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The Economics and Politics of Zoning

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11/04/2019

Both economic decisions and political decisions involve choices and tradeoffs. The difference is that economic decisions are ultimately informed and rely upon monetary prices, revenues and costs. Political decisions, meanwhile, do not depend on market outcomes—they can be based on love, legacy, favors, or establishing power relations.

Zoning is the practice of governments controlling the type, size, and population density of buildings. (Zoning should not be confused with building codes, which control the building materials and other design aspects of buildings.) The purpose of zoning has been to create separate regional “zones” of building types: broadly, these categories typically include residential, industrial, retail, and parks. The zones are then broken down into more minute categories, like low, medium, and high density homes, different kinds of retail businesses, and so on.

Zoning is a type of government intervention into economic decision making: it the practice of the state (whether it is the municipality, subnational, or national level) intervening in the affairs of private individuals in where and what they can build. By intention, zoning is a limit on the supply of housing. In effect, it is a limit on the quantity of the stock of housing; that is, it acts like any other quota or prohibition.

While many economists, from Rothbard himself, to even those in the mainstream, recognize the deleterious effects of zoning, there does not exist a single, thoroughgoing Austrian analysis on the subject. The purpose of this piece is to be that analysis. It is broken up into two sections: the politics of zoning, and the economics of zoning.

The Politics of Zoning

The economist Ludwig von Mises marked a distinction of ownership under the principle of violence, and ownership under the principle of contract.1 Under the principle of violence, ownership constitutes physical possession only. A person no longer owns a thing if someone stronger takes it from them via violence. It can be best expressed by Tacticus’s description of the young men of ancient Germania: “they actually think it tame and stupid to acquire by the sweat of toil what they might win by their blood.”2 The principle of violence is a policy of arbitrary chaos over peace.

Conditions are different under the principle of contract. Once it is recognized that the stability of ownership is a beneficial institution and ought to be maintained, the principle of contract emerges. Under a policy of contract, voluntary exchanges of property become the norm.

Zoning, as it is commonly understood, is a policy of the state. The state, despite its appeals to democracy, consultation, public reason, and the like, is fundamentally an institution that operates under the principle of violence. Its laws and ordinances are always backed by the threat of violence. It is zoning under the principle of violence that is under investigation in this essay.

It is important to note that land use restrictions can be an outcome of voluntary, contractual agreement as well. A condominium tower is often governed by a corporation made up of the individual owners of the units of the building. The condominium corporation could, if it wishes, limit commercial activity within units, subdividing units, renting units for short periods, limiting animals, and so on. The corporation would, in effect, be governed by a constitution, which would have been consented upon unanimously by the original owners. The terms of the constitution/contract may even allow future owners certain rights and protocols on how to change the terms.

Murray Rothbard created a taxonomy for violent interventions into economic affairs,3 using three broad categories: autistic interventions, binary interventions, and triangular interventions. An autistic intervention is one where the intervenor controls what the victim can and cannot do with their own property. In the case of a binary intervention, the victim is directly forced into an exchange with the intervenor. In a triangular intervention, the intervenor, A, dictates the terms under which a pair of victims B and C may exchange with each other.

The Economics of Zoning

By limiting the quantity of new housing that can be built, zoning gives existing owners of limited structures (be it housing, factories, or office space) a “monopolistic” privilege. As the history of government zoning has always been to limit the construction of new homes, those lucky enough to already own homes will have competition from other homesellers artificially restricted by government regulation. We can derive several political and economic consequences from this state of affairs.

Zoning Limits The Quantity Available for Sale.

Zoning prevents property owners from doing what they wish with their property. The express purpose of zoning is an indirect limit on the precise number of new dwellings or businesses in an area. It is only effective, though, if it limits development that otherwise would have occurred; it does this by satisfying two conditions. The first condition is that the population has to be growing. The second condition is that zones limit uses that otherwise would have occurred.

By zoning land exclusively for residential use, businesses that may have been desired by the community are not supplied. By zoning residential land exclusively for single family homes, less land is available for multi-family arrangements.

Of course, by designating land for strictly residential use, less land becomes available for commercial use. This also causes increases in commercial land prices, and subsequent space. Zoning is an arbitrary reorganization of the economy of land. Land that would be useful for many people living in a smaller area is prohibited by law in preference for fewer people living on a larger area. Land that would be useful as a commercial enterprise is prohibited by law in favour of residential usage. Land that would be useful as a residential area is prohibited by law in favour of factories, parks, or other empty uses of land.

