Saturday, December 31, 2016

Building affordable housing: what can work in urban areas

OK, I've been away long, just busy and without much motivation lately, with this follow-up hanging on me, preventing me from starting other posts. Anyway, if anyone still follows my blog, here is this article I wanted to finish before 2016 is over...

...so in the last article, I pointed out that the economics of building new housing is not really favorable to affordable housing. If you only had construction costs to contend with, it would be possible to have reasonably large affordable housing, however, in places where land prices tend to be high, these impose a premium that make it really hard to build affordable housing of decent size.

Furthermore, the post-WWII idea of affordable housing, the starter home for young families, is based on a "grow home" model, the idea that houses be sold with the basement or attic unfinished, with the expectation that, as the family grows, so will the house, thus keeping the initial price low but allowing for expansions further on. This worked well in greenfield developments, but the problem is that, once "grown" the house cannot be ungrown for the next generation. So a "grow home" is only affordable once, then it gets progressively more expensive.

All of that leads to a simple question: is it even possible to have affordable housing in an urban area, where land is expensive and greenfield development impossible?

So let's see a few approaches that can make economic sense...

Very high increase of density, without going too high

Replacing existing buildings by higher density ones is the traditional approach to increasing density. However, this isn't a silver bullet. There are two main pitfalls to that approach.

The first pitfall is if the density of the proposed building isn't high enough. That's because developers who want to redevelop a property have to compete to buy that property with people who would want to buy it to live in it.
Two major types of buyers competing for a given property
That means that the minimal price a developer could pay is the market value of the building, because if he's not willing to pay that much, a potential resident will just outbid him and buy the house to live in. And usually, if a developer wants to build something, it's because the area is reasonably desirable and the market value isn't too bad. That means that the land price the developer has to pay is AT LEAST equal to the market value of the current building which is usually AT LEAST equal to the construction cost, to which you have to add destruction costs (not that high usually) and the construction cost of the new building.

So let's say we take this house...

Which could be worth 270 000$ in market value.

And we want to replace it with this triplex:
So let's estimate things...

The current house's market value is 270 000$, let's say 30 000$ for removing the current house and 300 000$ for building the triplex. That's 600 000$, let's add another 10% for profit margin, that's about 660 000$, while the building has about 2 900 square feet of livable space. That's about 227$ per square foot, or 220 000$ per 969-sf 2-BR apartments.

That's not necessarily very affordable, especially when you consider that this replaces a 3-BR 1 260-sf house with another 1260-sf of basement that sells for 270 000$.

Now, if you could replace the house with an 8-plex like this one...
Then we add the value of the house (270 000$) and the destruction cost (30 000$) and the construction cost (1 030 000$), that comes up to 1 330 000$, plus 10% of profits, that's about 1 500 000$. That comes out to about 150 $ per square foot, or a bit under 200 000$ for a 1200-sf, 3-BR apartment. That's more reasonable.

Of course, that's ignoring factors like parking minimums, regulatory costs of rezoning and the like.

The saving grace would be a house in disrepair, a "fixer-upper" which market value would be lower than similarly-sized houses. Thus allowing for a lesser increase of density to have affordable housing as the effective land price is significantly lower.

The other pitfall is when the actual building is high enough density that the only way to add density in any significant manner is to go for a mid-rise or high-rise (4+ stories) building, which is significantly more expensive to build as they require concrete, elevators, water sprinklers, and other elements. So if the cost of construction of the new building alone is 200$ per square foot, that imposes a high threshold for housing prices.

So another approach might be needed.

Subdividing

So building a new building in replacement of an existing building is not a great proposal economically speaking. But what if you used the second of the three Rs? Reuse. After all, if you have a perfectly suitable building, maybe you don't need to destroy it to increase density. How? Well, by subdividing the existing building. Simply rearrange the interior of a large home to create many units out of just one.

For example, here is a house that could easily be subdivided into a duplex:
A raised ranch in Québec
This building has a door that opens on a small lobby which has 2 sets of stairs, one that goes up to the upper story, the other that does down to a half-buried floor.

If you put a wall in the middle of the lobby and add another door to the outside, you separate the floors, possibly creating two 2-BR or 3-BR units. So if you build a raised ranch with an unfinished basement, you can finish the basement, maybe for 70 000 or 80 000$, then convert the house into a duplex.

What if the house is too small to be subdivided into reasonably big units? Well, buildings can have additions built to them. You can build additions next to them, or even add another story in some cases. This seems to have been done relatively frequently in older American towns, like these examples in Lowell, Massachussetts:

As you can see, you have these long elongated buildings, often with dissimilar roofs and the front part of the building looks like a self-standing house, which is probably how they started. Additions aren't that cheap to add, as they are more complicated to build than a new building and so require more labor. I've seen estimates that they can cost 200$ per square foot to build in the case of an additional story. But the advantage of such additions is that the land cost is nil, unlike new constructions, since it's an addition, not a replacement.

Additions are also not a magic bullet, they are limited by zoning, like everything else, and the structure of the building must be able to accommodate the addition.

New building on the same lot

This is a reasonably frequent avenue used in many cities like Vancouver, taking the form of the laneway house for example. A laneway house is a possibility afforded by a lane behind rows of houses, as a second house can be built on the same lot, just facing the rear alley rather than the street. Like additions, the advantage of this approach is a nil land cost, since the owner can build it without replacing the existing building. In a way, it can be seen as a particular type of subdividing, where one subdivides the lot rather than the building.

