The genius plan that could bring down skyrocketing home prices – DAVID RAUDALES

DAVID RAUDALES

Businessman, musician / former Full Stack Developer

DAVID RAUDALES UK

The genius plan that could bring down skyrocketing home prices

If the US wants to build more homes, slow down rent growth, and give more people a place to live, it needs to learn from New Zealand.

Tyler Le/Insider

Imagine a bustling neighborhood with a mix of single-family homes, triplexes, apartment buildings, businesses, and public amenities. Rent growth is slow, home prices are reasonable, and there are plenty of affordable-housing options. Families, young people, retired folks, and businesses are all able to coexist, making the area diverse and vibrant. 

Unfortunately, most American neighborhoods don’t look like this. Instead, huge parts of the country have zoning laws that make it illegal to build anything other than a single-unit home. But these laws — originally designed to keep residential neighborhoods separate from manufacturing and to segregate and exclude people based on race — are running up against a harsh reality. American cities, especially those with growing job markets and a healthy influx of new residents, need to build millions of new homes to keep housing from becoming unaffordable. And keeping single-family-only zoning laws in place makes it almost impossible to meet these areas’ housing needs.

To make housing more abundant and affordable, economists and urban planners say, we need to upzone many neighborhoods — legalize the construction of denser, taller housing like duplexes, triplexes, and townhomes. Upzoning won’t cause the price of existing housing to suddenly tumble, but it will slow the growth of housing costs by meeting demand. It’s a necessary, but not sufficient first step in solving the affordability crisis.

“There’s an enormous amount of economics literature going back decades that shows us that places that have restrictive zoning build less housing over time, and that making zoning more restrictive reduces supply and increases prices,” Jenny Schuetz, an expert on urban economics and housing policy at the Brookings Institute, told me. “There’s essentially a unanimous consensus among economists and policy analysts that this is the direction we have to go.”

Aggressive opposition to zoning reform has limited the number of real-world models we have in the US. So experts have looked abroad for solutions. New Zealand stands out as an exceptional example of how to successfully boost housing supply through zoning reform. Facing an urgent housing crisis, the island nation implemented upzoning measures that legalized the building of medium-density housing. Not only did this help to slow down skyrocketing housing costs, it inspired a bipartisan, nationwide expansion of the policy. 

“The Auckland example is so particularly groundbreaking because it’s no longer a theoretical debate,” Matthew Maltman, an Australian economist who’s closely studied New Zealand’s housing reforms, told me. “It just makes it a lot easier to sell to people.” 

The Kiwi model 

New Zealand has long had the same issue facing many American cities: very low-density residential neighborhoods that restricted the amount of housing that could be built. In the 1970s and ’80s, the country even “downzoned” residential areas, further limiting housing capacity in much of the country. As its population grew rapidly — expanding almost 11% between 2013 and 2018 — a serious housing-affordability crisis started brewing. Home prices in Auckland, New Zealand’s biggest city, doubled between 2009 and 2016 and prices across the rest of the country followed close behind. People even began to pay hundreds of dollars a month to rent garages in Auckland without bathrooms or kitchens.

In the face of this growing problem, the city decided to act. A law passed in 2016 allowed for “gentle density” — making it legal to build duplexes, triplexes, and townhomes on single-home lots. The policy tripled the city’s housing capacity. Between 2015 and 2020, researchers found that new housing units permitted in the city grew from 6,000 to more than 14,300. Auckland went from mostly single-family homes to a much denser mix of multiunit homes and attached single-unit buildings. In a 2021 research paper, Ryan Greenaway-McGrevy, the director of the Economic Policy Center at the University of Auckland, found that Auckland’s policy succeeded in its twin goals of boosting supply and increasing density. 

“In per capita terms, Auckland has gone from somewhat of a laggard to a leader among New Zealand’s largest cities,” he told me in an email, adding that the number of per capita construction permits issued in the city hit a “record high in 2020 or so, which was surpassed in 2021 and again in 2022.”

New Zealand traditionally had low-density residential neighborhoods dominated by detached single-family homes until it passed new laws to allow more homes.

Guo Lei/Getty Images

The changes not only led to a lot of new housing, it also slowed the pace of rising housing costs. Maltman found a “significant reversal of the trend” of skyrocketing costs in Auckland. 

“There’s been a significant slowing of rental price growth since the policy was implemented,” Maltman told me, referring to the 2016 reforms. “Both incomes and inflation have grown faster than the price of rental housing.”

While the voices of New Zealand homeowners who opposed dense housing were loud in the rollout of the policy, a 2020 study found that Auckland residents were increasingly supportive of new construction in their neighborhoods — 64% supported medium-density housing as a way to solve the city’s housing shortage. The success of Auckland’s upzoning even helped inspire a bipartisan national policy, passed in 2021, that requires the country’s biggest cities to allow medium-density building in residential areas. 

The shift hasn’t been a silver bullet, and New Zealand continues to face housing challenges. The 2021 policy has faced significant local pushback and the center-right National Party has turned against it. The pandemic and seesawing interest rates wreaked havoc on the market, and the country is now technically in a recession. But experts say things would be much worse without the zoning reforms.

Early struggles and successes in the US

In the US, there are many opponents to zoning reform — particularly higher-income local homeowners, who don’t want to see their neighborhoods change. Some question the basic laws of supply and demand and insist that new housing actually raises prices. Others have more founded concerns about strains on infrastructure, schools, and other services. 

Many cities are also operating under old, complex regimes of regulations that make it hard to build. Land-use regulations tend to pile up and sometimes contradict each other, Vicki Been, who served as New York City’s deputy mayor of Housing and Economic Development under Mayor Bill de Blasio, told me. “So you have to, really, every once in a while, just sort of take a scalpel and say, ‘OK, we’re going to update this, we’re gonna cut through all of the layers of complexity,'” she said.

