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The Academic Paper Series is a monthly series of articles written by researchers in the IMPACT Center discussing in a nontechnical manner an economics paper published in an academic journal that is relevant to the economy of Washington.
Our aim is to highlight research findings that are likely to be of interest to many people in the region that are of limited accessibility due to the venues the articles appear in and the technical style in which they are written.
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Can Urban Growth Boundaries Accelerate Land Development?
By: Dr. Michael Brady
The epicenter for the controversy over the use of urban growth zoning policies in the U.S. to preserve natural areas has been the Pacific Northwest for some time now. This is in large part due to the intimate link between the economy and the region’s environmental resources across a number of sectors. While industries like fishing and timber have directly used resources for a very long time the indirect use of resources has become increasingly important. Cities like Seattle and Portland have increasingly been considered attractive places to live thanks to the attractive scenery and outdoor recreational opportunities in nearby areas. This is often referred to as ‘amenity driven growth’. A natural tension lies in the fact that population growth in an amenity rich region can degrade the amenities that drew so many there in the first place.
A response to the tension caused by amenity driven growth in both Portland and Seattle has been to use Urban Growth Boundaries (UGB) to reduce the degradation of natural resources caused by increasing population by restricting growth geographically. Research on UGB both seeks to evaluate whether they achieve their primary objective of reducing sprawling development, but also to investigate whether they have other unintended economic consequences.
A recent paper by Christopher Cunningham in the The Review of Economics and Statistics investigated whether UGB accelerate land development by reducing options for how the land can be developed or used in the future. Interestingly, this involved using theory taking from finance and statistical methods used to look at when people die. The idea is that a UGB could possibly have the unintended consequence of accelerating the rate of the development. Someone that owns a parcel of land is likely to want to make as much money from it as possible. As became painfully apparent in 2007 this largely depends on selling at the right time. If there are no zoning restrictions on how a parcel can be used then there are lots of potential scenarios that the landowner could consider happening in the future. Having to consider all of these options increases uncertainty about what the future holds, which could have the effect of delaying the development of the land.
To get a better understanding for how uncertainty can slow the pace of land development consider owning a parcel that can be developed for both commercial real estate and residential housing. Say housing prices have increased drastically in the last few years but are slowing down now and a developer has made an attractive offer to buy the land to build a subdivision. At the same time there is speculation that in response to all the new housing the commercial real estate developers could become interested in the future. So, while the landowner may want to capitalize on the value of land for housing they could feel it is best to delay selling in case the commercial market does develop. Now, what happens if the local government rezones the area where the parcel is located so it can only be used for residential uses? The landowner is now less uncertain about what they could sell the land for in the future making them more likely to sell the land sooner rather than later.
The UGB essentially reduced uncertainty about the future value of land by restricting development options for parcels on both sides of the boundaries. To examine whether the pace of land development did in fact increase following the enactment of the UGB in King County, WA, where Seattle is located, a statistical approach referred to as a harzard model is used. These models were developed to look at what factors were most important in determining when an event would happen. An important use was the survival of people with illnesses receiving different types of treatment. The same approach is used here to look at when a land parcel was developed.
On the outside of the UGB maximum housing densities affect the potential value of a piece of land by limiting the number of homes that can be built to one per acre. Cunningham shows that without accounting for the influence of the UGB on reducing development options parcels outside of the boundary were found to be 42% to 48% less likely to be developed. However, once the effect of reduced development options is included in the statistical procedure the reduced probability of development drops to a range of between 28% to 39%. Is this difference significant in terms of the goal of the growth policy? Of course, that depends on what the goals for preservation were. It does appear that development was reduced in both scenarios. At the same time it shows how a seemingly nuanced unintended consequence of a growth policy can have a potentially meaningful effect on the intended outcome.