Boarding houses

Boarding houses are a practice common in traditional American cities but that is now rarely seen. Basically, once upon a time, when an homeowner had empty bedrooms in their houses, for example, because their children were grown up and had moved out, they would advertise these bedrooms to rent. And thus, single people looking for affordable housing could rent out these bedrooms, often with meals being offered as part of the renting contract. That way, the occupancy of single-family houses could remain high, the "empty nesters" phenomenon didn't occur much and affordable housing options were available to singles, and maybe even some couples. This also solved an income issue for older people who were retired before the institution of government pensions... Hmm, interesting hypothesis: one of the reasons for the disappearance of boarding houses may be that government pensions reduced the need for older homeowners to find new income sources.

Famous boarding house occupants are Sherlock Holmes and John Watson, who rented out bedrooms in Ms Hudson's personal house.

What potential does renting out empty bedrooms have?

Well, going by the Canadian census, I estimate there are as many as 11 million unoccupied bedrooms in occupied dwellings in Canada. Enough to absorb a 30% increase in the population. Of course, most of these bedrooms may not be in desirable locations, but even in the city of Vancouver (NOT including the suburbs), there are probably around 82 000 unoccupied bedrooms in occupied dwellings, enough to increase the population by nearly 14%. In the city of Toronto, there are 340 000 unoccupied bedrooms, again, enough to absorb a 14% rise in population without building a single new home.

In older suburbs, the amount of unoccupied bedrooms is amazing. In my childhood's suburb of Boucherville, there are at least 47 420 bedrooms:

Meanwhile, there are 40 753 people living in the city, and 10 890 couples, married or common law. If we suppose couples sleep in the same bedroom, that means at most there are 29 863 occupied bedrooms, leaving 17 557 bedrooms unoccupied in occupied dwellings. That's enough to house a population increase of 43%, with a similar rise in density.

Filtering

Filtering is a phenomenon where the construction industry in a metropolitan region is able to build sufficient amounts of housing to outpace the growth in population and households. Basically, supply grows faster than demand. In such a situation, even if newly built units are not affordable on their own, they may lead to a decline in market value of older units that are not as desirable, therefore their owners who are renting them out or trying to sell them have to lower their asking prices to find a buyer or a renter.

This is not that common in the major cities of Western countries, because though fertility rates have fallen, governments have compensated that fall with increases in mass immigration, and immigrants tend to gather in the major metropolitan areas. This factor adds up on the rural-to-urban migration and makes it often unlikely to see demand growing slower than supply, as the local industry fails to keep up with the population growth. The temporal reality of supply and demand and industry output must not be neglected.

However, it does happen in Japan, as these graphs I made from condo (mansshon in Japanese real estate parlance) prices per square foot in central areas of Sapporo and Tokyo reveal. Data from suumo.jp:

When density in a city is high enough, filtering is the only approach that works, because subdividing would result in too small units for the needs of people and the current density makes it impossible to economically replace current buildings with walk-up low-rise buildings.

An alternative to the "grow home": the adaptable home

Finally, let's look at my own counter-proposal to the "grow home" model, that I've already derided. A reminder, the "grow home model" is the following:

First, a cheap home is built with an unfinished basement and/or attic, which is bought by a young couple.

As the family grows, the attic or basement is finished, or the house likewise improved, to accommodate the needs of the family at its peak (teenage or young adult children still in the home).
After the children leave, the parents still occupy the fully improved, now very valuable home.

When the parents have enough, they sell the house, at its current market value... likely twice what it was worth when it was built, because of all the improvement and additional living space.

So the house starts cheap, but doesn't remain cheap much longer... what to do?

Well, let me present the alternative, the "adaptable" home.



The two first look like duplexes, they have two doors side-by-side. The second looks like a triplex, with two doors on the first story, one going upstairs, the other opening on the 1st story unit. But here's the thing, the two side-by-side doors can in fact be easily converted into one single door, and the lobbies on the other side of them can be merged by removing the wall that separates them, thus integrating the stairway of the upper or lower unit into the other unit. This effectively merges the units together.

The building can thus be easily merged or subdivided as needed.

Raised ranches fit the bill, as does the triplex shown on this very page, since it has two adjacent doors that could be easily modified to merge both top units.

Imagine this but with one door instead of two on top of the stairs

So the life of these buildings can be the following.

First, they are built complete, all floors finished, and sold to a family that will occupy it. The family is small, so it first put the building into its duplex or triplex form: living in one unit and renting out the other(s).

As the family grows, it may lack space, in this case, the owner warns the renters to move out as they plan to merge two units to create one big 4- to 6-bedroom unit to accommodate their growing family.

As the children leave, the owners may decide the unit is now too big for them, they can then easily separate the units anew and rent out the now unoccupied unit.

This provides needed affordable housing to a city and a retirement supplementary income to the owner. Though the initial capital cost is higher, the revenue from renting out the other unit(s) more than makes up for the higher cost. In fact, if I compared a "grow home" scenario of a 200 000$ home which has its basement finished for 80 000$ 7 years afters its initial sale to an adaptable home that is built with a finished basement unit for 280 000$, renting it out for 7 years at a price of 600$ a month for a 2- or 3-bedroom basement unit, then converting into a single house, losing the revenue. The adaptable home is paid back 2 whole years before the grow home, thanks to the rent income.

In fact, an adaptable home can even start out as a grow home that ends up being subdivided later in the life of the family that occupies it.

The main issue here is purely regulatory. An adaptable home goes from single-family to multi-family and vice versa during its life, adapting to the needs of the owners. This would be illegal in most cities, and is just further proof of the idiocy of the current North American zoning practices.

Tuesday, August 23, 2016

Building affordable housing, where has the entry-level house gone?

One of the biggest topics of discussion in urbanist circles, and even beyond that, is certainly affordable housing. This debate is very politically fraught, even the term "affordable housing" is up for grab, with some people seeming to define it simply as "below-market price" housing.

Now, much has been written about the planning reforms that we need to achieve more affordable housing. But not much has been said about what affordable housing actually looks like. Sometimes, it feels like some people think that affordable housing is run-of-the-mill housing, just cheaper, and that's not how it works. You wouldn't expect a KIA subcompact to be identical to a Cadillac large sedan.

