Monday, February 6, 2017

'Legacy' cities often lack functional real estate markets

Read this  (CityLab on Newcastle) and thought:

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'Legacy' cities often lack functional real estate markets. What exists is (de facto) central planning of land, and thus of the built environment. Yet many cities are reluctant to let go of these land assets, as the municipal elders fear a) the loss of control, or b) being accused of having let land go too cheaply.

The dangers of doing so are manifest, as land tends to fall into the 'Dead Hand' of corporations. As property taxes are assessed on the value of the improvements on the land, rather than the land itself, there is minimal disincentive to 'sit' on a parcel of land. The obvious solution is to tax property of the value of the land, rather than the value of the improvement. 

The taxation of property on the value of the improvements is a historical quirk. Initially, taxation was assessed on the value of rural 'working landscapes' with large acreages. The value of the property could be assessed by the bushels of grain produced. Clearly, a similar paradigm could not be applied to non-productive urban land, which clearly had value. Initial efforts assess the value of urban land were little more than 'sumptuary taxes' based on the count of windows or the width of frontage on a public street. Over time, advances in economic theory demonstrated that the value of property was proportional to the economic rents derived from ownership, providing a sound basis on which to assess the value of property. Where no rents existed, the owners equivalent rent could be provided by using a comparable building.

SO WHY THE SEPARATION BETWEEN IMPROVEMENTS AND LAND?

In times before the limitations of zoning, there was a fairly direct proportionality between the value of the land and the degree of development on it. Post-zoning, this was no longer true. Land values continued to rise, but the value of improvements was effectively capped by the characteristics of the structure. While it is possible to retrofit a structure to raise its value, the surest method to raise the value of an improvement is expanding the total number of livable square feet. 


     Property taxes are assessed only on the value of improvements on the property, rather than the total value of the property. On its faces, these seems equitable. A cheap house thus only faces a small tax bill, while an expensive one faces a large bill. But it is very far from egalitarian. The poorer you are, the higher your cost of capital. As is reflected in everything from mortgage rates to the the use of high-interest forms of debt (credit cards, payday loans), and the lower your total loan limit. Thus, your capacity to purchase a home in a desirable location is limited. 
     You must thus purchase a home in a less desirable location, where costs are lowest. This results in the "Drive 'til you qualify' phenomenon, where lower income households are forced to buy house on the periphery of the metro area. Homes are developed there because value values are lowest, and so the ROI for a land developer is greatest. Consequently, the land to housing ratio is at its lowest, so that the least wealthy households are subject to the (proportionally) highest property tax burden. While seemingly egalitarian, a home value tax is actually a deeply regressive form of taxation. 
     Further, houses on the periphery are subject to the highest transportation cost burden. The trade-off between housing and travel costs has been theoretically establish since Von Thunen. It is possible to reduce the costs (in both time and money) of transportation by choosing housing in a more central location. However, the savings in travel time costs are typically capitalized in home values, making the more central desirable neighborhoods less affordable, and thus less available...

     The regressive nature of this tax structure also applies in central locations. In many urban environment, much of the cost of property is reflected not in the improvements, but in the value of the land. The value of urban land is largely determined by its proximity to other land uses, either through amenities/disamenities of proximity, and the degree of accessibility. In desirable locations, the value of land is often greater than the value of any improvements on the land. Thus, the tax burden, proportionate to the price of the house, is also the lowest. This is especially true in contexts where planning/zoning limit development potential.
     The combination of property tax treatment and high purchase prices makes property in central locations into attractive investments. The desireable location location translates into high rents, with minimal regard to the quality of the improvement (the housing itself). History is demonstrably replete with examples where housing has been allowed to depreciate into dangerous and barely habitable conditions while still remaining attractive to prospective tenants, so maintenance costs are minimal. 



The same phenomena explains the endurance of central city parking lots.  The improvement value of a parking lot is minimal, and thus so are tax costs. So long as the rents from a parking lot exceed the cost of capital and tax costs, downtown real-estate is worth more as parking. Following this logic, many cities have followed the path of Dallas and Detroit by demolishing older structures to make way for parking lots. It is difficult to argue that the 'highest and best use' of central city land is as a barely paved parking space. The importance of old buildings as incubators for new business (by reducing threshold costs) was noted by Jane Jacobs decades ago. 

Assessing land values on the basis of land area would be more equitable. While applying an areal tax in the (rural) context of a working landscape, where acreages are high and profits low would be regressive. Thanks to GIS, there is no technical limitation on the ability to do so. 

Urban agriculture...flips side too it...can't be used as a parking lot due to access control limitations.

Can't be developed (economically) due to setback requirements-->Parking lot
Can't de parking lot (due to access control limitations)--->Urban agriculture. 


