The Case for Strengthening Urban Property Rights

We'll never escape from NIMBY sentiments, but local governments can take steps to ensure everyone benefits from new development

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Reuters/Mario Anzuoni

People tend to have a proprietary feeling about their neighborhoods, particularly when they have large sums of money on the line thanks to their investment in their home. This feeling leaves urban property rights in a gray area. Residents are remarkably willing to dictate to private property owners what can and can't be done with their land. They're willing to approve restrictive zoning rules and lobby against permitting in ways that dramatically reduce potential land value, without ever dreaming of compensating owners and would-be developers.

Homeowners have long been abetted in this attitude by people of all ideological stripes – the progressive Great Society slum-clearers, the conservative suburb builders, and the New Urbanist suburban critics all accept the importance of tight government controls over land usage: over who can do what, where, in what kind of structure, with what color shutters. Most rich countries soured on economic planning and heavy regulation decades ago, but the move toward a more liberal order never made its way into urban development. New planning paradigms replace older planning paradigms, but very rarely is there acknowledgment that there may simply be too much planning, period.

One useful strategy for improving development in America's cities would be a simple increase in the humility with which residents and planners alike approach developmental rules and regulations. Quite often, the rules that are adopted in this context have significant negative consequences.

More concretely, a good first step would be to strengthen urban property rights. A straightforward way to accomplish this would be to declare that a neighborhood can limit development on land to whatever extent it wants, so long as it's willing to either buy the land in question or pay the land's owner to comply. Among the key problems associated with NIMBYism are the wedges driven between societal costs and private costs, and between private costs and private benefits. When a group of NIMBYs lobbies the government to restrict development on a piece of land, the private cost to the NIMBY group members is low—just the time to circulate petitions and attend council meetings—and the benefits are high: statutory protection of the neighborhood in its current, preferred state. But the societal cost is large: foregone potential population, lost productivity, foregone employment opportunities, lost tax revenue, and so on. It's cheap and worthwhile for individuals to limit development when it can be done through government lobbying. NIMBYism is a great bet for the NIMBY; it just happens to be terrible for everyone else.

Strengthening property rights, however, would more closely align private costs and private benefits. A group of NIMBY neighbors forced to buy a property in order to limit development on it would only make the purchase if they felt very strongly about doing so and, in particular, if they felt the benefits to them of blocking the development were worth the cost of the land in question.

But wait, you might argue: what if the potential developer stands to make billions by building on a particularly lucrative piece of land? How then could neighbors hope to buy the land to keep it un- or underdeveloped? It would obviously be much more difficult for NIMBY groups to halt development in such cases, but generally speaking, that’s a good thing. When land values are very high because development potential is very high, that suggests that demand is very high. And in such cases, the cost of blocking that high demand is also quite high. It is in precisely these cases that the economy is most harmed by NIMBYs who face low costs in restricting development.

Another potential criticism might be that in cases where development opportunities are most lucrative, builders will also have the greatest incentive to lobby for their project, offsetting NIMBY efforts. Clearly, big builders often manage to get large projects constructed in the face of neighborhood pressure. But this criticism only works up to a point thanks, to the essential asymmetries that are a part of such negotiations. Among the beneficiaries of development are many people beyond the immediate area of construction, including potential new residents and all those who benefit from more rapid growth and innovation. Costs, on the other hand, are focused on the few neighbors in close proximity to the development. Those few neighbors will often be represented by just a handful of local officials who will have a strong incentive to keep them happy. No one in the city represents the residents or businesses that might want to live or operate in the developments yet to be built. But their interests should matter.

Moreover, in the best of cases cities will tend to underinvest in density, such that any limitation on new development moves the city ever further away from where it ought to be. When a developer constructs a new building, participants in the transaction—from contractors to new property owners—all benefit (otherwise, they wouldn't transact). But so too do other residents of and workers in the city. The increase in a city's market potential associated with rising density can't be captured by individual builders, and so they'll tend to produce less new building than society would prefer, even in the absence of tight development rules. If anything, cities should go out of their way to counteract the impact of negative NIMBY sentiment for precisely this reason.

The nastiness of development battles suggests that sweeping NIMBYs aside isn't necessarily the most pragmatic approach. Neighbors will have their voices heard. In most situations, cities must work hard to accommodate the demands, unreasonable or not, of existing residents.

An alternative, then, is to enforce property rights rigorously, but to change their allocation. Cities could establish that neighbors in close proximity to a new project have the right to be compensated for the supposed costs of the development. In exchange for liberalized rules on new development, the city could charge developers based on project density and either distribute the revenues directly to residents or use the money to fund investment in community projects. Taxing density in this way isn't ideal, but by giving local residents a direct financial stake in new development, it may become easier for cities to meet demands for new space.

Cities may find it easier to manage neighborhood interests by planning ahead of time to make room for a minimum amount of new development. Legal scholars Roderick Hills and David Schleicher propose that city governments adopt a zoning budget. They note that supporters of improved urban policy often fight back against NIMBY efforts to limit new construction, and not without the occasional success. While high profile battles over big projects sometimes go the urbanists' way, however, residents in smaller cases are often winning new zoning restrictions that undermine the development gains from the big cases, and then some. It's simply too difficult for activists to overcome intense lobbying pressure from many, disparate neighborhood groups.

A government could act preemptively to ensure that zoning improvements are maintained by using a zoning budget. Each year, local government officials might adopt a planned level of allowable capacity expansion – a budget – that is then used to navigate NIMBY waters. Residents' demands can be accommodated in whatever way the city likes, so long as the net change in potential development meets the budget. If nothing else, the zoning budget plan turns neighborhood groups into adversaries rather than allies in the effort to shape planning decisions – a useful outcome, so long as the groups can be convinced of the general utility of increased development in the first place.

Edward Glaeser argues for a variant on this proposal relating to historical preservation designations. NIMBY groups are often quick to seek preservation of properties targeted for development on historical grounds. Sometimes, neighbors are in the right; in the past, rapid development has erased important and beloved structures from urban landscapes. Quite often, they're seeking the quickest and most expedient way to block development, by protecting buildings of dubious historical interest.

To avoid this tactic, Glaeser recommends a historical preservation budget, such that at any given time cities can only protect a set number of properties. If residents wish to add a new structure to the list, they must think carefully and weigh the value of the existing set of historical buildings, in order to determine which they care about most. This would create a strong incentive not to designate ho-hum buildings as special.

It's important to note that NIMBYism will often breed NIMBYism. When demand for a city is growing rapidly, a public outcry that blocks a new development won't eliminate that demand; it will only redirect it. That redirected demand often manifests itself as development pressure in other neighborhoods, which prompts still more NIMBY outrage. In a city in which development rules are generally more liberal, there will be less pressure on any given neighborhood.

This essay is adapted from author’s Kindle Single e-book, The Gated City.

About the Author

  • Ryan Avent is The Economist's economics correspondent and the primary contributor to Free Exchange, an economics blog