So let's look at what affordable housing actually is, in a functioning market. OK, sure, any housing can be "affordable" to the resident if it's subsidized, but since housing is such an expensive spending post, subsidizing all housing just isn't really plausible.

Building affordable homes

In this era where planners love to build neighborhoods from scratch to a final state, believing that what is planned is what will be built and what will remain there forever, the idea of adding affordable housing is often first conceived as the idea of building housing that is affordable from the get-go.

Now, theoretically, any housing can be "affordable" if subsidized, either directly or by regulation that forces the price of some units to be maintained lower than market value. But let's ignore that possibility here, let's look at what affordable housing can really be. Without subsidies, developers have to recoup the cost of constructing homes from those who buy the homes, so a look at the actual cost of building a house should provide a glimpse into what affordable housing can be.

Like any project, the first step is to establish a budget. For simplicity's sake, I will suppose that an affordable housing option is 3 times gross household earning, given my sources, all the amounts will be in Canadian dollars, adjust accordingly for American figures.

OK, so in Canada, the median household income is 69 000$. The low-income threshold for an household of 2 people is around 25 000$. So, as a gross estimate, an affordable median housing unit should be about 210 000$, and an affordable housing option for a poor household should be 75 000$.

So, what does that buy you?

I'll use a catalog of housing plans in Québec which provides estimated construction costs for their different plans to find out. You can check out the website at http://www.planimage.com/fr/. First, I'll restrict myself to single-family structures.

So, a 210 000$-house would be something like this 3-bedroom 1 260-square-foot bungalow, with an unfinished basement that offers the possibility of doubling the living space (so total potential living space of 2 520 square feet).

Or a 3-bedroom 2-story house with 1 546 square feet of living space with an unfinished basement of 773 square feet, for a total potential living space of 2 319 square feet.

On the other hand, what does 75 000$ buy you? Well, looking at the catalog, houses don't even go that low, the most affordable house model is a 2-story 910-square-foot house with 3 small bedrooms and an unfinished basement that can increase total living space to about 1 300 square feet.

If we look at bungalows only, then the cheapest bungalow model is a bit pricier and a bit smaller (768 square feet), but with a potential of over 1 500 square feet after the basement is finished.

But all is not lost, because filed under "chalet" or "secondary homes" meant to be only occasionally used homes in the countryside, we can find the following.


These are different from the bungalows above in that they are lacking in basements, meant to be built on concrete slabs. Which means that these do not have expandable living spaces. Note that unlike the previous homes, where the construction cost per square foot was around 100$, the small houses actually have higher construction costs per square foot, around 150$.

Still, this shows that it is theoretically possible to build affordable housing in North America, even in the form of single-family houses, housing that can be affordable even for people at the threshold of poverty. And indeed, such small houses can sometimes be seen in Japan in clusters that seem to indicate public housing developments.

Probable public housing developments in Hokkaido, Japan, note the number on the buildings, typical of Japanese public housing developments

Small 1-story houses in Obihiro

Of course, there is always the option of multi-family developments, and the same site provides a range of low-rise options for multi-family housing.

This triplex offers three 2-bedroom 950-sf units for about 300 000$ (around 100$/sf)


This 4-plex offers four 2-bedroom units, each 910 square feet, for 383 000$, or about 100$ per square foot too.


This 6-plex offers six 2-bedroom units each about 1 000 square-foot big for 604 000$, or about 100$ per square foot.

All of these are low-rise, walk-up buildings, all offer similar construction costs per square foot to the house models. So theoretically, it is certainly possible to build affordable housing for the middle-class and even the poor. Caveat: construction costs do vary from place to place, the biggest variable being the price of labor, as most of a house's building cost is labor, not materials.

Note that all these buildings have common characteristics of being low-rise, of being wooden-framed structures, of having little public areas (for multifamily units) and lacking elevators or any complex mechanical system. From what I've read, this is the most affordable type of housing one can build (at least per square foot). As long as you satisfy these criteria and do not have a tiny building, the construction cost per square foot tends to be roughly the same, around 100$ per square foot.

On the other hand, high-rise constructions that require concrete frames, elevators, sprinklers, plenty of mechanical fan ventilation of inner areas and units, etc... tend, from what I've read, to cost 50 to 100% more to build than the low-rise units. Not only that, but these mechanical systems need to be maintained, which adds to the cost over time. So if an household can afford only a 700 square-foot apartment in a low-rise unit, maybe it could afford only a 350 to 450 square-foot unit in an high-rise.

I know, I know, a building's cost is not limited to construction cost. So let's talk about this.

Land cost

You can't just build housing in the air, you have to acquire a plot of land first. Since land is not built, but rather pre-owned, it's all a matter of supply and demand, without construction costs as a yard stick to estimate value in a functional market. However, not all land is worth the same, the desirability of the location varies and creates submarkets. For example, if you have subway lines in a city, land within walking distance of a subway station may well be a submarket for land, and that type of land may well be in shortage even if there's plenty of undeveloped land waiting for buyers all around the city, land that just happens to not be near subways.

Furthermore, a building should have to pay for the municipal infrastructure needed to link it to a city's street grid and public services (drinking water, sewers). I can't find good figures to estimate the cost of these, I've seen the cost of entire street reconstruction of around 5 000$ per linear meter, but construction may actually be cheaper than reconstruction in this case.

So, anyway, to be able to build affordable housing, you also have to find affordable land, which means undesirable land that is in high supply. Usually, such land is found mostly on the edge of built areas, leading to the "drive 'til you qualify" phenomenon. Alternatively, you have to find a way to cut down on the land consumption per unit, have smaller lots or more units on a single lot.

