With upzoning, each owner may still want to maximise the money from their allotment, but what if that maximum is lower due to upzoning?
As a hypothetical, let's say there is market demand for 5 lots of (high profit margin) luxury apartments, and only 4 sites where they can be built. Each site becomes a bunch of luxury apartments.
But if there are 400 sites that would allow development, then the maximum possible yield from each site is less because the market demand is met and people could still make a (lower) profit by then enabling some other form of development, say duplexes or what have you.
Because every one of those lots will be different -- a different distance to amenities, to transit lines, etc.
I think the crucial distinction here is between a unit of land and a unit of housing. A unit of housing obeys supply and demand, so long as you're not restricted from building. Theoretically, you could keep the value of a unit of housing the same over time by building more units at the same rate as the price goes up.
But a unit of land is a monopoly over *that individual location*. No two units of land are identical, even if they're next door to each other. On a larger scale, there is a limit to the amount of land that can fit within, say, a 5-min walk of a transit station.
There will be a gradient of value between a 2-min walk, a 5-min walk, and a 10-min walk to the station, but each plot will be worth a slightly different amount.
Rent is a combination of the value of the unit and the value of the land. A really nice appartment will be paying less in land rents (because, as one appartment in the building, it has a small share of the land area) but have a high unit rents because it's got nice windows.
Total rent is the sum of what people are willing to pay for the location + what people are willing to pay for the unit.
Pricing for units of housing, or land lots which can accommodate one housing unit, is driven by the level of supply and demand, with the level of supply dependent on the expected feasibility of developing those units/lots, allowing an adequate profit margin for the risk taken by a developer of the lots/units.
I suggest the pattern of ownership is significant in setting prices, because with more developers (as landowners) active in responding to expected demand, there is a greater likelihood that at some point in the cycle the supply will exceed the demand such that the market price will fall and reduce the developer profit margins, maybe even resulting in a loss on some projects (but at least the sale at that point is better than holding onto such lots/units for no return, given the sunk raw land and development costs).
Of course, at that point in the cycle the reduced feasibility of developing more units/lots will reduce the number of new units/lots being brought forward for development, until the demand again reaches a level which raises the expected prices to a more feasible level.
Although each location is nominally unique, there is always competition between comparable units/lots in comparable locations, that is largely how sale prices/values are set.
In this way a greater spread of ownerships and development opportunities does provide for lower prices in at least part of the market cycle of the balance between supply and demand.
"The granting of additional rights without additional obligations cannot provide negative additional value to the recipients."
Cam you probably need to also clarify it's not merely the recipients of the additional rights. Take 3 different cases:
1. Case where Owner A receives additional rights for their location share, but Owners B & C do not. If we assume that total rent can only increase, then Owner A's rent increases but not to the detriment of Owners B & C.
2. However if we assumed rent was fixed, then increasing Owner A's rights would increase A's rent, but to the detriment of Owners B & C.
3. If rent could be diminished through issuing more rights, then not only would Owners B & C lose rent, but total rent (A + B + C) would decline despite Owner A's rent increasing.
The last scenario seems implausible, because it would imply that the "profit effect" of mass upzonings on individual parcels when collectively aggregated with non-upzoned parcels would result in a reduced "scarcity effect" that diminishes total land rents. But why should total land rents decrease when the aggregated productivity of all land holdings has been increased via upzoning?
Land rent is supposedly determined by Richardo's Law and at the margin. But if increasing the highest use of various sites (upzoning) does not reduce the use and demand for marginal land, then we should not see a decline in land rents. And even land rents declined from declining demand for marginal land, it's hard to say if the creation of additional rents in upzoned locations would not offset this and keep aggregate land rents the same. The direction of movement probably depends on the size of the movement caused by these 2 directional forces.
Great post Cameron! Just one question: “Upzoning would allow for higher total land rent, but not lower” - after reading your post this makes sense but wouldn’t we expect the average cost per dwelling to decrease? It seems common in Melbourne for people to knock down a $2M house and build 3 $800K townhouses.
THERE are challenges for a high-immigration country to ensure all its citizens have reasonable access to adequate housing, but Singapore has overcome those challenges.
Dr Paul Kauffman
Singapore has two strategies that could help many Australians if adopted in whole or in part by governments in Australia.
