The economics of residential density

Most Americans are used to low-density towns and suburbs and like them a lot. Many Americans have experienced unpleasant high-population-density places in America. In fact most of the high-density urban areas in the US were relatively unpleasant in recent US history due to the pollution boom in the 1960s and 1970s. For example, the city of Cleveland looked like this photo in 1970 before the passage of the first federal regulations on air pollution.

Pollution used to be much worse in high density areas than in rural areas because more people meant more dirty power generation for electricity and heating and especially more cars which were one of the worst offenders before regulations required catalytic converters. Plus factories preferred to locate in population centers because of easy access to labor and infrastructure. Thus, more people meant more pollution which meant that dense areas were unpleasant. It is hard to imagine how bad things were. For example, to pick on Cleveland again, Cleveland’s main river, the Cuyahoga, was so polluted that it regularly caught on fire and sometimes the fire departments could not put it out for days. It was covered with a thick layer of oily factory refuse for decades and there were thirteen major Cuyahoga River fires. Although local residents in Cleveland were used to the river catching fire, in 1969 a Time Magazine article about that last burn captured the imagination of the rest of the nation and fueled outrage which helped inspire the Clean Water Act of 1972 and there were no more river fires. In fact, the Cuyahoga is now so clean that it has fish in it again and the fish can even be eaten by humans although I would have a hard time eating anything that lived in the Cuyahoga after knowing its history.


Even worse than the aesthetic effects of pollution were its direct effects upon the brains of people who lived in dense urban areas. Lead pollution, primarily from automobile exhaust, was a potent neurotoxin that created a crime wave by warping the brains of people exposed to it. Lead exposure during infancy makes people stupid and violent and reduces impulse control which causes all sorts of problems when kids grow up. Lead was worst in densely populated urban areas, so the crime wave was worst in those areas. When lead emissions were banned, the crime rate fell the most in urban areas too. The reduction in pollution has led to an urban renaissance in cities across America as urban areas have become desirable again. Here is a graph of the correlation between blood lead levels and violent crimes from Kevin Drum at Mother Jones. The violent crime rate increased by about 380% from 1960 to its peak in the 1990s.

There is a common urban legend about the flight from American cities that blames racism for causing it, but there is no evidence that racism got worse in the era of urban flight and even if it did, racism didn’t cause whites to flee the cities into the suburbs rather than chasing the nonwhites into the suburbs. In other times and parts of the world without urban pollution, the rich people often claimed the urban centers and pushed the poor out into the suburbs. The main premodern exception were cities with bad sanitation which were polluted by human refuse that spread disease. Again, this was a form of pollution which the rich people fled to live in their aristocratic rural manor homes.

Fortunately, due to the anti-pollution regulations of the 1970s and 1980s, American cities have become cleaner than they have been in over a century and that has caused crime rates to plummet. This has made American cities extremely desirable places to live again. Unfortunately, during the last 50 years, other changes to American society have prevented Americans from being able to move back into the kind of densely populated neighborhoods that were popular during the first half of the 20th century. For one thing, Americans became a lot richer and decided that they want about double the average area per person in each home than in the 1970s. That means that only half as many Americans can fit into the homes that were built before 1970, so there is less existing real estate to go around with people hogging more floor space. New homes could be built that could house more people, and that has been happening in suburban areas, but there have been decades of steadily increasing regulations that make it illegal to build the kind of dense housing developments that many Americans want to live in. Many of the kind of homes that people built before World War II are simply illegal to build in most of America.

During the flight from urban pollution to the suburbs, local governments developed an ideology of subsidizing sprawl by building expensively infrastructure for developers to build houses. Each house is connected by millions of dollars of streets, sewers, and utilities. Each family is protected by fire stations and police offices and spread out housing requires more of them to provide the same level of security and all services become more expensive from postal delivery to bus transportation for school children. Sprawling neighborhoods are terribly inefficient, but if people want to pay more to live in them, that is fine, but not when everyone else has to pay extra taxes to subsidize the extra infrastructure that makes them possible. And even worse than the socialism that underpins suburban-style developments are the land-use regulations that make it illegal for private landowners to build anything but spread-out developments. There are minimum lot size rules, and setback rules and maximum building height and maximum residents and even mandatory amounts of parking area.

So big local government has not only been taking away taxpayer money to subsidize sprawl, governments have also restricted the freedom of landowners to build anything but sprawl. This means that whenever any place becomes an attractive place to live, and more people naturally want to live there, the price of living there can only go up because it is illegal to build more housing to accommodate more people even though more people would mean more local tax revenues to pay for more amenities and the average cost of city services would fall because the infrastructure would be used more efficiently.

Brent Toderian is an urban planner who was in charge of Vancouver, British Columbia, one of the world’s most livable cities, from 2006 to 2012. Most people don’t think much about urban planning and tend to just want to keep the status quo, but Toderian helped convince the voters of Vancouver that higher density would help make Vancouver more livable. He says that the best way to sell a skeptical public on the benefits of allowing more density is to show how cost effective it is rather than talking about aesthetics. As I mentioned before, North Americans’ have had experience with urban density where it was hellish and many are deeply skeptical that the beautiful dense urban areas that they visit on vacations are a new normal rather than just a temporary phase. Toderian says that city officials immediately get the efficiency argument as he explains in this interview with David Roberts at Vox:

…low-density developments become a drain on regional budgets — the infrastructure and service costs exceed the tax revenue — city officials are listening… The way you change the conversation about car dependency and sprawl is by not making it an ideological argument… We have to make it a conversation about cost and consequences. Sprawl is extremely subsidized, and the chickens are coming home to roost on that. Cities and regions are starting to see pseudo-bankrupt conditions. The tax generation doesn’t match the cost. Not even close. I’m not going to tell you your choice is fundamentally wrong. I’m going to point out that your choice is being subsidized by me, who’s paying more taxes and using less infrastructure. …The argument is not ideological, it’s mathematical.