Since the value of land is linked to the supply of it, it would stand to reason that greenbelt regulations or agricultural land protection laws that forbid development on land restrict the supply and thus make land on the fringe more expensive. There is also a matter of speculation, if land appreciates and taxes on land are low, speculators may believe it best to put off putting their land on the market to let their value climb more. If there are lots of speculators, this can artificially constrain the supply of land too, so putting higher taxes on land to force speculators to put their property on the market faster can help land prices go down.

Building affordable housing... a losing approach?

All in all, building housing for the middle-class ought to be possible, if you select an affordable housing type in a low-value location and/or on a small lot, or low-rise apartments in a likewise affordable location. However, it is hard to find a way to do so for the poor, especially once you take into account transport costs in areas that require cars to get around. In general, it would be best to build along existing rapid transit lines, but these are unfortunately too rare in North America, especially lines that extend beyond the urban core. To really find affordable housing without subsidies, we have to find other alternatives than building housing from scratch.

Still, why is affordable housing for the middle-class, so common in the post-WWII era, so rare nowadays?

The case of the post-WWII entry-level house

The decades following WWII in most of North America, and to a lesser extent, Europe, saw the rapid propagation of affordable single-family houses that would become the homes of an entire generation. Even families with just one income-earner could afford single-family homes. What was the recipe for that era? How did they achieve this?

Well, construction cost-wise, the houses built in that era were not particularly expensive to build, they were cookie-cutter wooden-frame small houses which were often only 800 to 1000 square-foot big, generally sold with unfinished basements or attics to cut down on costs while retaining the possibility for expansions.

Levittown, NY houses, the base models were about 10-meter wide and 8-meter deep, for a floor area of 80 square meters, around 880 square feet, without basement (built on concrete slabs) but with an unfinished attic for future expansion. Many houses have been so modified they're barely recognizable nowadays.
These houses were made as affordable as possible, with the idea that once the main house is paid for, the owners could modify it to fit the needs of their growing family.

Houses such as these are still affordable to build today... it's just a matter of finding cheap enough land.

And that is the single most crucial factor of the post-WWII starter home, which is hard to reproduce. Houses built in this era were built in perhaps the single greatest period of land glut in the history of urban development. This oversupply of land for urban development was the result of technological upheaval in the form of mass motorization and of the rapid creation of the interstate/freeway system. Though the freeways were made to help rapid movement from city to city, they were rapidly taken over by commuters who used them to be able to access cheaper land while maintaining access to the jobs and services of the cities, which then still held most of the jobs and businesses.

Before cars, the fastest mode of travel inside cities was transit, which meant that people had to find land within reasonable walking distance of a streetcar line. That limited the amount of land each streetcar line made available to development and encouraged a still somewhat dense development form...
Streetcar suburb of Chicago
... once the middle-class started acquiring cars, their travel speed increased tremendously. Once limited to 10 mph on transit lines, they could now drive at 20 mph on city streets and even faster on rural roads. Towns that used to be self-contained cities became suburbs of bigger cities as cars reduced travel time to mere minutes between towns separated by 5 or 6 miles. People no longer needed to live in the same city they worked, if land was cheaper in the next town over, they could go there.

Land within easy reach of a major city in the streetcar era, with the streetcar lines in black
In the car era, the land within easy reach of the city has been increased significantly, creating a huge glut of land to develop in the suburbs
The construction of the freeways made this even truer. Now, distances that might have taken a day of walking to cross could be done in 30 minutes. This addition of land to develop on the market brought the price of land way down, at the same time that the Green Revolution made farm lands no longer as essential as before, since the productivity of each acre had been multiplied, and freight could easily feed cities from food grown hundreds of kilometers away.

Though there was a huge movement to metropolitan areas in that era, the amount of land was so great that land was dirt-cheap.

So, small cheap houses with unfinished basements and attics, land made nearly worthless due to the glut brought about by cars and freeways, these are the ingredients for the era of the cheap "starter" home of the post-WWII period.

Where did the starter home go?

The era ended simply because the land glut of the post-WWII era turned into a shortage in many metropolitan areas. While land was cheap, people wasted it with big plots and endless parking lots, but at one point, even the large amount of land started running out. Not only that, but congestion started occurring rapidly because of the spatial inefficiency of private vehicles, reducing travel speed and reducing the land supply. Maintaining speed required building larger and larger freeways and highways, increasing public spending on infrastructure significantly without adequate return on investment. Some areas also implemented greenbelt policies, further constraining land supply.

The dream of a cheap house also came at exponentially higher transport costs, making people depend more and more on oil imported from unsavory overseas regimes. What one didn't spend on housing, one started spending on cars.

It's important to point out that starter homes are still around in second-tier cities that have not maxed their land or which still support the ever-growing freeway system to keep adding land to develop.

Starter home built in 2014 in the suburbs of Indianapolis, still affordable for a one-income family
But what about the existing starter homes built after WWII, aren't they still affordable?

Well, no. The big problem of a starter home is that it's only cheap when it is first built, because it is barebone. Once the owners start making the house theirs to accommodate the growing needs of the family, the house gets bigger and more luxurious. Every addition to the house results in higher market value because of increased desirability. So once the original owners are ready to move out, the house is no longer a starter home, but a big, well-furnished home from which the owner will expect to recover the costs of remodeling.

That is the issue of the "starter home" or "grow home" idea. That home is only affordable once, for its first owners. So for every generation to get its "starter home", every generation has to build entirely new neighborhoods in greenfield areas, where land is cheap. When a metropolitan area matures, this ideal no longer works, the greenfield areas are just too far and are disconnected from the city. So, what can be done?

This is long enough...

I initially wanted to talk about the alternatives for affordable housing in this article, but it's clear it's best if I stop here and write another article. This article only looked at one way of obtaining affordable housing, namely the one way that people tend to obsess about: building housing that is affordable from day one, because of the current supposition that neighborhoods are essentially pieces of art to preserve over the years rather than living and evolving human ecosystems.