Since 1960 the Singapore Housing Development Board (HDB) has built numerous apartments linked to the city’s mass transport system, in towns providing supermarkets, local shops, health clinics, community centres, local libraries and playgrounds.
Over time, the HDB has improved apartment quality. Many now are green buildings with vertical gardens. The median size of apartments is 100 square metres.
Singapore has built up, not out, because it is a small island and apartments provide an efficient means of housing many people.
Apartments, townhouses and flats at present only provide 28 per cent of Australia’s housing stock, but the percentage is increasing and the case for high-quality apartment buildings is compelling in our larger cities.
Singapore’s second housing strategy was established by its founding prime minister Lee Kuan Yew. He saw home ownership as a key pillar of a strong society.
Home or apartment ownership grew from 29 per cent in 1970 to 93 per cent in 2001 and has since remained about 90 per cent, the highest in the world for a high-immigration country. More than 90 per cent of HDB housing is sold to home occupiers. There are large discounts for citizens, calibrated to an income test, and low-interest loans. You have to be a couple or a family aged 21 or over, or a single person aged over 34.
If you do not live as a resident in your home for the first five years, the substantial discount has to be repaid to the HDB.
In Australia, the home-ownership rate increased from 50 per cent to 71 per cent between 1946 and 1966 when Commonwealth and state governments provided low-interest loans and constructed housing for first-time home owners.
In the UK, home ownership increased from 55 per cent to 67 per cent between 1980 and 1990, by selling off council housing, some of it in poor condition, at a 20 per cent discount, to the tenants living in that housing. This was not simple philanthropy, because the cost of repairs and maintenance, and management of rental housing is high.
A study undertaken by the Australian Housing and Urban Research Institute (AHURI) in August, 2021, found that building a two or three-bedroom apartment in Canberra costs between $330,000 and $560,000, and if owned by social housing there is an ongoing annual subsidy of about $46,000 for each unit in the community sector, and $56,000 in the government sector, to cover repairs, maintenance, rates, depreciation and management, less rent collected.
Governments in Australia may not wish to construct housing themselves, but they could partner more with private developers and ensure high-quality control on those developments.
If there are few options for people on a low income to purchase all or part of their dwelling immediately, it is desirable that the buildings are of a high quality and energy efficiency, because at some future time a state or Australian government, may wish to sell those apartments to the residents and the residents may wish to buy them.
Dr Paul Kauffman formerly administered a national concessional home ownership and housing grants scheme for 12 years.
“[That up-zoning will reduce land prices] presupposes that there can be meaningful “competition” between landowners and policy changes to promote this can engineer lower land prices”
This seems to miss the nature of unzoning. It does indeed grant the existing owner ‘More” rights, but in the sense of different rights. By granting an owner the right to build a residence for a hundred people in an area that presently can house only a dozen, supply does in fact increase. Where the ceteris paribus decrease in other land prices and so of housing will occur, is however, so complex that it is a poor motive for the change. It makes more sense to think of this in standard: removing a barrier to mutually profitable transactions increases wealth. No misconception of property rights is involved
“Consider first one individual owning all the land in the titles system. They would clearly act as monopolist, maximizing total land rent (equivalently, average land rent per sqm).”
No, the owner maximizes _subject to the existing land use rules_. Change the rules, “up-zone,” and the land value of the newly up-zoned land goes up as it is put to more profitable uses. What's not to like?
More and more wealth ends up in the unproductive factor needed for creating wealth (land) draining that wealth away (as Rent) from the productive factors: capital and labour.
How does allowing some parcels of land to go from a less productive to a more productive use "drain wealth away" from anyone? I really do not understand your model.
Now I will grant that at the extreme margin, we allow one developer to buy and convert one block of row houses to an apartment building, the developer receives almost all of the increase in the value of rule change, but between that an no rule change at all, what's not to like?
Hey maybe I'm coming across as more negative than I really intend. If so sorry. But I think there is a perfectly good story/analysis of how loosening land use restrictions does create wealth, some of which shows up as lower costs of housing somewhere, just not necessarily within the proximity of the parcels affected by the loosened restriction.
With upzoning, each owner may still want to maximise the money from their allotment, but what if that maximum is lower due to upzoning?
