Behold Vancouver, where since 1960 we have more than tripled the number of housing units within city limits.
In 1960 the city was already “built out,” with no undesignated or unoccupied parcels. Thus, this tripling was all “infill” densification or changes in land use from industrial to residential use. This was an unreservedly good thing – in all but one respect. This giant surge of new housing supply did not lead to more affordable housing as we all hoped. Somehow, confoundingly, the reverse happened.
During this period, Vancouver housing prices quadrupled, rising faster and further than in any other North American centre city. Currently, Vancouver home prices are North America’s highest and the third-most expensive globally (behind only Hong Kong and Sydney).
Vancouver-area wages have stayed stubbornly flat (inflation-adjusted) while housing prices (also inflation-adjusted) have climbed by 400 per cent. “Real Estate Fundamentals” would tell us that a region’s housing prices should rise and fall with average area incomes. In Vancouver, average wages and home prices have separated wildly. Why?
Part of the explanation is that average wages and home prices are now separating everywhere in most of the developed world. And it does not seem to matter how rapidly new supply is added. Prices keep rising. So this problem can’t be caused by imbalances in “supply and demand” for housing; something else is going on.
In both the USA and Canada this “something else” is reflected in the fantastic increase in the value of - not urban buildings - but in the value of the land under those buildings.
And the overwhelming bulk of that new value is confined to less than five per cent of the nation’s land area – in major cities. Rural land is now effectively worthless, while access to a share of urban land is unaffordable to all but the well-off.
Why is urban land more expensive now than in past decades? Thomas Piketty’s book, Capital in the 21st Century, provides a clue to the mystery. He says that this increase in land price is not new. It’s a reversion to the norm. He was the first economist to compile financial data dating back to the 1700s. His breakthrough insight was that “wealth” (privately held assets like real estate) has always been far greater than “income” (wages) except for a relatively brief period between World War II and 1980. After 1980 that disparity began to shoot back up to the norm.
The big change is that most of that new wealth was in “housing” (replacing agricultural land) or, really, in urban land value, since 70 per cent of average home value is now the value of the dirt below (up from three per cent in 1930).
This shift really matters because it means that wealth now comes from the appreciating value of wealth itself - not from income – and especially from the increasing value of urban land.
We have gone back to an inequitable financial situation, the likes of which we have not seen since the turn of the 20th century “Gilded Era,” and urban land is the main instrument of that inequality.
This crazy increase in land price is happening worldwide. In Auckland, New Zealand, urban land prices jumped by over 300 per cent in just six years. Or in Los Angeles, where land values (separated from building values) have increased in many areas by over 500 per cent in just seven years. Tragically those hardest hit areas in the LA basin are mostly districts where middle- and low-wage earners live – or try to.
And Vancouver, by many measures, leads the land price inflation pack. Over the past 15 years, the value of the buildings in the city rose modestly or even decreased . . . while during the same period, the land portion of assessed value increased by 300 per cent. Many individual plots of land, especially along the Broadway corridor where the new Vancouver subway is under construction, increased by over 1,000 percent in the same 15 years, while building value actually declined.
Many people think that crazy inflating land prices don’t matter much, because if land costs a lot you just add more density to the parcel to cut the “land share component” of the dwelling unit cost. But if this were true, parcels with bigger buildings on them should show a stronger relative value for the building. But this is not true. As density goes up, so too does the land value share of total parcel value.
In simple terms it works like this: Housing is priced by its market value per interior square foot. Let’s set that value at $1,000 per square foot. When the city decides to allow higher density buildings in the hopes of getting more affordable housing, what most often happens is that the asking price of the land immediately inflates, such that all the additional value of the new density allowance is captured by the land owner. Smart developers know this and many make most of their money by being the land owners during the rezoning process. In the end, no benefit accrues to the eventual buyer or renter.
Some very good developers like Michael Geller are also alarmed by these shocking increases in land price. With urban land so costly, they find it impossible to put out an affordable housing product.
But that doesn’t fully explain why our tripling of the number of allowable units in the city did not eventually lead to a drop in home prices. And in Vancouver, the production of housing units has exceeded household formation for more than a decade. So the so-called “law of supply and demand” should have kicked in at some point, lowering the cost of land that could be developed.
Why didn’t this happen?
To answer that question, we have to think about how urban land is different than “commodities” like steel or blueberries.
It was good old Adam Smith who first noted that land was not a commodity, it was one of the
three “factors of production” along with capital (a factory or a tractor) and labour (a farm worker or a barista). Land is always necessary to production but makes no direct contribution. He pointed out that land owners (or “landlords”) are essentially parasitic, drawing off value from capital and labour without doing any of the work to deserve it. Smith’s artful summary of the problem: “As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed and demand a rent even for its natural produce.”
