California’s housing crisis is not just one thing. There are myriad crises, and they are interconnected: housing cost burdens, household instability and homelessness, racial segregation, economic inequality, health disparities, and climate change are all exacerbated by California’s inability to build sufficient housing (especially for lower-income households) and ensure that new supply is fairly distributed across communities and in ways that reduce greenhouse gas emissions. Every day, there’s a news story of people leaving the state for cheaper places, of a renter doing their best to stave off an eviction, or of a community struggling with gentrification and displacement. The politics of housing in the state also sometimes feel intractable: cities continue to rely on exclusionary zoning tactics to thwart new supply, while developers, labor unions, NIMBYs, YIMBYs, and tenant advocates all stake out opposing views of what is needed to solve the crisis. All of this contributes to California’s future housing trajectory feeling grim.
U.S. cities spent much of the middle and late 20th century reducing capacity for new housing through extensive downzoning, leading to a shortage of homes and rising prices in high-demand locations. To combat this, many cities and states are now reversing course and upzoning to allow higher-density housing, usually in targeted locations such as individual neighborhoods or corridors. While these targeted upzones have increased housing production in some cases, they have also led to higher land prices that erode the affordability of new homes. In this paper I introduce the concept of the “zoning buffer” — the gap between the existing housing stock and the maximum number of homes allowed by current zoning — and describe how it affects land values and ultimately the production and affordability of housing. When upzoning produces a large zoning buffer, land values should not increase substantially because land with redevelopment potential is no longer scarce; property owners lack the leverage to demand more from a developer than a typical homebuyer. These properties can transact at lower prices, delivering lower-cost housing to residents. When zoning buffers remain small, upzoning will result in land value increases that are largely captured by incumbent property owners. I argue that improved housing affordability at a city-, metro-, or region-wide scale can only be achieved through “broad upzoning,” defined here as zoning changes that allow at least moderate density (roughly 6-10 units) on a large share of parcels (at least 25%-50%). With zoning reform receiving more attention across the country, policymakers should prioritize broad upzoning over other strategies that may be unlikely to improve long-term affordability.
Should cities only allow new housing on the condition that the developers of that housing deliver public benefits in return? This idea is often called “value capture”, and is used to justify — among other things — various forms of inclusionary zoning. I argue in this essay that value capture is conceptually and logically flawed. It rests on the idea that new housing is not by itself a public benefit, and on the assumption that not building housing is socially harmless. Most of all, it inverts one of the most important insights in urban economics and urban public finance: that value rests primarily in land, and that development is an important way to share and redistribute land value. Value capture mechanisms that are triggered by development tacitly punish landowners who share land value, and tacitly reward owners who withhold it. The fair and efficient approach to value capture involves taxing land, not development, and encouraging rather than discouraging the production of new homes. Contemporary value capture, in contrast, provides a veneer of redistribution but serves primarily to protect most urban wealth from redistribution.