As a hypothetical, let's say there is market demand for 5 lots of (high profit margin) luxury apartments, and only 4 sites where they can be built. Each site becomes a bunch of luxury apartments.
But if there are 400 sites that would allow development, then the maximum possible yield from each site is less because the market demand is met and people could still make a (lower) profit by then enabling some other form of development, say duplexes or what have you.
What do you say to this hypothetical?
Because every one of those lots will be different -- a different distance to amenities, to transit lines, etc.
I think the crucial distinction here is between a unit of land and a unit of housing. A unit of housing obeys supply and demand, so long as you're not restricted from building. Theoretically, you could keep the value of a unit of housing the same over time by building more units at the same rate as the price goes up.
But a unit of land is a monopoly over *that individual location*. No two units of land are identical, even if they're next door to each other. On a larger scale, there is a limit to the amount of land that can fit within, say, a 5-min walk of a transit station.
There will be a gradient of value between a 2-min walk, a 5-min walk, and a 10-min walk to the station, but each plot will be worth a slightly different amount.
Rent is a combination of the value of the unit and the value of the land. A really nice appartment will be paying less in land rents (because, as one appartment in the building, it has a small share of the land area) but have a high unit rents because it's got nice windows.
Total rent is the sum of what people are willing to pay for the location + what people are willing to pay for the unit.
No problem.....my work is here.
https://justicelandandthecity.blogspot.com/p/download-sick-city-pdf.html
Peace, love and stuff.
Pricing for units of housing, or land lots which can accommodate one housing unit, is driven by the level of supply and demand, with the level of supply dependent on the expected feasibility of developing those units/lots, allowing an adequate profit margin for the risk taken by a developer of the lots/units.
I suggest the pattern of ownership is significant in setting prices, because with more developers (as landowners) active in responding to expected demand, there is a greater likelihood that at some point in the cycle the supply will exceed the demand such that the market price will fall and reduce the developer profit margins, maybe even resulting in a loss on some projects (but at least the sale at that point is better than holding onto such lots/units for no return, given the sunk raw land and development costs).
Of course, at that point in the cycle the reduced feasibility of developing more units/lots will reduce the number of new units/lots being brought forward for development, until the demand again reaches a level which raises the expected prices to a more feasible level.
Although each location is nominally unique, there is always competition between comparable units/lots in comparable locations, that is largely how sale prices/values are set.
In this way a greater spread of ownerships and development opportunities does provide for lower prices in at least part of the market cycle of the balance between supply and demand.
"The granting of additional rights without additional obligations cannot provide negative additional value to the recipients."
Cam you probably need to also clarify it's not merely the recipients of the additional rights. Take 3 different cases:
1. Case where Owner A receives additional rights for their location share, but Owners B & C do not. If we assume that total rent can only increase, then Owner A's rent increases but not to the detriment of Owners B & C.
2. However if we assumed rent was fixed, then increasing Owner A's rights would increase A's rent, but to the detriment of Owners B & C.
3. If rent could be diminished through issuing more rights, then not only would Owners B & C lose rent, but total rent (A + B + C) would decline despite Owner A's rent increasing.
The last scenario seems implausible, because it would imply that the "profit effect" of mass upzonings on individual parcels when collectively aggregated with non-upzoned parcels would result in a reduced "scarcity effect" that diminishes total land rents. But why should total land rents decrease when the aggregated productivity of all land holdings has been increased via upzoning?
Land rent is supposedly determined by Richardo's Law and at the margin. But if increasing the highest use of various sites (upzoning) does not reduce the use and demand for marginal land, then we should not see a decline in land rents. And even land rents declined from declining demand for marginal land, it's hard to say if the creation of additional rents in upzoned locations would not offset this and keep aggregate land rents the same. The direction of movement probably depends on the size of the movement caused by these 2 directional forces.
Great post Cameron! Just one question: “Upzoning would allow for higher total land rent, but not lower” - after reading your post this makes sense but wouldn’t we expect the average cost per dwelling to decrease? It seems common in Melbourne for people to knock down a $2M house and build 3 $800K townhouses.
https://citynews.com.au/2023/in-singapore-its-all-about-home-ownership/
THERE are challenges for a high-immigration country to ensure all its citizens have reasonable access to adequate housing, but Singapore has overcome those challenges.
