You quote: "A higher rate reduces the number of sites that are attractive for redevelopment while a lower rate increases the number of sites that are financially attractive for redevelopment."
This seems to be glossing over the dynamic that developers need to buy land - presumably, most of those SFHs are owned by individual households (otherwise, everyone bemoaning speculative buyers may have a point...) ... A lower CAC rate would increase the potential net profit before land costs are considered. Developers are then willing to pay more for the land. Whoever owns the land will take what they can get for it. Windfall to land owners ensues.
Yes, if there was more money to be made, more people might be willing to sell, more supply comes onto the market, housing prices (price of a condo or rents) should go down...
But conversely, I would rather the public (the City) make money, rather than a windfall to private property owners. The the net input cost to develop (land, construction, all the stupid marketing they do, profit, etc.) stayed the same, we wouldn't see significant improvements in affordability.
It is hard for me to understand to what extent just straight upzoning is going to wind up reducing developers' input costs & result in lower cost housing, versus windfall value bequeathed to property owners with no change in the net cost of inputs. How could zoning & CACs (or equivalent value capture) be dialed to increase former & reduce latter likelihood?
Hi, Brendan. I think the question is, who pays the CAC ("tax incidence") - the landowner, the developer, or the final purchaser? If CACs are perfectly predictable, then as you say, it falls on the landowner, but the less predictable they are, the less likely that is.
There's an episode of the UCLA Housing Voice podcast, with Minjee Kim, which discusses public exactions (like CACs). The point of exactions is to capture some of the increase in land value. She talks about the incidence issue. But she and Michael Manville also point out that value capture is being triggered only for development. It's not triggered for someone who's just sitting on land and seeing its value increase.
To me that suggests that one of the most straightforward ways to capture the windfall land value increase from landowners is to shift the tax burden from public exactions to higher property taxes. (It would also have the beneficial side-effect of reducing demand.)
[Minjee Kim:] [Public value capture] is essentially this idea that certain governmental actions increase the value of property. And so some of that increment should be recaptured for the public benefit.
... Value capture overall is much broader than upzoning. It's about cities becoming or certain places becoming more desirable regardless of the upzoning taking place. So in those instances, again, without a value capture mechanism, the uplift will go to the landowners. [Inclusionary zoning, requiring the inclusion of non-market housing, as a public benefit:] If they're functioning efficiently, the burden falls on the landowners, it's supposed to capture that value uplift that's going to the landowners, because again, developers will bid for less because they can anticipate the cost of providing whatever public amenities that they're asked to provide. But I think there's a difference between how it's supposed to function theoretically or on paper versus how the real world functions.
Inclusionary housing ordinances or other value capture mechanisms do add a layer of burden to housing developers. So that added logistical and administrative burden for the housing developers does have an impact on housing production and who can get the projects through the finish line. And then also, land markets are not perfect. It's one of the most imperfect markets out there. So because developers do not have all the information, because the landowners do not have all the information, the idea that the majority of the burden will fall on the landowner is unclear. And that's where we get into whether imposing additional burden makes market rate housing more expensive.
[Michael Manville:] The issues I have with the way we do value capture are largely with what the trigger is. I think that part of the problem Minjee identified, which is this issue of, well, the goal is to make sure landowners don't get a windfall. And we're not sure how often that happens in practice. And it becomes in real life a very difficult policy problem. A lot of that stems from the fact that we want to capture the value from the landowner, but we use the trigger for the policy to be development.
And so whenever you do that, there's going to be some risk that the burden falls on the developer. And there's going to be some risk that some development simply won't happen, not because it's infeasible totally, but just because the typical landowner is a satisficer. They're not someone who needs to make the absolute most money possible out of their property. They're someone who is fine making a comfortable amount of money at minimal effort. And in property markets, in land markets, like Los Angeles, Seattle, Boston, and so forth, owning land is just a pretty good gig. And you can be doing almost nothing and making quite a bit of money.
And so to have someone come to you with the prospect of making more money, if you go through all the hoops that are involved in property development, that end result of more money has to be really big to change that inertia. So I'm very attached to the probably politically very difficult, if not impossible, original version of value capture, which is just we tax the land value and let the chips fall where they may.
And I think in addition to the reason I just stated for that, one of the other reasons I really favor that is because there is value that comes with upzoning. And it's appropriate as policymakers and planners for us to be aware of that. But there's also just a lot of value that comes from not upzoning. And that, in most of our big expensive cities, is the much more common situation. And so the South Boston waterfront grew tremendously in value as a result of public investment and so forth, and the economy growing. My parents' house quintupled in value, and they did sort of fix up the interior, but that's not why that happened. And it's because their suburban town really didn't build much housing for 40 years.
And so I think my fundamental hesitation with the way we approach value capture is that the not upzoning and the not building is probably in the aggregate responsible for a lot more value uplift in a supply constrained city, and is also more socially harmful.
