes that warrant rectification. But if we don’t understand it and work to build policy around it, the results will be ugly. From the mounting affordability crisis to the income and racial segregation of our cities, the failure of shifting responsibility for the distribution of densities from markets to planning boards has been a self-evident failure.

For future content and discussion, follow me on Twitter at @mnolangray.

The post Density Is How the Working Poor Outbid the Rich for Urban Land appeared first on Market Urbanism.



This post first appeared on Market Urbanism – Urbanism For Capitalists | Capitalism For Urbanists, please read the originial post: here

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