Pricing Upzoning: A Reply to Critics

We thank the four respondents to our article, who have provided a range of insights into the debate around upzoning. To organize this reply, we first restate our main arguments below, and then summarize our responses to the main criticisms advanced by the four respondents.

In our article, we made the following arguments:

1. Upzoning provides additional property rights to current property owners, akin to providing them with “airspace” rights.

2. These rights have a market value that could be priced.

3. Unpriced upzoning has a budgetary cost due to this foregone revenue.

4. The initial allocation of residential property rights in most countries is highly unequal, and thus unpriced upzoning will accrue to current property owners, exacerbating inequality.

5. The alleged housing benefits from upzoning rely primarily on the idea that it will significantly increase the rate of supply, and thereby lower house prices and rents for non-owners. However, this claim is questionable, and existing evidence suggests it will not occur.

6. There are many effective policies to price upzoning or otherwise achieve public benefit from upzoning, and these should be undertaken.

The respondents agreed with several of these main points. For example, there was broad agreement that the value of upzoning rights can be large and that this represents an opportunity to generate public value. All the respondents also recognized that policies exist that are feasible to capture this value, even if there was disagreement on which, if any, should be adopted.

We note that a common thread in the responses was to focus on unique legal, cultural, and political circumstances in the United States. However, the economic concepts at play are common to most property rights systems and housing markets globally, regardless of local idiosyncrasies. While we do not believe that the American legal system precludes the policies we proposed as means to capture public value, whatever the answer, this does not undermine the utility of the analysis and argument in other countries with different legal situations. As we noted, many of these policies already exist in one form or another in a host of countries.

Will Upzoning Deliver Housing “Abundance”?

In our article, we argued that there are economic limits that regulate how quickly any amount of zoned capacity is taken up, and this means that housing supply is unlikely to sharply accelerate after mass upzoning (Murray, 2020). Rather than zoning limiting rates of construction, it is instead the optimal “absorption rate,” itself closely tied to housing demand, that determines rates of housing supply (Murray, 2022).

All the respondents, with varying emphasis, contest this argument, suggesting that upzoning will increase the rate of new housing supply by a significant amount. This is a central and important point of disagreement. As such, we try to address this issue here by making three points.

First, when there are large sums of government revenue at stake, the standard for policymaking should be strong evidence. Major amounts of potential government revenue should not be forgone with weak and tentative evidence. Yet this is the state of the evidence regarding the claim that mass upzoning will spur a significant acceleration in housing supply. Many studies cited do not address the region-wide versus location substitution aspect of upzoning, and because of this, it remains an “evidence-lite” area of scholarship (Murray & Phibbs, 2022). We agree that there are many studies that identify substitution between areas in terms of new housing because of zoning changes, but our reading of the evidence is similar to that of Freemark (2023), who concluded his review of the literature as follows:

“Evidence assembled thus far from actual upzonings suggests that the construction that does occur following rezonings is inadequate at the regional scale for policymakers to rely on such regulatory reforms alone to provoke filtering of existing units into affordability.”

Second, there are good theoretical reasons to expect that upzoning will not generate significant increases in region-wide housing supply (Murray, 2022). To repeat, zoned capacity usually does not constrain the absorption rate. The decision to produce new housing involves an optional but irreversible asset reallocation – swapping returns on under-developed land and cash for housing returns. When to do that is a timing choice. Feasible projects can be profitable to build today but are often even more profitable not to build. The absorption rate equilibrium arises from the trade-off between these returns (Murray, 2022).¹ Related to this, Paavo Monkkonen and Casey Dawkins argue that pricing upzoning at the time of development rewards delay. However, the price effects of upzoning arise immediately, as do the effects of pricing upzoning. This mean that pricing upzoning is unlikely to have important effects on the timing of development.²

Third, one prominent case frequently invoked in this debate is Auckland. But the evidence here is not strong. Paavo Monkkonen makes explicit reference to a widely circulated paper by Greenaway-McGrevy and Phillips (2023), which argues that upzoning in Auckland generated around 20,000 extra housing units, an increase of nearly 4% of the housing stock. One of us has already noted the numerous methodological problems with this paper (Helm & Murray, 2023), but there is one feature of the methodology that bears emphasizing. To generate a counterfactual for an Auckland without mass upzoning, Greenaway-McGrevy and Phillips extrapolate a linear trend of housing supply fitted to non-upzoned areas prior to the policy’s introduction. However, the consents (approvals) data is not linear in Auckland and reflects instead cyclical booms and busts, as is common in housing markets. In the period after upzoning, Auckland saw a trend of increased housing production, similar to construction booms seen in comparable cities like Wellington and major Australian cities, and a decline in the rate of conversion of dwelling consents to net additional supply. Adopting a linear counterfactual is questionable, then, and it is this assumption that produces the large estimated effect of upzoning.