Given how big of a problem CACs are, I’m surprised that there isn’t more public awareness. There is a potential benefit to it being an abstract issue: people don’t oppose things they aren’t paying attention to. Do you see greater public awareness of CAC reform as having a positive, neutral, or negative effect on achieving that reform?
Thanks Jay! From reading through the 2022 budget document, CACs appear in the capital budget as "developer contributions" and "in-kind projects delivered by developers." They don't appear in the operating budget. ("Licence and development fees" are basically application fees.)
I think greater public awareness of issues requiring reform (like CACs) is helpful overall. Elected officials are generalists rather than specialists, so their understanding of issues is similar to that of the public. At the municipal level, opposition to reform tends to come from small well-organized groups, so I don't think the "Secret Congress" approach to reform (as Matthew Yglesias puts it) is workable - such groups are tracking changes pretty closely.
I think public awareness of such issues has another benefit. If at least we know **why** zoning in Vancouver is so restrictive (ultimately it's driven by the desire to keep property taxes low), that doesn't help us directly, but at least we know what's going on. It makes the situation, although still maddening, at least less baffling. (And in the absence of such an explanation, there's going to be plenty of competing explanations: it's common to hear people like Colleen Hardwick say that development is what's driving up prices.)
Unless I’m missing something, your second use of the 1/6 figure isn’t correct. If CACs were eliminated and property taxes entirely made up the shortfall (something you're not advocating for), property taxes would have to increase by 29% (using 2022 figures):
Good point! To be more precise, giving up CAC revenue entirely would require raising revenue elsewhere by about 1/6 (CAC revenue fluctuates from year to year), and it seems impossible to do so without raising property taxes. I think it's possible to gradually reduce CAC revenue over time, but going from $250M or $300M to zero all at once would not be.
Are there any examples that you know of where CACs are not used as major source of a cities funding? Are there models where the city's incentives are aligned to build more housing?
Thank you, glad you liked it! According to Mario Polese, Montreal has much lower development charges on new housing, paying for public amenities through property taxes instead.
Hey Russil - getting to this write-up late...
You quote: "A higher rate reduces the number of sites that are attractive for redevelopment while a lower rate increases the number of sites that are financially attractive for redevelopment."
This seems to be glossing over the dynamic that developers need to buy land - presumably, most of those SFHs are owned by individual households (otherwise, everyone bemoaning speculative buyers may have a point...) ... A lower CAC rate would increase the potential net profit before land costs are considered. Developers are then willing to pay more for the land. Whoever owns the land will take what they can get for it. Windfall to land owners ensues.
Yes, if there was more money to be made, more people might be willing to sell, more supply comes onto the market, housing prices (price of a condo or rents) should go down...
But conversely, I would rather the public (the City) make money, rather than a windfall to private property owners. The the net input cost to develop (land, construction, all the stupid marketing they do, profit, etc.) stayed the same, we wouldn't see significant improvements in affordability.
It is hard for me to understand to what extent just straight upzoning is going to wind up reducing developers' input costs & result in lower cost housing, versus windfall value bequeathed to property owners with no change in the net cost of inputs. How could zoning & CACs (or equivalent value capture) be dialed to increase former & reduce latter likelihood?
Hi, Brendan. I think the question is, who pays the CAC ("tax incidence") - the landowner, the developer, or the final purchaser? If CACs are perfectly predictable, then as you say, it falls on the landowner, but the less predictable they are, the less likely that is.
There's an episode of the UCLA Housing Voice podcast, with Minjee Kim, which discusses public exactions (like CACs). The point of exactions is to capture some of the increase in land value. She talks about the incidence issue. But she and Michael Manville also point out that value capture is being triggered only for development. It's not triggered for someone who's just sitting on land and seeing its value increase.
To me that suggests that one of the most straightforward ways to capture the windfall land value increase from landowners is to shift the tax burden from public exactions to higher property taxes. (It would also have the beneficial side-effect of reducing demand.)
https://www.lewis.ucla.edu/2021/08/18/08-exactions-and-value-capture-with-minjee-kim/
[Minjee Kim:] [Public value capture] is essentially this idea that certain governmental actions increase the value of property. And so some of that increment should be recaptured for the public benefit.
... Value capture overall is much broader than upzoning. It's about cities becoming or certain places becoming more desirable regardless of the upzoning taking place. So in those instances, again, without a value capture mechanism, the uplift will go to the landowners. [Inclusionary zoning, requiring the inclusion of non-market housing, as a public benefit:] If they're functioning efficiently, the burden falls on the landowners, it's supposed to capture that value uplift that's going to the landowners, because again, developers will bid for less because they can anticipate the cost of providing whatever public amenities that they're asked to provide. But I think there's a difference between how it's supposed to function theoretically or on paper versus how the real world functions.