Zoning is, in fact, two forms of quantity control: it both (partially) prohibits new real estate developments from where they would be most economical, to where the ordinance decrees they should be built; and it also grants monopoly privileges as well. Zoning achieves the latter through the convoluted, byzantine processes that inevitably arise in order to approve any new development. These processes will require entrepreneurs to hire of specialist lawyers and quasi-lawyers to navigate a successful approval. The city itself will also have to hire more bureaucrats to deal with the increasing complexity of the zoning ordinances as well. Effectively, this creates a legal barrier to entry for smaller or less politically connected firms. This entrenches the incumbent developers, essentially raising their status to that of monopolist.

This limits not only the means of production, but the means of satisfaction, and so both buyers and sellers are made worse off.

Zoning Causes Higher Prices.

It is this reduction in supply of land that causes an increase in prices. Just like any other situation where a lack of availability results in higher prices, so too is the case in land. Furthermore, in a situation where there is still a growing demand to live in the city, the lower quantities available for purchase will result in higher prices immediately, and will increase inequalities within society over time.

Keep in mind that what causes the lack of availability is both the prohibition on free development, as well as the monopolistic/oligopolistic situation that arises from the legal system. The prohibition results in the ordinary reduction of quantity. The regulation-created oligopoly has then a further incentive to reduce its output, to enjoy even greater profits.

These great suppressing pressures on quantity will only contribute to a further acceleration of prices. It will feed a “speculative frenzy”, where seemingly anyone who can invest in real estate gets rich. Eventually, two classes of people will be created: those who have been priced out of the market, and must move to the suburbs or other cities; and those who had the means or the luck to enter the market.

Zoning Promotes Black Markets.

Legal limits to trade only serve as an increase in the cost of doing business. For some, the expected benefits will still exceed the expected costs. In the case of zoning, black markets will exist for both homes and businesses.

Black market homes effectively mean that more people will live in one dwelling than the legal maximum. It results in overcrowded housing. In many jurisdictions today, a dwelling is defined based on a minimum number of privately accessible kitchens and bathrooms. In black market housing, many adults will share the same kitchens and bathrooms. These conditions per se are not problematic. What is problematic is that tenants and landlords who engage in illegal behaviour tend to shirk other duties and responsibilities as well. Often, these means that landlords will not take the proper safety precautions with their overcrowded homes. Tenants, on the other hand, will not do their part in keeping the residence clean.

This combination of untidy conditions, coupled with lackadaisical safety precautions create dangerous conditions for the tenants. Fires are more likely, and would be more deadly as well. It’s important to note that these conditions are not entirely due to unethical disregard for human life. In some cases, it may be that undertaking safety-enhancing renovations will result in the permanent eviction of the residents: a fire department may be called in to inspect the structural safety of a home, but instead the home is reported for a zoning violation. This was exactly the case in a recent episode in Toronto.4

Landlording is not the only business someone can run out of their home that violates zoning bylaws. In North America, zones explicate what kinds of non-residential enterprises are permissible within a zone. Indeed, the origins of zoning bylaws were expressly to prohibit home-based laundromats in California. Residential zones typically allow libraries and care facilities, and not much else. Thus, if someone wanted to offer baked goods out of their home, they would be in violation of the ordinances. They would have to save or borrow more money than otherwise, in order to start their business.

By increasing the cost of doing business, less business takes place. Fewer goods of all kinds are created, brought to market, exchanged for, and benefit consumers and producers alike. As the unavailability of homes leads to instances of homelessness, bidding wars, and overcrowded living conditions becoming more prevalent, councillors now have two choices: they can either roll back the restrictive policies, or introduce new interventions into the market.

Zoning Promotes Increases in the Quality of Legal Housing

These rising prices, due to reduced quantities for sale, result in increases in quality as well. New developments feature “luxury” finishes that are relatively cheap to manufacture, but fetch a high price. Older homes are remodeled and upgraded and “flipped” in order to sell at higher prices, as opposed to being sold as is, or being rented out to low income families. This makes it harder for lower income households to live (and subsequently work) in the city.

Zoning Will Require More Interventions.

Due to the complicated, time-intensive nature of the inefficiencies of zoning, it becomes difficult to ascertain cause and effect among the public. As a result, other sources will be erroneously blamed as the cause of the social ills listed above. Typical scapegoats include speculators, greed, and general market failures. To this end, more interventions will be introduced in the form of price controls (like speculation taxes and rent control), and other quantity controls--like “inclusionary zoning” requirements, which require developers to give up part of their land or property for low-income housing.

There is also a concept called “density bonusing.” Under the mantra of “growth must pay for growth”, those seeking to build in excess of the limits set by zoning ordinances must pay a fine to the governing body. The fine may be a direct tax or in-kind benefits for the state, or in the case of Toronto, it may even be a requirement to buy art valued as a fixed percentage of the gross construction costs.5

As each new intervention will bring with it new inefficiencies, there will be an increase in calls for even further interventions. What's more, is that the new interventions will eventually become contradictory. Politicians have to satisfy both the consumers’ demands for lower prices, as well as the producers’ demands for higher prices.

