A billboard advertising a new condominium tower stands in front of dilapidated houses.
Houses marked for demolition stand next to a billboard advertising a future condominium to stand in their place in Toronto. Chris Helgren/Reuters

A new study of zoning changes in Chicago finds that they led to higher, not lower, local home prices, while having no discernible impact on local housing supply.

One of the most influential ideas in urbanism today is that the key to addressing the housing crisis is reforming zoning and building codes to allow for taller buildings and higher population densities.

A growing chorus of market urbanists and YIMBYs make the case: Restrict supply, and demand and therefore prices go up. So, it follows, liberalizing codes to make it easier to build—and to permit taller, denser structures—will increase supply and cause prices to fall, which will then make housing (and expensive cities) more affordable.

But a new study published in the journal Urban Affairs Review throws a bit of a proverbial wrench into the works. Its author, Yonah Freemark, a doctoral student in urban planning at MIT, has analyzed the effects of upzonings in Chicago neighborhoods. His study takes the form of a natural experiment (the “gold standard” of social-science research) by comparing an initial set of zoning reforms, undertaken in 2013 to encourage development around transit stops, with a more aggressive set of reforms from 2015, which expanded the upzoned areas and increased incentives for taller, denser development.

Prototypical rail-station-adjacent Chicago neighborhood, indicating illustrative distribution of analyzed parcels. (Yonah Freemark)

The study design allows Freemark to overcome the analytical problem of an endogenous relationship between upzoning and changes in prices and construction activity. He uses Chicago zoning files to determine the parcels of land affected by the two zoning changes, as well as data on building permits from the city and property values from the Illinois Department of Revenue. The study tracks the period 2010 to 2018, before and after the zoning changes.

Freemark reaches two startling conclusions that should at least temper our enthusiasm about the potential of zoning reform to solve the housing crisis—conclusions that, interestingly enough, he has said he did not set out to find. First, he finds no effect from zoning changes on housing supply—that is, on the construction of newly permitted units over five years. (As he acknowledges, the process of adding supply is arduous and may take longer than five years to register.) Caveats and all, this is an important finding that is very much at odds with the conventional wisdom.

Second, instead of falling prices, as the conventional wisdom predicts, the study finds the opposite. Housing prices rose on the parcels and in projects that were upzoned, notably those where building sizes increased.

Freemark identifies two key mechanisms by which upzoning acts to increase prices. First, the fact that upzoning registered so quickly in higher prices is a signal that land prices respond rapidly to the ability to build more units, which translates into money in the pockets of incumbent landlords. Second, the large effect of reduced parking minimums on the value of vacant land means that the biggest impact of zoning liberalization is on land that is ripe for development anyway. As Freemark puts it bluntly: “[T]he short-term, local-level impacts of upzoning are higher property prices but no additional new housing construction.”

Freemark is aware of the limits of the study (for one thing, it looks at only one city, Chicago; for another, it does not include rent data). Last night, in a Twitter conversation about his research, he wrote:

In an email exchange with me, Freemark noted that the study does not “invalidate the basic laws of supply and demand. In no way is it suggesting that increases in the number of housing units won’t eventually lead to lower prices overall.” But what the study does show, he added, is what happens on specific lots and areas that are upzoned. And that’s “where we should be concerned,” he continued, because “those who worry that upzoning will increase prices in certain neighborhoods are likely being reasonable.” He added,

even if upzoning—in the medium or longer term—increases the number of housing units (though I do not find evidence for or against this in my study), we still have to contend with the potential that the short-term impacts of the change are higher home prices and likely higher rents for those directly affected by the change, especially since new development, as everyone knows, takes many years to get underway. The speculation will come first.

Freemark’s findings are in line with my own thinking, in my book The New Urban Crisis. There, I argued that although it is important to combat unnecessarily restrictive zoning and building codes (whose advocates I dubbed “New Urban Luddites”), easing these codes would do little to address housing affordability and might actually serve to increase housing prices in the neighborhoods in question, for the simple reason that developers would use the land not for affordable units but for luxury construction.

I noted that the markets—and neighborhoods—for luxury and affordable housing are very different, and it is unlikely that any increases in high-end supply would trickle down to less advantaged groups. Another economist who is more pro-market than I am, Tyler Cowen, has similarly argued that the result of liberalizing zoning codes to allow for taller buildings will likely be more luxury housing and more profits for landlords and developers.

In our email exchange, Freemark emphasized that simply liberalizing zoning for taller buildings and denser development will not address the critical need to provide affordable housing for less advantaged people. He pointed out the “need for other programs, like more affordable units and rent control, which should potentially come with upzoning. Upzoning isn’t a sufficient affordability program in itself.”

The notion that increasing housing supply will magically fix our problems is one of those things that is simply too good to be true. Zoning liberalization is at best one part of the answer. America’s housing and urban crises are thorny problems that we can only come to grips with using a broad mix of strategies and solutions.

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