For those wanting to read the follow-up to this article, click here.

Sunday, July 24, 2016

City taxes as urban growth policies: choosing the taxes that get you the city you want

Let's talk about taxes. Sure, nobody likes paying taxes, and the discussion about them tends to be about their amount, and not how that amount is raised. But that is a wasted opportunity, both as a matter of fairness and as an opportunity to do efficient urban regulation.

The issue of fairness is simple: a city raises taxes because it provides certain services and to support public infrastructure. Therefore, a city should make sure it raises its taxes on people who use these services most or that require more of it by design, to avoid subsidizing one lifestyle over others.

On an urban planning level, people, whether they be homeowners, speculators or developers, make economic decisions all the time. Whether to buy, whether to sell, renovate or not, etc... A city is the result of a vast number of economic decisions. Tax policies, by increasing the cost of some options over others, thus influence the final decision people will make, and will change how the city will evolve and look.

These effects shouldn't be considered necessary evils, they need to be analyzed so that tax policies can be fashioned to obtain desired results. Which is exactly what urban regulations usually seek to achieve, in fact, I think that well-thought-out tax policies can replace a lot of regulations, can achieve roughly the same objectives while requiring a lot less bureaucracy and red tape.

Let's do a simple thought experiment, there are two paths from A to B, one red path and one green path, though the red path is much more affordable than the green path for the user, the green path is preferable for the community.
Because the planner wants people to take the green path, it adds a regulatory hurdle that  prevents the straight red path to happen...
 

But people just do a detour to do the red path again, since its cost is still lower than the green path, so the planner sees this and adds another hurdle...

...and another...

...and another...

 ... and so on. But each hurdle means that the planning authority needs people to review things to ensure compliance, which means bureaucratic costs and red tape. So you can end up with a big bureaucracy and complicated regulations, all of which could have been avoided by putting a higher cost to the red path without forbidding it.

So, let's take a few steps and analyze a few of the common practices and the result they may have on how cities grow and develop.

Property taxes

By far the most common municipal tax is a yearly tax on the value of one's property. This is often seen as a fairer way than a lump sum all have to pay because people who own richer, bigger buildings will pay more than people with smaller, cheaper housing, making it kind of a progressive tax.

Most cities tend to evaluate a property's value as the sum of the land value and the improvement value, then the same tax rate applies to both. (As an aside, I think this is not entirely correct, or at least calling it "land value" leads to confusion, because it supposes that this is the value of the land on its own, which it isn't. But that's for another day...)

Anyway, the big problem with this approach is that it rewards people who lower the value of their property and punishes people who invest in their property. Who would want to lower the value of their property? Well, speculators would, because they are holding the property to sell to a developer down the line, so they don't care about the improvement value, just the land value, which is what the developer will pay.

So speculators will pay very low taxes versus property owners who use their property either directly or by renting it out. This allows speculators to be more patient and keep their property off the market for longer, because as long as the value increases faster each year than they pay in property tax, they are better off waiting rather than selling.

Another problem can occur if there is a wide area with the same property tax, including walkable inner suburbs and car-centric outer suburbs. In such a situation, people choosing between the two have to balance out housing and transport costs, the inner suburb having more expensive housing but more affordable transport options, the outer suburb having cheaper housing but more expensive transport.

Inner suburb: expensive housing but affordable transport

Outer suburb: affordable housing but expensive transport
The issue here is that an inner suburb household may have to pay 50% more in property tax than one in the outer suburb with the same purchasing power and wealth level. This is an issue in Montréal, where following amalgamation, property taxes fall ever more heavily on old streetcar suburbs which have more expensive housing rather than more recent and car-centric suburbs.

This is one case where having a fragmented metro area can be useful, because if the two suburbs are split into separate cities, then property tax levels may vary between the two.

So, overall a property tax tends to be useful to tax wealthier households by using housing value as a proxy for wealth, but it tends to encourage speculation and it may result in punishing taxes on the more walkable areas of a city, where housing is more expensive because transport costs are lower.

There is also an issue of taxing different land uses at different tax rates. Frequently, non-residential uses tend to be taxed at much higher rates than residential uses, because residential property owners are much more numerous than commercial property owners, many of whom don't even live in the city and are not voters. In Montréal for instance, the central city's residential tax rate is 0,66% (0,68% for buildings with 6 units or more) but the commercial rate is 3,19%. This can hurt a city's economy, especially small businesses who struggle more to pay taxes or rents, and this can push commercial and industrial developments to suburbs.

Land value taxation

This is the tax that Monopoly was made to promote. I'm not kidding. The most famous promoter of this idea was Henry George, an economist who thought that communities prospered when the land is optimally used. It is very similar to a property tax, but in this case, rather than taxing both land and improvement at the same rate, land value is either taxed significantly higher or improvement is just not taxed at all.

Though this results in very similar tax rates for the average owner than the regular property tax, it impacts owners at the extremes. Notably, it falls with full strength on speculators and parking lot owners who keep the value of the improvement on their lots low, waiting for a good offer for their property, which forces them to sell off their lots much faster because the price of holding on to these unproductive vacant lots is much, much higher than it is with a simple property tax. In extreme cases, where there is no improvement tax, this would mean that a vacant lot downtown would pay as much in tax as the lot next door on which there is a 50-story skyscraper.

This tax doesn't punish people who improve their property either. Adding value to your property will not result in a much higher tax bill.

LVT have actually been used a lot in the State of Pennsylvania, where it is notably credited with encouraging the formation of dynamic downtown areas in many cities like Pittsburgh and Harrisburg, despite bad economic conditions.

