Sep 27, 2021
A new essay by UCLA’s Michael Manville delivers a strong critique of the method many cities use to extract fees and concessions in exchange for allowing new homes to be built. Known as “value capture,” these fees are sold as a means to make new development “pay its own way” — but in practice, end up entrenching the rent-seeking behaviors of existing property owners. They also directly drive up the cost of new housing.
Professor Manville argues that the premise of value capture policies is fundamentally flawed, because new development is actually a way to redistribute wealth from unproductive asset owners to a productive, working class. Instead, cities should focus on capturing the value from land rents, not housing production.
- “Value capture mechanisms that are triggered by development tacitly punish landowners who share land value, and tacitly reward owners who withhold it.”
- “The fair and efficient approach to value capture involves taxing land, not development, and encouraging rather than discouraging the production of new homes.”
- “Contemporary value capture, in contrast, provides a veneer of redistribution but serves primarily to protect most urban wealth from redistribution.”
When facing a critical housing shortage and the highest poverty rate in the nation, advocates like California YIMBY and the Biden Administration agree: upzoning to allow more multifamily housing is a necessary step for increasing housing supply, and bringing down costs. But municipal governments present a barrier to this approach: In making it legal for landowners to convert their properties into denser housing, do cities relinquish some “value” that the public must “capture”?
Unfortunately, Manville (2021) observes in his research that too many cities answer this question with “yes.” And the process of value capture itself is subject to political whim: various ad hoc negotiations that increase taxes and fees on the desired product — more homes — rather than on the undesirable outcome — which is housing scarcity.
Recent state legislative proposals to remove these arbitrary costs, such as AB1401’s effort to end costly parking mandates (and similar local efforts), have been met with stiff opposition from some city planners and local nonprofits who contend that this would be giving away value to developers for “nothing in return.”
Similarly, Manville observes: “Inclusionary laws do not compel low-density places to accept more density. Sometimes inclusionary is used as a condition for more density … more importantly, inclusionary is conditional on density.” In other words, while more housing is in itself a public value — even if it’s privately owned — our current “value capture” policies actively discourage the production of this value, and imply that more homes are a burden that must be penalized.
Manville instead proposes a more traditional approach to value capture, leaning on the century-old analysis of economist Henry George. George (1879) observed that “if … rising land values were not broadly shared, prosperity could, perversely, immiserate the average person, by creating high rents.” The lucky landowners would reap all the wealth from productive growth, but the workers producing this wealth would enjoy diminishing returns.
Just as George predicted, those impoverished by high rents “would come to believe that they had been doing better when the economy was doing worse, and they would, tragically, look with suspicion on economic progress” (this should sound familiar in a state that has the 5th largest economy in the world, and the highest poverty rate in the United States). George’s proposed remedy of taxing the value of land rather than its productive uses spawned countless variations of land reform movements from Pennsylvania to Taiwan.
Tragically, the “value capture” paradigm today takes the exact opposite approach, rewarding landowners who do not add to the housing supply amid a nationwide housing shortage. Manville illustrates the problem: “If I own land in Los Angeles and want to put 20 units of housing on it, I assume a special responsibility to house low-income households. If I leave the land empty, I owe low-income people nothing. If my land already has 10 housing units and I knock them over, I owe nothing. If it has a 35-year-old single-family home and I sell it to someone else for twice what I paid for it, I owe nothing.”
Here’s a thought experiment: if new market-rate housing is only a benefit to the private developer, then would demolishing old market-rate housing also be irrelevant to housing supply and affordability? “The sheer prevalence of older expensive housing makes it unlikely that Los Angeles’s vulnerable residents would be unharmed if the city made its expensive homes disappear,” Manville says. “When housing is in short supply, it is high-income people who are least likely to leave, and because they don’t leave, expensive housing can always replace itself.”
Some critics argue that new market-rate housing has an “amenity effect” that signals desirable conditions for more high-income people to move to the neighborhood, canceling out the benefits of new supply by raising demand even higher. But surely amenities themselves are not a strictly private value with no social benefit. Manville notes that many positive factors can increase housing prices, and should not be taxed as developer profits: good schools, community interventions to reduce crime, and planting street trees would not be the subject of “value capture” policies. Yet they, too, can make housing more expensive.
Manville provides a fairly simple illustration for why zoning does not create land value out of thin air: “No one has zoned Detroit or Cleveland into an urban renaissance, and the same reason that Iowa farmland won’t get Manhattan’s skyscrapers even if it’s given Manhattan’s zoning.” Zoning operates in a context of demand, and the demand is for a location on a particular piece of land, which as Mark Twain famously noted, is no longer in production.
The crux of Manville’s argument is: “Taxing land rather than development aligns the incentives of landowners with those of society … When a landowner has to pay the tax, the landowner needs to make the land generate income. The best way to do that, of course, is to develop the land…in the process, he shares the land with more people, and eases the housing shortage.”
And that, in itself, is valuable.