Not too many decades later, British economist David Ricardo clarified Smith’s point with his “Law of Rent.” It argues that a landlord will demand in rent the difference in yield value between productive land and completely unproductive land. What that means is that all of the value of the soils production (or in modern terms the value of a prime urban location) will go, not to the entrepreneur or worker, but to the landlord (land owner). This law and Smith’s three factors of production are still fundamental tenets of classical economics as taught to this day.
Closer to home, and closer to our time, Henry George, the Progressive Era economist, clarified how this all applied to the late 1800s – by which time cities were economically more important than rural areas. He became world-famous for explaining how as cities mature, more and more of the value produced collaboratively by wage earners (labor) and entrepreneurs (capital) eventually gets absorbed in the higher and higher price of urban land.
As this process unfolds the regional economy becomes destabilized by the ever-more-absurd price of urban land, while the poorest of the poor end up with no urban land to claim; in other words, homeless.
Today’s out of control land prices are again a burning topic among economists, including Nobel Prize-winning economist Joseph Stiglitz, who also concludes that urban land has an innate capacity to absorb far too much of the wealth generated by labour and capital into the price of urban land – land which, again, contributed nothing to the wealth generated by capital and labour. Stiglitz: “Much of the increase in wealth has little to do with savings in the usual sense. Rather it is the result of capital gains — especially the increased value of land — and an increase in the capitalized value of other rents. It is a mistake to confuse capital with wealth.”
But why is it all so much worse now than it was in the 20th century? Part of the answer seems to be that as global productivity per wage earner increases, those increases have flowed toward the owners of capital, with wage earners getting no real benefit from their increased productivity. With this glut of capital in the hands of those who already have wealth, they must invest it in something, and urban land has been a very safe bet. This form of globe-wide and highly speculative “asset inflation” eventually bids up the price of urban land way beyond its utility value for housing or industry, exerting an ever more crushing burden on both entrepreneurs and wage earners.
All of which helps explain why certain cities are seeing outrageously inflated home and land price increases. San Francisco and Vancouver are extreme examples of this phenomenon. Also New York, Miami, Toronto, Sydney, Christchurch, London. On and on.
So, if adding density can’t make housing cheaper what, if anything, can be done about this?
One city that solved this problem 100 years ago is Vienna. During its own extreme housing crisis, it adjusted its municipal tax structure to fall heavily on landlords. It then took the money gained from this source and used it to buy land for non-market housing. It worked with its non-profit housing providers and the city’s best architects to build affordable housing – supplying land on a competitive basis to community groups anxious to create affordable communities
The results are striking. Now more than half of all housing in Vienna is non-market housing -permanently affordable to citizens making average wages and below. Rents in Vienna are about half what they are in other equivalent European cities. Those citizens who wish to own their own homes also pay less in Vienna than elsewhere, since the strength of the non-market housing sector exerts downward pressure on all land values throughout the city.
In the past Vancouver found a way to build far more non-market housing than most people realize, most prominently in the False Creek South and Champlain Heights neighbourhoods. Actually, non-market co-op type housing projects are tucked away in every part of the city, and collectively, along with social housing of all types, makes up 15 per cent of all housing units in the city. If Vancouver had continued to build non-market housing after the 1980s, and at the same rate as in that decade, non-market housing would constitute about 30 per cent of the total by now.
Closer to home and much more recent are the efforts of city leaders in Cambridge, Massachusetts. This city-wide alternative development path allows non-market developers to be granted double current zoned density, on any parcel in the city, but only to developers who agree to supply 100 per cent affordable housing units, whose rents are permanently pegged to average household incomes in the region.
This approach puts downward pressure on the land price “residual” value of potential development parcels, making them affordable to the non-profits who would be the preponderant site developers under this policy.
This last point is key. If Cambridge just allowed a doubling of allowed density city-wide, without this affordability demand, it would not work - for all the reasons discussed above. Land prices would rise to the market price per “buildable” square foot, pushing eventual rents out of reach for average income earners. Non-profits could not get their projects to “pencil out” at these inflated land prices. Doubling allowable density without the demand for affordability streams public benefit to private hands and effectively excludes non-profit developers from the land market.
The grass roots politics of development should never be ignored.
Cambridge’s elected and appointed officials were very careful to consult with neighbourhood groups about this plan. Neighbourhood owners’ concerns were respected in the forms chosen for the new buildings. These historically precedented Cambridge building types were eventually seen as positive additions to the typically very high-quality of Cambridge neighbourhoods.
Good systems thinking – thinking that includes quantitative and qualitative understanding – was key to their political success.
Patrick Condon is the James Taylor chair in Landscape and Livable Environments at the University of British Columbia’s School of Architecture and Landscape Architecture and the founding chair of the UBC Urban Design program.