In sum, our view on this topic is consistent with a recent review of the literature which found mixed and limited evidence for mass upzoning having significant regional effects on housing supply.

Moreover, at this point we are aware of no compelling examples where mass upzoning generated substantial declines in local rents through increased housing production, a key claim made by proponents. In the face of this evidence, we think there remain strong grounds for governments to insist upon priced upzoning.

Is Low-Density Zoning “Racist”?

Each of the respondents refer to the idea that low-density zoning, especially single-detached zoning, has racist origins, or is at least an important contributor to racial exclusion or segregation. This claim is often made in the American context, and indeed all the respondents are based in the United States.

We acknowledge that the United States history of zoning often had a racial dimension and that the motivation for some zoning practices stemmed in part from racial animus toward minorities. The citations provided by the authors document this well. We do not think these are good grounds to engage in unpriced upzoning, however, nor is this history necessarily a strong argument against existing low-density zoning.

First, the emphasis placed on the racial aspect of zoning in the United States discourse likely exaggerates its importance in the creation and maintenance of single-detached zoning. Many countries arrived at this kind of zoning in their large cities, especially Anglo-Saxon countries, even in circumstances of (initially) near-total racial homogeneity. Ground-oriented, low-density housing is an attractive typology for many households, irrespective of its supposed “exclusionary” potential, and this has primarily motivated its spread and attempts by residents to retain it. Indeed, we note that this housing form has proved highly popular with visible minority immigrants in all these countries. Some minority ethnic groups have found themselves able to access this housing type at similar rates to native-born, white populations in countries like Canada and Australia.

Second, we are skeptical that existing proposals for mass rezoning would do much to reduce racial segregation. It is unpriced and unconditional upzoning that we argue against, and thus these upzonings would only generate market-priced housing. Given that this new market-priced housing is often expensive, even in so-called “missing middle” typologies, those who will be able to purchase it will usually remain distinctly upper-middle class. To the extent that race and class correlate, as they do in the United States, this is unlikely to generate much new racial integration, certainly not in the short-term. In fact, a recent review of upzonings mainly in the American context found that “there is some reason to believe that upzoning real-estate may increase the share of non-Hispanic white people in affected communities,” and that the long-term effects on racial integration are uncertain and likely to be modest (Freemark, 2023). Indeed, if the goal is to generate racial desegregation, then conditional upzoning premised upon “inclusionary zoning” principles is likely a more effective short-term measure – which again cannot be generated by unpriced and unconditional upzoning, and is made harder once density has already been given away. We also note that even with highly dense, “missing middle” housing forms, racial segregation remains a reality in cities such as Paris, London and Stockholm (e.g., McAvay & Verdugo, 2021). It is class and individual preferences for ethnic proximity that now overwhelmingly generate racial segregation, not specific zoning rules.

Lastly, we note the irony in this rationale for unpriced upzoning as it is usually depicted, which is that to allegedly help (a stereotyped conception of) minority renters – a benefit which we argue is unlikely to materialize – major windfalls through bonus property rights should be given to (stereotyped) white homeowners. In fact, Minjee Kim suggests that mass upzoning “can be seen as the public sector using air space as currency to buy out private homeowners who have been the fervent gatekeepers of their neighborhoods” – in other words, a massive bribe to wealthy (presumed white) homeowners to potentially, one day, if market conditions allow, have a little more racial integration. We find this upwards redistribution objectionable, and explain why it need not, and should not, occur.³

Upzoning and Public “Airspace” Rights

One criticism of our article is that airspace rights above a property should, by default, belong to the property owner, without limitation. As Casey Dawkins writes:

“MG’s critique of the privatization of airspace rights implicitly assumes that land use rights are public rights that are given away, rather than private rights that were originally taken by the public.”

This passage depicts planning regulations and zoning as “takings,” which remove property rights from owners. We maintain that property rights are socially negotiated and thus that there is no “return” to an “equilibrium market price” – it is precisely because zoning defines property rights in important respects that it can have a large impact on their market price. Indeed, the whole point of zoning is to regulate and control the use of “airspace.” As we documented in our article, moreover, the notion of malleable and circumscribed airspace rights around land ownership is common in most countries and informs the policy mechanisms that already exist to price upzoning.

Another related criticism is made by Paavo Monkkonen, who suggests that some proposals for mass upzoning do not affect the vertical limits to construction, and thus don’t affect “airspace rights.” Yet property rights are separable, even if not separable physically as vertical airspace. We think the airspace concept helps to communicate the separability of the property rights bundle clearly, and directly applies in most upzoning debates. Nevertheless, we also noted the following about changes of property rights within existing airspace:

“Even if the vertical building limit does not change, the right to use the airspace more intensively is a new property right, separable from existing rights, and with its own market value.”