Housing Affordability in SLC

"The consensus among real estate experts is that the recent expansion in housing supply has managed to keep DC area rents from spiraling out of control....December's year-over-year multifamily apartment rent growth in the DC metro region was 2.6 percent.....considerably lower than the national average of 4 percent.....attribute this to DC’s above-average multifamily housing stock growth rate (3.6 percent last year, compared to 2.4 percent nationally)....supply has narrowly outpaced demand recently. - Greater Greater Washington.

Seems pretty clear to me. If rents are rising, supply is not meeting demand. SLC's rents are rising; We can't control demand; we can only control supply. There is strong market demand for housing, and the limit is regulatory. Relax regulatory limits, and increase supply.

I recognize no one wants a high-rise worth of buildings looking into their backyard. For owner-occupiers, their homes are their primary investment, and they are willing to fight to project that, which makes them politically powerful. So clearly some sort of buffering is going to be necessary. What that is going to look like is (broadly) hammered out: Two story buildings, over a half basement, with a total height of about 30'. The major conflict is over cars, and where to put them. On-street parking can accommodate 3 cars per 33' lot. Beyond that, off-street parking is required. How that is going to work out needs serious consideration as part of accessory dwelling units.

I'm opposed to efforts focuses on increasing the supply of owner-occupied housing. I rent, and I resent the implication that it means my housing preferences are inferior. It's also deeply inequitable: Providing a few more owner-occupied houses means a few more people are going to be able to 'win the lottery' by buying a home and sitting on it while it appreciates, without it doing anything to alter the fundamental dynamics of the housing market.

But relying on market solutions alone is not going to solve SLC's affordable housing problems. All the housing that is being added is being added on the higher end of the market. This is natural, and somewhat necessary--new construction requires higher rents. While that mitigates the tendency for mid-range apartments to be rehabbed and upgraded, it doesn't provide short-term relief for the low end of the rental market.

Market rate new construction requires high rents. So to provide low rents, a non-market intervention is required. SLC, as part of its homeless initiatives, is already engaging in this policy, at the low-income level. I'd like to see that extended further into the low-middle, and middle-income levels (50-80% of area median income).

As a long-term policy, a 'overbuild' in elevator apartments is appealing. Permit a very large number of high-rise apartments. Apartment construction is 'lumpy', and buildings 'package' units big bunches. Over-building is a expected characteristic of the development cycle; people start new projects until the financing runs out; the projects take a long time to complete, and my the time many hit the market, the increase in supply has caused rents to fall, and the projects are no longer profitable. Rather than competing with the private market at the peak of the cycle, the city should take over 'orphan projects' partially through the development process, and convert them to use as affordable housing. Denver's housing agency has done so with single family homes on a pretty successful basis.

To go even further, SLC could use public money to 'overbuild' the multi-family market after the development cycle has peaked. I'm less of a fan--the oversupply generates a 'hangover' effect that last decades, suppressing new market-rate multi-family development. I'd far prefer reducing market costs for new multi-family construction.

Finally, I'd like to suggest that the regulation most in need of attention is per-unit parking requirements. Parking is expensive, and mandating 2 stalls per unit seriously affects the affordability of a unit. There are increasing number of people in SLC that would be willing to make do with one less car (or no car) if that made rent cheaper. As a back of the envelope calculation, assume that a stall in a parking garage costs $40,000 to build. Using the 'building worth is 10 years of rent' ratio, that means a $40,000 bit of real estate is worth about $333 per month. I think many people would be willing to shed a car to reduce their rent by that much.

The immediate objection to such a policy would be the ease of violation: Deprived on on-site parking, people turn to on-street parking, and then overflow into near by areas, putting them in conflict with other users of on-street parking. Potential policy solutions include permitting reduced parking ratios only where on-street parking is metered for all nearby areas. For districts lacking meters, residents in the low-car or car-free units could be required to verify that they do not have a registered vehicle.


Monday, January 30, 2017

On Ride-sharing

"I think the future is actually in ridesharing. So for example, if you compare the ridership of the Southeast corridor, if you look at the person miles that are traveled on that corridor compared with the person miles traveled on I-25 and I-225 that are right next to it, light rail is carrying about 4 percent. Which means you just need to add one rider to about every 20th car, and you could carry the capacity of light rail. And so when you think about these ridesharing apps and so forth, there's a lot of unused capacity on highways. I think that's where the future is really going to go, is to use the automobile much more effectively and sensibly."

-Michael Ransom- BYU professor 

However. As Mike Brown of Metro Analytics put it:

“BRT would be great, except for the fact that I am only using the BRT corridor for half of my trip.  The rest of the trip involves to/from my house, which is a mile from the corridor, and the other end likewise is 3-4 miles off corridor.”'

Ride-sharing would certainly reduce the last-mile issue. Fewer people per vehicle, fewer detours, less delay per passenger.  But that requires letting a stranger get into your car . Uber and Lyft have proven this can be overcome. But Uber-Pool has not been an enormous success. Which suggests that for most people, the financial benefits of car-pooling aren't worth the time-costs.