For decades, zoning laws have been an essential part of community development and growth. Los Angeles was one of the first major cities to implement zoning laws in 1904 and was quickly followed by New York City in 1916. There are many purposes of zoning laws, but some of the most important include:
- Maintaining consistency of building types in designated areas to optimize the value and enjoyment of property owners. For example, many cities separate residential from commercial and industrial areas, so a homeowner is less likely to have a factory built on an adjacent property.
- Creating an orderly development plan for the city to organize municipal resources better, address traffic congestion issues, meet the community’s housing needs and other development issues.
- Ensure adequate distribution of public infrastructures such as roads, water, electricity, and sewer.
Not only do zoning codes regulate the locations where residential homes and commercial businesses can be located, but they also provide specifications for lot size and structural requirements. For example, the minimum lot size in some rural residential zones may be 2 acres, while in a suburb, the lot size is ¼ of an acre. Zones will also dictate if a residential property is limited to a single-family home or if a duplex or apartment complex can be built there. Of course, there are also other rules such as setback provisions, structure height limitations, fencing restrictions, etc.
So how do these rules impact housing prices?
Recently, much attention has been given to the necessity of zoning regulations, particularly for residential areas. Many communities are suffering from a lack of affordable housing. It’s easy to see that if zoning regulations limit how many family units can be built on a given piece of property, they directly impact the fundamental supply and demand laws. Fewer available homes mean higher prices.
However, there’s another interesting study that sheds light on the impact of zoning regulations on home prices from Ross Kendall (from the Reserve Bank of New Zealand) and Peter Tulip (from the Reserve Bank of Australia) published in the CATO Institute’s Research Briefs in Economic Policy (2018). In short, they reviewed three characteristics of a home’s selling price: the overall sales price, the cost of building the structure, and the land cost.
In Sydney, they found the average home price to be $1.16 million (about $850K in USD). Of that price, the house’s cost was only about $395K. Surprisingly, they found the average value of land to be about $400 per square meter, making the actual cost of the land only $276K. That means that in this situation, the difference between the sales price and the cost of the home (a whopping $756K), which should approximate the cost of the land (cost of land + cost of structure = sales price), was over-inflated by $489K.
- Average sale price = $1.16 million
- Less Average structure cost = $395 thousand
- Equals the Market value of land = $765 thousand
- The market value of land = $765 thousand
- Less Actual cost of land = $276 thousand
- Equals over-inflation of market value = $489 thousand
In other words, homebuyers are willing to pay $489 thousand over the actual cost of land to own a home built on i.
Kendall and Tulip hypothesized that without zoning restrictions limiting subdividing the land or building multi-family structures on a single lot, there would be less necessity for a developer to place as much “profit margin” into the land’s market value. For example, if a developer could place two homes on the same lot, the $489 thousand could be split between two houses rather than just one, lowering the sales price of both homes.
Does this mean zoning laws should be eliminated?
Definitely not. Municipal zoning regulations provide communities with many essential benefits. However, this is an example of why landowners often have valid cases to approach the city for amendments to the current laws. City development departments have procedures in place so that landowners can apply for changes and make their cases to the department officials.
Our team can help you navigate the process.
If you’re interested in requesting a zoning change to your property, contact the professionals at Richard Stevens & Associates. We assist our clients with all work related to rural and urban land use planning permits and zoning laws. Our team will work to understand your needs and help you understand the legal processes involved with reconfiguring the classification of your property to achieve your goals.