The fallacy of composition leads people to get the connection between density and affordability backwards

Our good friend at Strong Towns, Chuck Marohn is utterly right about a great many things. But he’s committed a classic Kotkinesque blunder when it comes to evaluating the connection between density and home prices. His theory is that higher density makes housing more expensive. But he has it exactly backwards: Limiting the number of homes and apartments that can be built in places where there is high demand will inevitably drive up housing costs and make affordability problems worse.

I’m not sure that I agree with you a hundred percent on your policework there, Lou

He observes that in Portland and Austin (as in other cities) land which is zoned for apartments commands much higher prices than land zoned for single family housing.  So much so, that it’s just not economically possible to build less dense structures on land that is zoned for more intense housing.

Its undeniably true that a 10,000 square foot lot on which you can build 100 apartments will command a higher price than that same 10,000 square foot lot on which you can build only a single home. And downzoning that lot from allowing 100 apartments to allowing one house will lower the price of that lot.  But it won’t lower the price of land generally, nor will it lower the price of housing. This is the classic fallacy of composition: what’s true for any one individual lot is not true for an entire marketplace.

At a larger scale the effect is reversed. The practical effect of down zoning would be to further drive up the price of the remaining land which upon which apartments could be built. The price of land is a product of the supply of sites on which apartments can legally be built and the demand for living in a neighborhood and metropolitan area. Down-zoning a particular site reduces the supply, but doesn’t diminish the demand, with the result that buyers bid up the prices of the remaining parcels. That, then gets reflected in the price of housing.  Vicki Been demolished the New York City version of this argument:

If the supply of housing is not increased, to accomodate growth, rents will go up. There are no other plausible outcomes . . . Unless we build new housing, people who can afford higher rents will outbid poorer current residents for existing housing.”

Let’s take Chuck’s argument to its logical conclusion:  If you prohibit development altogether on a piece of property, you can drive its market price almost to zero. But then you also don’t get any housing built on that property, and the demand for housing that could otherwise be filled by that site is displaced to all other properties, driving up the overall level of prices. Alternatively, consider Noah Smith’s thought experiment:  If we believe lots of high priced housing is the problem, what would be the effect of demolishing a lot of high priced homes? As Smith points out, the occupants of those homes would bid up the price of the remaining housing stock.

For powerful evidence of how allowing more density actually facilitates lower housing prices, you need look no further than this Strong Town Post from last fall: “The $50,000 San Francisco Home.”  As the article points out in copious detail, its possible to produce small but affordable housing on land of any given price, provided you are allowed to build densely enough.

Downzoning, in essence, is a requirement that any person who wants to build a home has to buy a fixed amount of land to go with that home.  A 5,000 acre minimum lot size says, you can build as many houses as you like, but you must buy 5,000 square feet of land to go along with each home. Anybody who can’t buy that much is automatically priced out of the neighborhood.

And from the standpoint of public finance–where Strong Towns has a sensible perspective–downzoning is a fiscal disaster.  Cities incur substantial expenses to build roads, transit systems and parks to enable development in a neighborhood. Downzoning automatically increases the per capita costs of all of those investments, because each road, park and bus line can serve fewer people. It also pushes additional development to the urban fringe, where some municipality must build entirely new infrastructure at high cost, and where not incidentally individual households will have to drive more, creating more pollution and congestion plus incurring more transportation costs. Ultimately, downzoning is a recipe for more sprawl: if you can’t build as many apartments, you’ve got to build more single family homes, and you’ll end up consuming a lot more land in the process.

If we are concerned that the price of land for apartments is too high, it actually means that we want to increase the number of places where you can build apartments, by upzoning.  The reason people pay high prices for land zoned for multi-family development is because most land is restricted to only single family homes.

The the level and increase in rents in Portland is alarming, especially if you’ve arrived from Brainerd. Some of what’s going on in Portland–and other cities–is what economists call the “temporal imbalance” between supply and demand: demand changes rapidly, but supply takes longer to respond. Thankfully, there’s growing evidence that rent increases are subsiding as new supply comes on line. But the high prices for land in cities–and particularly in desirable urban neighborhoods is a sign that we’re not building enough housing units in those places. And far from making housing cheaper, downzoning land in cities like Portland and Austin will make the housing affordability problem far worse.