Dr Paul Kauffman
Singapore has two strategies that could help many Australians if adopted in whole or in part by governments in Australia.
Since 1960 the Singapore Housing Development Board (HDB) has built numerous apartments linked to the city’s mass transport system, in towns providing supermarkets, local shops, health clinics, community centres, local libraries and playgrounds.
Over time, the HDB has improved apartment quality. Many now are green buildings with vertical gardens. The median size of apartments is 100 square metres.
Singapore has built up, not out, because it is a small island and apartments provide an efficient means of housing many people.
Apartments, townhouses and flats at present only provide 28 per cent of Australia’s housing stock, but the percentage is increasing and the case for high-quality apartment buildings is compelling in our larger cities.
Singapore’s second housing strategy was established by its founding prime minister Lee Kuan Yew. He saw home ownership as a key pillar of a strong society.
Home or apartment ownership grew from 29 per cent in 1970 to 93 per cent in 2001 and has since remained about 90 per cent, the highest in the world for a high-immigration country. More than 90 per cent of HDB housing is sold to home occupiers. There are large discounts for citizens, calibrated to an income test, and low-interest loans. You have to be a couple or a family aged 21 or over, or a single person aged over 34.
If you do not live as a resident in your home for the first five years, the substantial discount has to be repaid to the HDB.
In Australia, the home-ownership rate increased from 50 per cent to 71 per cent between 1946 and 1966 when Commonwealth and state governments provided low-interest loans and constructed housing for first-time home owners.
In the UK, home ownership increased from 55 per cent to 67 per cent between 1980 and 1990, by selling off council housing, some of it in poor condition, at a 20 per cent discount, to the tenants living in that housing. This was not simple philanthropy, because the cost of repairs and maintenance, and management of rental housing is high.
A study undertaken by the Australian Housing and Urban Research Institute (AHURI) in August, 2021, found that building a two or three-bedroom apartment in Canberra costs between $330,000 and $560,000, and if owned by social housing there is an ongoing annual subsidy of about $46,000 for each unit in the community sector, and $56,000 in the government sector, to cover repairs, maintenance, rates, depreciation and management, less rent collected.
Governments in Australia may not wish to construct housing themselves, but they could partner more with private developers and ensure high-quality control on those developments.
If there are few options for people on a low income to purchase all or part of their dwelling immediately, it is desirable that the buildings are of a high quality and energy efficiency, because at some future time a state or Australian government, may wish to sell those apartments to the residents and the residents may wish to buy them.
Dr Paul Kauffman formerly administered a national concessional home ownership and housing grants scheme for 12 years.
“[That up-zoning will reduce land prices] presupposes that there can be meaningful “competition” between landowners and policy changes to promote this can engineer lower land prices”
This seems to miss the nature of unzoning. It does indeed grant the existing owner ‘More” rights, but in the sense of different rights. By granting an owner the right to build a residence for a hundred people in an area that presently can house only a dozen, supply does in fact increase. Where the ceteris paribus decrease in other land prices and so of housing will occur, is however, so complex that it is a poor motive for the change. It makes more sense to think of this in standard: removing a barrier to mutually profitable transactions increases wealth. No misconception of property rights is involved
“Consider first one individual owning all the land in the titles system. They would clearly act as monopolist, maximizing total land rent (equivalently, average land rent per sqm).”
No, the owner maximizes _subject to the existing land use rules_. Change the rules, “up-zone,” and the land value of the newly up-zoned land goes up as it is put to more profitable uses. What's not to like?
Whats not to like is this:
More and more wealth ends up in the unproductive factor needed for creating wealth (land) draining that wealth away (as Rent) from the productive factors: capital and labour.
How does allowing some parcels of land to go from a less productive to a more productive use "drain wealth away" from anyone? I really do not understand your model.
Now I will grant that at the extreme margin, we allow one developer to buy and convert one block of row houses to an apartment building, the developer receives almost all of the increase in the value of rule change, but between that an no rule change at all, what's not to like?
My model is from Wealth of Nations.
Show your work. :)
Hey maybe I'm coming across as more negative than I really intend. If so sorry. But I think there is a perfectly good story/analysis of how loosening land use restrictions does create wealth, some of which shows up as lower costs of housing somewhere, just not necessarily within the proximity of the parcels affected by the loosened restriction.