Harrisburg's downtown is notably densely built with few surface parking lots for a mid-size American city at the center of a half-million metro area

This is Lansing, Michigan, to provide a contrast

A LVT may also create pressure for developers to build higher density in order to consume less land and thus lower the tax bill. This is not only a good idea for urbanists, but it is also a sign of fairness, as that way big properties that require a lot of public infrastructure to serve will pay more, so that people fund public services more proportionally to how they use them.

Frontage tax

A frontage tax is a tax on the street-fronting width of the property, which is generally defined as a fixed amount to pay per year per meter or foot of frontage of a property.

This tax is mainly justified by an user-payer system, the street is where the public infrastructure is, including the street itself, the watermain and the sewers. The frontage of a property is thus almost directly proportional to the amount of public infrastructure the city has to build and maintain to service that property. So it stands to reason that the city should levy a tax that is proportional to the frontage of the property.

Think about it, if your property is 20 meters wide, that means you have 20 meters of street in front of it, 20 meters of watermain pipe, 20 meters of sewers, etc... These are things the city built to service your property, so it's fair to ask you to pay for them.

Some might say that this is independent of the wealth of the household who owns the lot, so the tax is regressive. But in reality, it's a tax that becomes progressive over time as owners and developers adapt to this new price signal and so attempt to conserve width as much as possible. It also rewards multi-family housing and townhouses, housing types that the poor live in more often than the rich.

Of course, this tax shouldn't be the only tax a city relies on, but it has an added advantage that it can actually be estimated in an objective manner as the cost required to replace the city's infrastructure every 30 to 50 years. For example, I've seen many cases here that indicates that reconstructing a street and its underground water pipes cost about 5 million dollars canadian per km, or 6 million dollars US per mile. If this is an accurate estimate, then you can estimate that every property which fronts a paved public street and connected to a public watermain and sewers should pay about 60 $ per linear meter of frontage per year, or 18$ per foot.

5 000 000$/km equals 5 000$ per meter, divided by 2 because there are properties on either side of the street means 2 500$ per meter per side, divided by 40 years (reconstruction of the infrastructure every 40 years), that is 62,50$ per meter per year.

If you have a regular single-family lot that is 15 to 20 meters wide (50 to 70 feet), that means paying 900 to 1200$ per year in taxes, 100$ per month, ONLY in order to rebuild the street at the end of its useful life expectancy. Not cheap, eh?

An added bonus to such a tax is a matter of fairness for certain developments that have private streets and infrastructure. For example, there was a condo cluster that was built in Boucherville a few years back:

This condo cluster actually had private streets as there was no public street in the middle of the lot, which would have precluded development of part of it. This also allowed them to make a street that was narrower than the city would allow, being only 20 feet wide. But right now, the condo owners are demanding that the city take over these private streets. Why? Because they know they will have to repair it someday, and that since they're private, the condo owners will be on hook for 100% of the cost... MEANWHILE, since Boucherville has no frontage tax and funds itself primarily through a property tax, the condo owners pay 100% of the taxes that every other owner in Boucherville who has a public-street-fronted lot pays.

This is evidently unfair, either the private streets' maintenance and reconstruction must be assumed by the city because the owners already pay for them through their taxes OR the city should lower the owners' taxes to take into account that they are not connected directly to a public street.

With a frontage tax, there is no issue, the condo owners in this case would have to collectively assume only the tax for the public street that fronts the condo cluster, and they would then have lower taxes which allows them to put money aside towards maintaining and rebuilding their own private streets. If they still don't... well, that's on them.

Development charges

Development charges are often a big part of cities' budgets, despite their "once-in-a-lifetime" occurrence. These are charges levied on new developments, often justified because of the need to provide new infrastructure for new developments.

On the issue of fairness, it is reasonable to ask greenfield developments to pay for the new infrastructure needs they create. However, in many cases such development charges are often levied even on brownfield redevelopments who reuse existing infrastructure. Development charges, to be effectively fair, need to be modulated based on how much infrastructure new developments actually required. Redevelopment in existing areas should pay next to no charges, while greenfield developments should pay a lot.

With regards to the impacts on city developments, it really depends on how the charges are determined. If each new unit has to pay the same charges regardless of size or location, then of course this falls much more heavily on smaller units and affordable housing. A proper development charge should probably be mainly based on street frontage.

That being said, it is important for cities not to grow dependent on such taxes to fund their current budgets or repairs to their current infrastructure. When a city starts relying one one-time development charges to balance the books, it is setting itself up to fail in the future when development stops. Again, I highly recommend reading about the organization called "Strong Towns" which makes that argument over and over and argues for financial sustainability of cities.

Property transfer taxes

This is a tax that is a bit like development charges, but instead of being charged only once upon construction of a building, it is charged every time a property is sold. This is a widely used tax, but I honestly don't know why it is so popular. The most obvious effect of the tax would be to reduce the number of property transfers, which can hurt cities by locking down some lots that would be sold otherwise.

This tax is especially stupid when condos have started replacing apartments in certain housing markets. In the past, since job security was higher and housing options were basically apartments and single-family houses, the average citizen would probably pay it just once. He would rent apartments until meeting a spouse, then buy a house in which he would raise his family. Today, with jobs being less stable and the lack of recent apartments for the middle-class, the new generation may buy many condos before going into a house, and they may also move a few times even after buying a house. So the new generation is probably going to pay that tax more than once.

The thing with this tax however is that it is great politically. The people who pay the tax are newcomers without the right to vote, they become residents only after paying it, at which point they pay that tax only if they move. So that's a revenue for cities that they can levy without protest from long-term citizens who are more involved politically.

Overall, this is a stupid tax, there's no point to it and it should be abolished wherever it may be found. Considering the extraordinary growth in condos, which are often replacing middle-class and high-end apartments and the greater mobility of households due to the modern economy, this tax is nothing short of a disaster.

