Three Things Cities Could Do Immediately to Make Cities More Affordable

Cities are becoming increasingly unaffordable. Almost a million NYC renters are rent-burdened, with more than half of those renters paying more than 50% of their income in rent. Urban rents have been climbing faster than wages for decades, a trend that has only accelerated over the past 10 years. With that in mind, it’s not surprising that the populations of large, expensive cities like New York and Los Angeles are dropping for the first time in decades.

In addition to the human impact, the economic cost of high rents is substantial. High rents prevent people from moving to areas of economic opportunity, limiting growth and constraining socioeconomic mobility. Studies estimate that real GDP could be 9% higher if NYC and San Francisco alone built sufficient housing.

Despite a lack of action by local governments, this issue is solvable. A tendency to place politics over solutions prevents cities from moving forward with the most straight forward remedy: legalizing the development of more housing through zoning reform. But, there are additional, often overlooked policies that cities could and should implement as soon as possible if they want to remain the cultural, creative, and economic centers they claim to be.

 

Legalize Single-Family Home Conversions

The market is good at giving cities indicators when single-family zoning isn’t matching residents’ needs.  From immigrants in South Brooklyn to companies serving tech workers in Palo Alto, people in supply-constrained markets are creating additional housing by carving up single-family homes into SRO-style dwellings. Residents would be much better served if cities acknowledged this need and changed the zoning appropriately; limiting the number of illegal and often dangerous conversions to proliferate.

Minneapolis took a big step forward this spring when the local government passed an ordinance allowing the conversion of single-family homes to duplexes or fourplexes throughout the city. This has the potential to make a significant impact on affordability, as home conversions and low-rise developments are a key part of “missing middle” housing i.e., units that can be created inexpensively and can serve people who can’t afford to live in a high-rise development.

Several cities and states are looking to replicate Minneapolis’s model. This summer Oregon followed suit, legalizing conversion of single-family homes across the state.  Forward-thinking jurisdictions – including California and Washington D.C. – have also legalized Accessory Dwelling Units, backyard “tiny houses” that can be rented affordably without changing the streetscape.

 

Eliminate Parking Requirements

In almost all American cities, local laws require developers to build a certain number of parking spaces per residential unit – in many cases, more parking spaces than the building actually needs. These spaces take up valuable square footage and drive up the cost of construction, particularly if the developer is required to build parking spaces underground. At Common, we’ve seen parking construction costs make up to 20-30% of the total construction cost of each unit, forcing higher rents in order to justify the added costs.

To a residential developer, there is no way a $100 or $200 per month parking fee will justify the cost of building required parking – parking inevitably becomes a subsidy, effectively taking money from car-free tenants and handing it to those who own cars. This is the entirely wrong incentive structure for dense cities that should be discouraging car ownership in favor of transit, biking, and other means of transportation.

Some cities have successfully rolled back parking requirements near transit, including Houston and San Diego. However, cities without by-right zoning often see developers add more parking than legally required to win the approval of local community boards, who skew older and whiter than local populations and tend to focus on the needs of car owners.

 

Tax Land, Not Buildings

Land value taxation hasn’t gotten the mainstream attention of zoning reform or abolishing parking requirements, but it has just as much potential to make cities affordable. The idea is simple enough: the government should tax the value of land, not the improvements (e.g., buildings) upon that land.

In many supply-constrained cities, land is the costliest ingredient of new housing. And many landowners have little incentive to develop or sell – urban land prices steadily appreciated throughout the 20th century, a trend that shows little signs of abating. In order to command the rents needed to justify paying the going price for land, developers are forced to build high-end, luxury units simply because no other type of development makes financial sense.

Taxing land would bring both macroeconomic and social justice benefits. All too often, the benefits of economic expansion accrue to landowners through increased rents.  In San Francisco, property values increased by 90% over the past 10 years. The wealth generated through the last decade’s tech boom – and resulting acquisitions and IPOs – have accrued to Bay Area landowners who did nothing to earn it, reinforcing generational inequality.

Existing property tax regimes reinforce landowners’ reticence to do anything valuable with their land. Taxation should discourage vacancy, not the development of new housing.

There’s no one silver bullet to making cities more affordable. However, smart policies can combine with zoning reform to tackle our current crisis and support fairer and more accessible cities.  Without policy changes, high rents will continue to sap economic growth and burden workers with ever-higher costs of living. Continued population declines will deprive cities of economic and cultural diversity, leaving only the rich and childless. Avoiding this future will require swift and decisive political action.