But New Zealand offers a way out of this morass. The country is a particularly good model for the US, because the countries have relatively similar urban-planning systems, land-use regimes, and geographies, Schuetz said. “It’s more similar to the US than, say, much of Europe.”

Nolan Gray, a city planner and research director for California YIMBY, agreed. “A typical New Zealand city looks a lot like a typical US city,” Gray said. “Most of the construction happened in the age of the car; you have a lot of single-family neighborhoods; you have a lot of low-rise commercial corridors.” Like Americans, average New Zealanders also treat their homes as an investment “that they secretly hope will go up in value, and they can cash out and retire,” Gray added.

There are three models of housing construction in US cities right now, Gray said. There are cities — including New York, San Francisco, and Los Angeles — that are building very little new housing per capita. Then there are cities, including Sunbelt boom towns like Phoenix, Houston, and Atlanta, that are mostly building sprawl. And then there are cities like Denver, Seattle, and Washington, DC, that are successfully building a lot of new, denser housing in existing neighborhoods. He’s optimistic about the third model.

“What those cities share is a shared long-term recognition that we’re going to grow a lot, and let’s start doing the infrastructure planning and the public-amenity planning to make that happen,” Gray said.

The legalization of accessory-dwelling units — smaller, detached homes like backyard “granny flats” — in California and in a few US cities, including Seattle and Portland, Oregon, has been very successful in spurring construction. California approved more than 23,000 ADU permits in 2022, up from fewer than 5,000 in 2017. 

“The fact that there’s been such extreme developer response to allowing the construction of ADUs suggests that there’s something going right about that policy,” Yonah Freemark, a land use and housing researcher at the Urban Institute, told me. 

Houston also dramatically increased density by cutting its minimum home lot size from 5,000 to 1,400 square feet in 1998. Almost 80,000 new homes have since been built on these smaller lots.

Houston has been one of America’s housing success stories: A reduction of its minimum lot size has allowed homes to be built more densely.

Brett Coomer/Houston Chronicle

And there are signs zoning reform is appealing to different geographies and across the political spectrum. Progressive blue state YIMBYs, libertarians, and free-market conservatives have all gotten behind versions of it. Montana Republicans recently passed a slew of bills loosening zoning across the state, framing the effort as a way to avoid California-style sprawl. 

“Flexibility in messaging is one of the real strengths of the pro-housing movement,” Schuetz, of the Brookings Institute, said. “In California, you can frame this as about racial equity, about climate friendliness. In Montana, you can say this is the anti-California. Utah is very focused on their scarcity of water and also very much on family-friendly areas, making it feasible for kids to move back to the places where they grew up.” 

Reforms don’t always work in one fell swoop, though. In 2018, Minneapolis became the first major US city to institute Auckland-style reforms, ending single-family zoning and legalizing the construction of up to three homes on a single-family lot. But the city didn’t allow new multiunit buildings to be taller or wider than the single-family homes they replaced, so the initial policy changes spurred just a fraction of the construction the city was hoping for. The size limitations make the option less financially attractive to developers. The experience proved that policymakers have to be willing to tweak policies repeatedly to get their desired outcomes. 

“The devil is in the details,” Been, the former New York City deputy mayor, said. “There are a gazillion details.”

In spite of some hiccups, Been added, the early success of these zoning reforms is promising. 

“We are seeing the fruits of the changes, and that’s really affirming of the importance of doing this, the importance of reforms, but also reassuring in the sense that the world hasn’t fallen apart,” she told me. 

Accessory dwelling units are catching on in places like California that have legalized them.

Allison Zaucha/Getty Images

Upzoning is necessary, but not sufficient

Zoning reform is just one piece of the puzzle. There are a slew of other necessary fixes to get the US to housing-market nirvana — from building-code changes to long-term expansion of services and amenities. Cities and states need to build sufficient infrastructure, including mass transit, schools, parks, water and sewer capacity, and other essential services to accommodate growing communities. 

“You really need to look at it holistically and make sure that you’re bringing all of the additional capacity in the basic things that make the neighborhood feel like a neighborhood,” Been said. 

The government also needs to invest public funds in affordable-housing and public-housing options for lower-income people. Without subsidies for more inclusive housing, people who can’t afford market-rate homes will be left behind. 

“More housing supply is almost an unambiguous positive, and allowing that new housing supply through government regulation seems extremely important,” Freemark said. “That said, we can’t just rely on a market-based response to actually get those new housing units to be built, because we’re not going to see investment in low-income neighborhoods, and we’re not going to see new housing units that are affordable to low- and moderate-income people.”

But any way you slice it, cities need to build more housing. And they need to make sure the voices of current homeowners don’t drown out those of generations of future residents. 

“The procedural side matters a lot, because if you give existing residents veto power, they can show up at community meetings and protest things and drag out the process and require the developer to keep making changes and go back to their architect,” Schuetz said. “You just make it very, very expensive and so some of the projects will just die because they’re no longer worth it.” 

Upzoning can appeal across the political spectrum — from progressive YIMBYs to conservatives who want less government regulation. New Zealand shows that, particularly in the midst of an affordability crisis, it’s a necessary first step to bigger, more ambitious efforts.

“Any incremental step toward upzoning is a positive step toward increasing supply and improving affordability,” Emily Hamilton, a housing researcher at the libertarian-leaning Mercatus Center at George Mason University, told me. “In terms of an overall objective, I think bringing down house prices to construction costs is an ultimate sign of housing abundance.”

Eliza Relman is a policy correspondent focused on housing, transportation, and infrastructure on Insider’s economy team.

Read the original article on Business Insider