Conclusion: my take on taxes

Personally, I think that provincial/State governments should mandate cities levy a frontage tax on all properties, based upon the reconstruction cost of the infrastructure of the street that fronts a property, and the funds of that levy should be earmarked only for maintenance and construction of a city's public infrastructure. That way, we can make sure that all cities levy enough taxes for the long-term sustainability of its public infrastructure and avoid entire cities going to seed due to neglect and deferred maintenance. If this results in taxes increasing a lot on certain property types, that's a good thing, because the tax will signal how wasteful that type of development is and result in more financially sustainable developments from now on. It would also hurt speculators maintaining vacant lots or decrepit buildings.

As to funding the rest of municipal budgets, I think this should fall upon a land value tax and an improvement/building value tax, and the land tax should be much higher than the improvement tax in order to further discourage speculation. The tax on improvement is still there to modulate taxes based on one's wealth. However, it's important that this property tax is modulated on a relatively local area, so as to avoid having urban areas subsidize suburbs, where housing value is low but transport costs are high.

Wednesday, June 22, 2016

Observations on Chinese cities

OK, so for the last two weeks, I've been traveling around China, just for fun. As far as urbanism go, China is one of the biggest stories around. Like in every other country that developed economically, China is living through extremely rapid urbanization of its population. Also, unlike most other developing countries, the Chinese government is strong, stable and willing to take the lead in investing tons of money into public infrastructure.

30 years ago, Shanghai had no subway, today its 588 km of tracks make it the most extensive metro system in the world and one of the most used, with 3 billion passengers per year
So let's talk about about Chinese urbanism, shall we? Again, I'm no expert, this is my own personal experience and my conclusions from what I have noticed. I make no claim of omniscience or infallibility.

The Chinese street

Streets in China are a mixed bag. Some of them seemed to be extremely well-designed, with narrow store fronts all along it, relatively wide sidewalks with good design (including tactile guidelines for the blind) and plenty of trees.

A common Chinese street: tons of streets, nice sidewalk with guidelines for the blind and tons of tiny shops lining it
Many Chinese cities also often separate wide streets with grassy medians on both sides, leaving travel lanes in the center of the street and either bike/scooter lanes on the side, parking lanes and/or bus lanes.
This street leaves 4 travel lanes for cars in the center, with bike/scooter lanes and parking lanes on the side, separated from travel lanes by medians covered with bushes and trees
One thing I can say for sure is that the Chinese don't give a damn about "fixed object clearance", they are keen to put trees bordering travel lanes or other fixed obstacles. Kudos to them for it.

However, there's a problem, a very big problem. Chinese drivers, whether of cars, buses or scooters, are terrible at actually following the rules of the road. Drivers next to never give right of way to pedestrians or scooters. Instead, they slow down and honk to force them to let them pass. After a few days, I had started to be used to it, I was tolerating the incessant honking of Chinese streets by thinking back on the idiom "chien qui aboie ne mord pas", "barking dogs never bite".... maybe "honking driver never hit", it's the ones who don't honk who are the most dangerous.

Chinese drivers also have no qualm about using the sidewalk for parking when convenient. This reminds me of my articles about how tolerating street parking can cripple emerging parking markets by providing a free publicly-provided alternative.

A wide sidewalk being used as supplementary parking despite parking being allowed on the street

This bozo parked his car right on the guidelines for the blind

Other example of formal parking on the sidewalk, taking almost all of it
In areas under construction, sometimes streets were an utter disaster, with pedestrians walking along what were essentially highways, with no sidewalk to speak of. I also saw people walking in an highway interchange while I was in a bus, the planners in the area having made the mistake of providing infrastructure requiring cars to be properly used, in a country where most people still cannot afford cars.

People walking on the shoulder of an extremely wide urban road, almost highway-like
The Chinese who spoke English I talked to who were aware of Japanese streets and their highly respectful drivers were largely envious of Japan in that regard. A sentiment I feel is pretty widely shared, however, in a context of tolerated aggressive driving, even people who are tempted to follow the law are forced to become aggressive drivers too. Overall, what China indicates to me is that you can have the best infrastructure possible, but you still need to make sure people follow the rules. And if you tolerate deviant behavior too much, then at some point, you force even people who want to be law-abiding to adopt deviant behavior not to be shoved out of traffic by other drivers.

"I haven't ridden a bike in ten years!" - testimony from a Chinese

As a side effect of this free-for-all, bikes are being shoved out of public streets, often despite the presence of bike lanes, which are taken over by scooters and e-bikes that can more easily keep up with cars. Most people have been scared into abandoning even the mere idea of biking, despite biking being extremely appropriate for the dense Chinese cities and their megablocs.

The Chinese street grid, or the megabloc

There is a clear pattern I found in recent developments in China, which I call the commie megabloc. Essentially, in a way reminiscent of Soviet urbanism, developments in China, rather than having a dense network of streets like Japan or Korea, have enormous blocs that are often half a kilometer in width and length, with streets only on the periphery.

Example of megabloc, a very big residential bloc-sized development is bordered by straight streets
However, this form of development is actually even worse than the Soviet-style one for a simple reason: the traditional Chinese approach of surrounding one's residence by walls.

"Why wouldn't you want a wall there? It's your property!" -response from a Chinese when I said that houses in North America have unwalled front yards open to the street

This can be seen in traditional Chinese hutongs (or alleys) and the Siheyuan courtyard house that made up much of the urban residential housing stock in Imperial China.

A Chinese hutong in Beijing, doors in the walls often open on small courtyards, with houses built inside walls located at the property line
This tradition has actually been ported over to multifamily developments, but instead of each household having its own walled off property, the apartment bloc, or even the apartment cluster, is surrounded by a wall with only one access path, often one with a barrier and a security guard.