Inclusionary housing ordinances or other value capture mechanisms do add a layer of burden to housing developers. So that added logistical and administrative burden for the housing developers does have an impact on housing production and who can get the projects through the finish line. And then also, land markets are not perfect. It's one of the most imperfect markets out there. So because developers do not have all the information, because the landowners do not have all the information, the idea that the majority of the burden will fall on the landowner is unclear. And that's where we get into whether imposing additional burden makes market rate housing more expensive.
[Michael Manville:] The issues I have with the way we do value capture are largely with what the trigger is. I think that part of the problem Minjee identified, which is this issue of, well, the goal is to make sure landowners don't get a windfall. And we're not sure how often that happens in practice. And it becomes in real life a very difficult policy problem. A lot of that stems from the fact that we want to capture the value from the landowner, but we use the trigger for the policy to be development.
And so whenever you do that, there's going to be some risk that the burden falls on the developer. And there's going to be some risk that some development simply won't happen, not because it's infeasible totally, but just because the typical landowner is a satisficer. They're not someone who needs to make the absolute most money possible out of their property. They're someone who is fine making a comfortable amount of money at minimal effort. And in property markets, in land markets, like Los Angeles, Seattle, Boston, and so forth, owning land is just a pretty good gig. And you can be doing almost nothing and making quite a bit of money.
And so to have someone come to you with the prospect of making more money, if you go through all the hoops that are involved in property development, that end result of more money has to be really big to change that inertia. So I'm very attached to the probably politically very difficult, if not impossible, original version of value capture, which is just we tax the land value and let the chips fall where they may.
And I think in addition to the reason I just stated for that, one of the other reasons I really favor that is because there is value that comes with upzoning. And it's appropriate as policymakers and planners for us to be aware of that. But there's also just a lot of value that comes from not upzoning. And that, in most of our big expensive cities, is the much more common situation. And so the South Boston waterfront grew tremendously in value as a result of public investment and so forth, and the economy growing. My parents' house quintupled in value, and they did sort of fix up the interior, but that's not why that happened. And it's because their suburban town really didn't build much housing for 40 years.
And so I think my fundamental hesitation with the way we approach value capture is that the not upzoning and the not building is probably in the aggregate responsible for a lot more value uplift in a supply constrained city, and is also more socially harmful.
Thanks for explaining! I learned a lot. A few questions:
Where does the CAC revenue fit into this pie graph?
https://vancouver.ca/your-government/money-in-funding-the-budget.aspx
Given how big of a problem CACs are, I’m surprised that there isn’t more public awareness. There is a potential benefit to it being an abstract issue: people don’t oppose things they aren’t paying attention to. Do you see greater public awareness of CAC reform as having a positive, neutral, or negative effect on achieving that reform?
Thanks Jay! From reading through the 2022 budget document, CACs appear in the capital budget as "developer contributions" and "in-kind projects delivered by developers." They don't appear in the operating budget. ("Licence and development fees" are basically application fees.)
I think greater public awareness of issues requiring reform (like CACs) is helpful overall. Elected officials are generalists rather than specialists, so their understanding of issues is similar to that of the public. At the municipal level, opposition to reform tends to come from small well-organized groups, so I don't think the "Secret Congress" approach to reform (as Matthew Yglesias puts it) is workable - such groups are tracking changes pretty closely.
I think public awareness of such issues has another benefit. If at least we know **why** zoning in Vancouver is so restrictive (ultimately it's driven by the desire to keep property taxes low), that doesn't help us directly, but at least we know what's going on. It makes the situation, although still maddening, at least less baffling. (And in the absence of such an explanation, there's going to be plenty of competing explanations: it's common to hear people like Colleen Hardwick say that development is what's driving up prices.)
Thanks for the detailed reply!
Unless I’m missing something, your second use of the 1/6 figure isn’t correct. If CACs were eliminated and property taxes entirely made up the shortfall (something you're not advocating for), property taxes would have to increase by 29% (using 2022 figures):
Total revenue from from developer CACs: $310B
Total revenue from property taxes: $1,082B
https://storeys.com/city-of-vancouver-financial-statement-2022-property-tax-revenue-developer-cacs/
Good point! To be more precise, giving up CAC revenue entirely would require raising revenue elsewhere by about 1/6 (CAC revenue fluctuates from year to year), and it seems impossible to do so without raising property taxes. I think it's possible to gradually reduce CAC revenue over time, but going from $250M or $300M to zero all at once would not be.
Great write up, fascinating as usual.
Are there any examples that you know of where CACs are not used as major source of a cities funding? Are there models where the city's incentives are aligned to build more housing?
Thank you, glad you liked it! According to Mario Polese, Montreal has much lower development charges on new housing, paying for public amenities through property taxes instead.