Consider, for example, adding to the property rights bundle the right to undertake residential uses instead of agricultural uses. These additional property rights have a market value that could be separately priced, even though these rights don’t change the vertical building limits at that location. In the case of single-family detached zoning, to allow several units on a given plot with a substantially increased floor space ratio would also represent valuable property rights being added, and even if the vertical limit were not altered, it would have clear implications for the use of “airspace” – as neighbors would quickly recognize were the development potential acted upon.

Despite this, as we noted, most policies discussed in debates around mass upzoning, and certainly those policy visions pushed aggressively by YIMBY groups, do alter airspace rights in a direct and unambiguous manner. Indeed, those that do not have achieved disappointing results, even according to proponents. For example, California’s SB9 law, which was pitched as the end of single-detached zoning in the state, was found by proponents to have had a marginal impact on housing development shortly after passage: “SB 9 activity is limited or non-existent in [the] thirteen cities [studied]” (Garcia & Alameldin, 2023). This suggests that in the context of most meaningful debates around this topic, the concept of “privatizing airspace” will be relevant.

The Politics of Upzoning

Two of the respondents, Minjee Kim and Harley Etienne, make the point that the politics around pricing upzoning are not favorable. They argue that existing landowners are unlikely to accede to attempts to reduce the potential payoff to upzoning, and thus unpriced upzoning may be the best that can be sought, given their understanding of the benefits.

We do not deny that the politics around pricing upzoning are difficult. There are powerful vested interests who lobby continuously for unpriced upzonings and who would fight vigorously against any attempt to curtail that arrangement (see e.g., Archer, 1976). In fact, it was precisely the point of our article to make this dynamic clearer to the public and to researchers, and to alert them to the large public financial costs implied by granting airspace rights cheaply or free. As we noted, based on the figures from policies that price upzoning in the Australian Capital Territory (ACT), around AUD$19 billion could be collected annually in Australia were such policies adopted across the country (Murray & Frijters, 2022). These are not small sums and indicate what might be possible in other countries.

It is arguably because of these large financial stakes that we see so much confusion on this topic. Indeed, in some places, a central purpose of so-called YIMBY groups has been to argue for more favorable upzonings for developers, especially in the context of local council meetings, and to obfuscate the public costs involved with rhetoric such as “legalizing housing.”

This is but one element of the politics involved in these debates, and undoubtedly the politics are highly complex and vary by context. However, our basic point remains this: many leftist politicians and researchers in countries with politically charged housing debates have recently adopted a perspective and policy agenda that would grant highly valuable property rights to existing landowners at no cost, despite the clear upwards redistribution involved, when there are established policy alternatives available that could capture significant public benefits or revenues.

It is this puzzling situation that we hoped to address in our contribution. The achievable public benefits can be delivered in a variety of ways, some of which will ultimately benefit many landowners too (e.g., public amenities). Yet it is important that scholars first recognize and think clearly about the trade-offs involved in upzoning. It is our hope that spelling them out, through the conceptual schema of airspace rights, might help create a politics modestly more favorable to pricing upzoning for public benefit.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

Cameron K. Murray

Cameron K. Murray is a post-doctoral research fellow in the Henry Halloran Trust at The University of Sydney. His interests include property markets, environmental economics, and corruption. He writes the Fresh Economic Thinking newsletter and co-authored a book about the game of grey corruption entitled Rigged.

Joshua C. Gordon

Joshua C. Gordon is a visiting research fellow in the Digital Society Lab at McMaster University. His research interests include housing policy, labour market policy, union movements, and the politics of immigration.

Notes

1 If upzoning has major effects on the absorption rate, market participants would instantly adjust their pricing to reflect expected lower future rents and prices. But these immediate price reductions do not happen.

2 In fact, because priced upzoning can increase future costs when prices are rising it reduces the payoff to delay. This is consistent with Titman’s (1985) dynamic real options approach whereby adding costs to delay from strict density limits, or in this case pricing upzoning rights in the future, brings forward development decisions.

3 Etienne suggests the possibility that upzonings could be targeted at low-income, minority communities and used to thereby narrow the wealth gap. While this is possible, most proposals are not of this nature and mass upzoning is typically justified in relation to providing access for lower-income or minority groups to high-amenity neighborhoods. To the extent that this strategy was successful in fostering new housing (which has typically not occurred with upzoning in low-income neighborhoods), this would likely generate considerations around gentrification and displacement that have also concerned researchers (Freemark, 2023).