A high metal fence surrounds this cluster of residential high-rises, cutting off pedestrian traffic between it and the street

Here, they use an unbroken wall of 3-story buildings at the edge of the cluster to wall it off from the street
In this case, they have a wall of narrow store-fronts all around the apartment cluster

An older neighborhood with residential walls around mid-rise residential blocs
This isn't a military base, it's just a regular entry point into an apartment cluster in one of China' megablocs
The effect of this obsession with walling off residential areas is that it severely cuts down on side streets that can serve as alternative straighter paths for pedestrians and cyclists rather than going on the main through streets that surround the megablocs. This imposes detours on residents who must first get to the one point that allows entry and exit of their community before going where they want to go. That's not how the Soviets did it, nor how the Swedes do it (for they also have things inspired by that design, I talked about it here).

In effect, a lot of Chinese developments are basically like gated communities. It's just that instead of being isolated geographically, they are built deep inside urban areas. This mode of development has some advantages and some disadvantages.

ADVANTAGES

  • It avoids having traffic running through residential areas, as they have no through street within them, which makes areas safer and quieter (considering the constant melody of cars honking in China, that is not to be neglected).
  • It channels stores and offices onto the periphery road, all these roads forming a regular grid that are highly conducive to surface transit. Indeed, buses have no alternative but to simply travel on these roads in straight lines, without detours, which also makes it easy for people to navigate the bus system: just go to the major road and take buses in the direction you want to go to.
  • It limits the number of intersections pedestrians walking along the major roads will face, since there tends to be only one of them every 300 to 500 meters.
DISADVANTAGES

  • It creates a street grid with a very low number of through streets, which results in a dilemma where you can either have small streets that face near constant congestion (terrible for buses too) or very wide streets that act as barriers to non-motorized travel.
  • Without footpaths and bikepaths through the megablocs, this can also impose detours for short-distance trips, which makes ownership of cars and scooters much more attractive.
  • Though the low number of streets makes for better transit lines that are easier to understand, they also can create bus bunching and congestion because bus lines have relatively low capacities. In China, most buses tend to be midibuses, which are shorter and narrower than the usual North American bus, and I never saw any articulated bus (though I did see and rode a double-decker, which was bouncy as all hell). So it's not unusual to have 4 or 5 buses following each other, each being of a different overlapping line.
4 buses bunched up together
In recent years, the Chinese government has started pressuring developers to build more streets in their megablocs, but will it change this pattern?

One effect of this way of building cities is that I had the opposite problem while reading maps than I had in Japan. In Japan, while reading maps, I would continually be confused by the dense grid of small residential streets into overestimating distances. In China, it was the opposite, I kept underestimating distances due to the lack of streets.

The economics of transport

The first thing I can say about public transport is that it is exceptionally cheap. The typical bus has a fare between 1,0 and 2,0 yuans, which is about 20-40 Canadian cents. Taxis are much more affordable too, with the fare per distance being of about 2,3 to 2,5 RMB per km from what I've seen, or about 50 Canadian cents per km (which comes out to about 0,60 USD per mile) with a minimum fare of 10-15 RMB. So yes, taxis are affordable for foreign tourists, but public transit is much, much cheaper than them. Metros have distance-based fares, but rarely go above 5 RMB (1 CAD).

However, what hurts trains and metros is that following a mass suicide knife attack on a train station by Uyghurs (three guesses as to their religion, the first two don't count), China has installed X-ray baggage scanners in EVERY train and metro station. Train stations even have guards with assault rifles at the doors, just in case. Unlike the Japanese, they do not allow train passengers to access train boarding platforms, people have to wait in an overpopulated and way too hot waiting room and line up 30-45 minutes before the train leaves, to allow staff to control tickets. This is like what VIA Rail does in Canada and is a disaster in terms of customer experience, taking the airplane experience, and making it worse.

China also has tolls on its highways, but since I never drove (you couldn't pay me to drive there!) I cannot say how high the tolls are. These tolls may help limit car travel in the long run, but there doesn't seem to be all that many of them.

Then, there is the issue of parking. Talking with my guide, it appears that underground parking spaces in China are about as expensive as over here, and the government has started to mandate minimum parking rules for new developments. However, the continued tolerance of sidewalk parking remains a thorn in the growth of a healthy parking market that forces drivers to pay the full cost of their parking. Parking costs are a great incentive for urban residents to avoid using their cars for short trips, cutting down significantly on local traffic. As long as people can avoid paying for parking by parking haphazardly on sidewalks, it will likely remain a difficult situation for all involved, even drivers as they are likely to have less parking options than they would if they were paying for their parking and thus attracting developers to build more parking.

What is interesting is the lack of commercial parking. Commercial areas rarely have more parking than street parking, though I'm sure big malls have underground parking or the like. This is radically different from North America, where the high parking requirements for commercial developments is the main reason why towns and suburbs remain largely unwalkable, since commercial density is more important to walkability than residential density.

Overall, my impressions

China has great density, and there is a lot of green spaces and trees inside their cities. Their government invests massively to provide the public infrastructure on which their mega-cities are running. Chinese urbanism, as far as developing countries go, is decent enough, but I couldn't call it great. The use of megablocs with gated communities severely hurts non-motorized transport, and it somehow echoes some suburban practices in North America (dead-end residential streets, subdivision-level development of clusters of similar buildings, few through roads that are often wide with difficult intersections to cross, gated communities, etc...).

The first measure I would like to see is an opening of the megablocs to pedestrian traffic, then an enforcement of traffic rules that is severely lacking. Surface transit could be made better through use of larger vehicles and eliminating some lines to increase capacity while reducing bunching.

Despite its faults, the system works decently enough and allows Chinese cities to expand in a way that doesn't preclude non-motorized transport or public transport. It was an interesting experience, though not the greatest of my life.