Toderian argues that small towns and suburban areas can also achieve densification by simply allowing private landowners to build two additional housing units on existing lots:

So our minimum density allows three units on a lot: the primary house, the secondary suite [known in America as an “accessory dwelling unit,” or ADU], and a detached laneway house in the back yard, where the parking pad or garage would normally be. The most important decision we made in bringing laneway housing in was, we reduced the parking standard from one space per unit to one space per lot. One space per unit would’ve killed the idea; you physically can’t fit three parking spaces on these lots.

Most people do not want to give up some of their yard to create more housing, but some do and they should have the freedom to do it since it generates more tax revenues than it costs in additional infrastructure. And more people create more economic benefits for local business too. That is why towns and cities exist at all.

In another interview urbanist Brent Toderian explains how to create density that works for existing residents so neighbors don’t regret it:

Density done well has three components.

One, it has to be of a very high design quality. I don’t just mean aesthetics, although that can be part of it, but it’s about profound relationships being addressed through smart design.

The second piece is that it has to be multimodal. In fact, it has to have active transport priority: walking, biking, and transit have to be emphasized. If you try to design density around cars, it’s a recipe for failure. You have to make walking, biking, and transit not just available, but delightful.

The third piece is amenities and a diversity of housing types, to make density not just compact, but livable and lovable. It’s the difference between cramming people in and creating great neighborhoods. So, amenities such as parks and green spaces, public and people places, heritage preservation and integration, community and cultural facilities, civic facilities, even things like incubator space for artists. Amenities are the things that give communities heart and vibrancy. It also includes housing diversity: rental housing and public housing.

Unless you are planning in a magical city where you have infinite resources — and I haven’t seen that city yet — you are struggling to pay for those kinds of amenities, or achieve that kind of housing diversity. In many cases, you can’t mandate it from developers, because that’s beyond your power. So tools like density bonusing are critically important to delivering that piece of the puzzle.

…[that is where a developer] can increase to a higher density by negotiating amenities that make that higher density more livable. The key is to make sure that you’re spending the value on things that make density successful.

I help cities set up these systems all over the world. It makes the conversation about density with developers different. It gives them a higher level of certainty within the political process, which they like.

And it gives the community a sense that the additional density is translating into something that’s going to support quality of life. They can see a connection between the additional density and amenities their community needs, but probably won’t be able to afford.

And that’s key: It should always pay for things the community couldn’t realistically afford without the density. It doesn’t replace the obligation to pay for the basics. But most cities are struggling to pay for things that go beyond the basics.

Vancouver has the most robust density bonusing system in the world. It’s not even close. And it’s one of the keys to our livability. It’s entirely changed the politics…This is going to sound overly simplistic, but the truth is, [densification] starts with a better city-wide conversation. In Vancouver, you can’t swing a stick without hitting an event talking about cities. Its constant, it’s unrelenting. It wasn’t always that way, but it’s certainly that way now.

One of the modern demographic patterns in urban areas is that they are extremely popular with young adults, but if or when those people have children, they tend to flee to the suburbs. Surprisingly, one of the main reasons is economics. Family-sized housing simply isn’t as profitable for urban developers. Brent Toderian again:

If your homes can’t fit families, you don’t get families, period. That generally comes down to the number of bedrooms, though it can also be about the size of the apartment or home. For decades, Vancouver has been requiring that 25 percent of units in all major projects have two bedrooms or more. And there’s been a debate for decades about whether that requirement should include three bedrooms. Thankfully, Vancouver has recently moved in that direction, requiring 10 percent of units to be 3 bedroom, on top of the 25 percent 2 bedrooms. [developers have to be pushed hard to build a multi-bedroom unit] because it’s not as profitable, per square foot, as a small unit. Developers will cater to the more profitable market segment, even if there is a strong market interest for two- and three-bedroom units. But it’s not the job of planning to maximize the profit of developers. It’s the job of planning to determine the vision for the city and the downtown, set clear expectations, and let those expectations help clarify land value for developers. Developers will argue that two- and three-bedroom units are not viable, but it’s false. Economic analysis shows that two- and three-bedroom units can be less profitable than one-bedrooms or studios, but that’s not the same as saying that they aren’t viable.

Vancouver, unlike most North American cities, has lots of families living downtown because Vancouver’s officials have forced developers to build housing that fits families. This is a kind of subsidy for families, and it might seem strange at first, but governments always subsidize families and most other kinds of subsidies for families are much more expensive. The US has lots of tax breaks for families and extra programs to help children including what was the most expensive government social program for well over a century: free, compulsory public education. So simply requiring developers to build a few units with multiple bedrooms that they sell at a profit is a way to provide a lot of benefit to families at extremely low cost.

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Posted in Public Finance

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