Just as government now imposes both a “sin tax” for cigarettes (to discourage the negative health and social effects), while at the same time subsidizing tobacco farmers,6 so too can we come to expect some “sinful” selling or buying of homes to be taxed, while others will be encouraged to buy and sell homes. Indeed, we already see this happening: in the name of preventing prices from rising, foreign buyers are subject to a special tax in Ontario; meanwhile, first-time home buyers are subject to special tax exemptions, that allow them to bid up prices anyway.

Finally, as each new intervention accrues, taxes must be raised higher and higher to support their enforcement. At the same time, the prohibitions on development continue to cause an increase in prices. This reveals the true nature of zoning, as with all other restrictions on production. Ultimately, they are policies on social expenditures.7 As such, if the policy was strictly to support home values, this end could be achieved much cheaper and less intrusively with a direct subsidy to homeowners (or, equivalently, a direct subsidy to home buyers).

What’s more, is that any proposals to fight against these interventions will be fiercely rejected by what has been dubbed as the “iron triangle of beneficiaries, politicians, and bureaucrats.” The beneficiaries of zoning are those homeowners, developers, and army of ordinance navigators that have benefited directly from the law. The politicians are, in turn, kept in power by appeasing these beneficiaries. The bureaucrats are hired by the politicians.

Conclusion: Zoning Makes Everyone Worse Off

Operating under the principle of violence, government zoning is an intervention on multiple fronts. It is an autistic intervention, in that it prohibits property owners from using their own property as they see fit. It is a binary intervention, in that requires conciliatory fees and even property in exchange for permission to build. It is also a triangular intervention in that it prohibits parties to contract freely with each other.

Many will say that zoning creates winners and losers. The winners are those who have been able to buy property at low prices, while the losers are those who were unlucky in when they tried to enter the market. The analysis above rejects this possibility.

It's not the case, either, that the benefits that accrue to the protected class “outweigh” the losses of others: While some do indeed become very rich, much richer than perhaps they would have been under a free market, by restricting development, zoning restricts overall incomes. It is a restriction on trade, and thus a restriction on the division of labor, the extent of the market, and the ability for entrepreneurs to satisfy the most urgent needs of consumers. As people will be forced to spend more of their income and wealth on procuring housing, they will have less money to buy other goods and services. The became house rich, but cash poor. What’s more, as more lower income people are zoned out of the market, fewer people will be available to work low wage jobs. However, the relative cash poverty of the denizens of the city will not enable to rise up enough to attract more workers.

So even though only progressively richer people will be able to move to and live in the city, the relative high cost of housing will capture most of the new wealth. This leaves less money for restaurants, nightclubs, and other every luxuries. Thus, relative to the incomes of people living in the city, prices will be higher for ordinary goods and services. At the same time, the dearth of savings and investment in other lines of production will mean that new goods and services will take longer to come to market.

Zoning lowers the incomes, savings, investment opportunities, and innovation potential for the whole of society. Over time, these functions would have accrued benefits to everyone. So, while on a first glance zoning enriches the few at the expense of the many, it must also be true that zoning makes everyone poorer over the long run.

  • 1. Mises, Ludwig von. Socialism: An Economic and Sociological Analysis. (1962 [1922]).
  • 2. Tacitus. The Origin and the Situation of the Germans. (1876).
  • 3. Rothbard, Murray N. Power and Market. (2004 [1970]), pp. 11-13.
  • 4. Galbraith, Sean. “I don’t normally tweet about projects I work on, but when it involves a Committee of Adjustment denying a variance to maintain an entirely existing (not legal) triplex containing 3 units of affordable housing bc the new owner wanted the fire department to make sure it was safe…”. Tweet thread. December 13, 2018. https://twitter.com/PlannerSean/status/1073289278308773888
  • 5. Toronto Realty Blog. “What Is The “Percent For Public Art Program?”“ January 26, 2018. https://torontorealtyblog.com/blog/percent-public-art-program/
  • 6. Physicians for a Smoke-Free Canada. “Tobacco Production in Canada: Revenues and Government Subsidies.” No date given. http://www.smoke-free.ca/pdf_1/Agricultural%20Subsidies%20to%20Tobacco%20-%20Canada.pdf
  • 7. See Chapter I of: Mises, Ludwig von. Interventionism: An economic analysis. Indianapolis: Liberty Fund. 2011. https://oll.libertyfund.org/titles/mises-interventionism-an-economic-analysis

Ash Navabi is senior economist at Housing Matters. Visit torontohousingmatters.com, or send him mail at ash@torontohousingmatters.com.

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