Sunday, August 9, 2020

Are NIMBYs financially motivated or are property developers?

A puzzle came via twitter following the crazy story of RBA research claiming that if you remove planning controls, apartment prices will fall 42%.

I argued that it would be weird for property developers to lobby for policies that eroded the value of their products and sent their housing projects broke.

Andrew responded as follows:


So we have two groups who apparently stand to benefit from tight planning controls if they do in fact increase prices, yet they are arguing opposite cases.

This is a genuine problem. How do I make sense of it?

The first thing I would do is break it down further. Homeowners are an investor-renter hybrid—landlord and tenant of the same property. Maybe we can break out renters and landlords separately and see if they lobby for different planning outcomes. The position of homeowners would then reflect them acting as their “renter” or “landlord” selves.

Survey research has shown that renters are just as likely to oppose rapid development in their neighbourhood as homeowners, perhaps even more so if we believe this survey.
“If a similar ban were proposed for your neighborhood, how would you vote?”

Given the consistent NIMBYism found among homeowners nationally, I expected homeowners to show stronger support for a ban on new development within their own neighborhood. Instead, only 40 percent of homeowners chose to support this ban compared to 62 percent of renters. In other words, 30 percent more renters supported the NIMBY ban than homeowners.
This gels with my experience in community groups. Renters play a large role. Investors/landlords not at all.

If tight planning controls increase prices, renters will be the worst off, having to pay higher rents. Yet they lobby in favour of these tight controls.

Landlords will be better off, but they do not lobby in favour of tight controls.

So if homeowner NIMBYism matches the behaviour of renters, not landlords, then we can say that NIMBYism is not financially motivated by homeowners looking to increase the value of their homes.

This goes against the conventional wisdom [1]
NIMBYism is part of what drives property prices so high. When opposition to local development means that homes can’t be built in useful areas, the remaining homes become scarce and extremely valuable.
So what’s the deal?

One way to reconcile this behaviour is to question whether in fact tight planning controls increase local rents and prices. My experience as a property developer is that areas undergoing rapid densification become more attractive and, if anything, increasing in value.

Some have argued that it is the risk, or variation of the outcomes, from densification that homeowners don’t like, hence their conservative status quo bias. Will the benefit of more local retail services outweigh the cost of extra traffic or not? This risk issue could certainly be part of the story.

Another resolution to the puzzle recognises that densification typically does increase local rents and prices but, unlike investor landlords, homeowners can’t realise any financial gains without selling and relocating.

Since they chose to buy and live in their suburb rather than an alternative area, they have a preference for the current density/amenity. Had they known they were buying into a high-density area that was not yet built, they may have chosen to buy elsewhere instead. The same logic applies to renters.

It would be a bit like someone coming along and offering to paint your car pink. Sure, maybe pink cars sell for more, but if I wanted a pink car, I would have bought one in the first place. 

If NIMBY psychology is more like this, we would expect that development that complies with zoning codes to see little push back, as homeowners have reasonable expectations about what sort of development is planned for their area. But we would expect a lot of push back against development proposals that fall far outside planning codes. This is consistent with my experience. 

In the end, I don’t think I am fully satisfied with any of these ways to reconcile the NIMBY and developer puzzle.

What is clear is that the story is not a simple one of NIMBYs preventing some local developments in order to increase the value of their home.

What are your thoughts?

fn. [1] The conventional wisdom is often wrong when it comes to property markets and planning.

4 comments:

  1. A lot of these reasons make sense. Adding another, in your terms:

    A land/homeowner's option to build up in the future is vague and speculative, so isn't worth as much as the actual built-out result. Prices go up because many options have been physically realized?

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  2. Utility. Some landowners are prepared to accept a lower price to live in an area with a certain amenity. Higher density reduces amenity (traffic etc). Perfectly rational.

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  3. 1) The premise that developers have a vested interest in higher price because they own land is wrong. Developers are not normally long-term property investors. They are more akin to manufacturers. They work on a gross margin of, say, 20%, which is constrained by competition between developers, as in any other competitive business.
    Like manufacturers, their industry association promotes regulatory change that promises to increase the total volume of sales. Higher volumes not only mean higher total value of profits, but also a shorter increase in percentage margins as competition will be diminished. Obviously, the existing stock of buildings, as well as the work-in-process, would be devalued if the replacement cost is reduced, but that is equally true of any manufacturing business.
    2) Whilst releasing the constraints on development, and increasing density in just one neighbourhood, leads to higher land values as a particular parcel can now support more developed floor space, the opposite is true if constraints are released everywhere in the city.
    3) This response window seems to be set to American Spelling.
    Keep up the good work.

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  4. I haven't read the survey results, but I struggle to think that they transfer to Australia. I think the demographics would be pretty different in Aus vs US of renters, not to mention the types of housing they occupy, and where.

    My anecdotal feeling is that renters in Australia are not highly engaged with planning issues - many of them could not be confident of staying in an area long enough to make it even worthwhile. In this sense I think maybe it's disingenuous to think of owner-occupiers as being like renters at all - they have a very different level of stability and expectation re: staying in the area.

    I think there's also a difference between a survey finding and the level of active NIMBYism. Maybe in theory a renter would say "oh yeah, I'd rather not have an apartment go up". But it's hard to imagine the people running meetings and making submissions being anyone other than owner-occupiers. Interested that your anecdotal experience seems different.


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