Study: Bad Zoning Policies Lead to Economic Stagnation

Published December 4, 2014

A team of New York-based researchers has found policies intended to preserve historic neighborhoods resulted in depressed economic activity, as such regulations discourage developers from investing in the communities.

Examining historical property-value and construction data spanning 35 years and hundreds of neighborhoods in New York City, New York University School of Law public policy professor Vicki Been and researchers Ingrid Gould Ellen, Michael Gedal, Edward Glaeser, and Brian J. McCabe discovered the city’s land-planning policies may be distorting local economies in unforeseen ways.

Squeezing Renters

The study found annual real construction rates in New York City as a whole are 21 percent lower than expected rates calculated by the researchers, which they attributed to the city’s historic neighborhood policies.

“Historic districts have significantly less new housing construction, while prices for homes within these neighborhoods, and those just outside, receive a boost relative to others. The story of supply restrictions increasing prices seems to be confirmed,” said Matt Kelly, a policy analyst with Florida State University’s College of Social Sciences and Public Policy. 

“The historic preservation status definitely squeezes renters and depresses values for buildings whose height is below average,” Kelly explained. “This policy contributes to sprawl, and when contrasted with the rent control policies elsewhere in the city, makes little sense.”

Cutting Profitability

The study identified multiple variables underlying zoning policies’ effects on the housing market, one of which was restrictions on the height of buildings. In New York City, neighborhood zoning codes often include restrictions on the maximum height of a building, for aesthetic reasons. These rules make investing in buildings in non-historic neighborhoods more profitable than in the height-restricted areas, because the former can have greater overall square footage by virtue of their greater height.

That makes renovation of historic buildings less profitable than for buildings in other areas of the city. In addition, the study found, property bordering high-demand historic neighborhoods typically increases in value because the bordering areas enjoy the geographic benefits of designation without the accompanying restrictions. That makes them more expensive to build on.

Reducing Buildings’ Value

Kelly says the study’s findings are “novel, but not surprising.”

“As builders are prevented from building upward, the resulting lack of housing supply would intuitively lead to an increase in price. This increase is seen in most areas, but where the [existing] building height is sufficiently low, it does not occur,” he explained. “When one realizes that building restrictions are preventing a building from being used in the most profitable way, the decrease in price [relative to buildings free of the restrictions] is less surprising.”

In historic neighborhoods, building owners must seek approval from the city’s Department of Buildings and Landmark Preservation Commission before starting repairs and maintenance. In some cases, maintenance requests may be subject to public hearings. 

“Since 1965, New York’s Landmarks Preservation Commission has designated 120 historic neighborhoods, and the pace of these designations has spiked since 2000,” Kelly said. “Essentially, this designation prevents developers from building anything new or significantly changing the existing edifices.”

Distorting Market Signals

Kelly said he agrees with the authors’ conclusion that zoning policies are, in his words, sending “a distorted market signal, preventing entrepreneurs from building where it is most profitable to do so.”

“Historic districts have significantly less new housing construction, while sales prices for homes within these neighborhoods, and those just outside, receive a boost relative to others,” he said. “Entrepreneurs and developers are taking into account the future cash flow of a building, and when the potential profits of a taller building outweigh both the costs of redevelopment and the profits of the current building, such redevelopment is likely to occur.”

Kelly expressed hope New York City policymakers would take the study’s advice when designing future policies.

“By considering the relative height of buildings in an area, the Landmark Preservation Committee can better prevent the negative effects that the designation can have on new construction,” he said.

Dotty Young ([email protected]) writes from Ashland, Ohio.


Internet Info:

“Preserving History or Hindering Growth? The Heterogeneous Effects of Historic Districts on Local Housing Markets in New York City,” Vicki Been, et al. :