But there is a potential complication: Critics of liberalizing housing construction are concerned that, at least in the short term, looser zoning rules could make existing houses more expensive and exacerbate the affordability challenge. Fortunately, this worry is somewhat overblown. In conducting new research, I found that an important housing policy change in Houston — the major U.S. city that’s done the best job of welcoming housing construction — did not measurably increase land values.
At issue is the concept of upzoning, which means increasing the allowable size and density of buildings that can be built in a given place. Because upzoning increases a property owner’s rights to build on their land, it can also increase that land’s value. Imagine San Francisco policymakers upzoning a block of single-family houses and giving the owners the right to build skyscrapers, creating an option value worth far more than the existing houses.
But there are ways to mitigate this issue. Policymakers can implement upzoning that applies across all or most of the land in a larger region, in contrast to allowing more construction only in a small area. Further, reforms should be designed with an eye to facilitating construction that homebuilders will want to take advantage of to meaningfully increase new housing construction.
Abundant and diverse new housing construction pushes rents down. And because land’s value is ultimately determined by the stream of income it can produce, as more housing supply reduces rents across a region, it puts downward pressure on land values, too. That effect could be bigger or smaller than the effect of the policy change on a parcel’s option value.
Beginning in 1998, Houston policymakers implemented a modest upzoning covering a large land area. Prior to the reform, the minimum lot size across the city was 5,000 square feet, meaning no home could be built on a piece of land less than that size without a zoning variance. Following the reform, houses could be built on as little as 1,400 square feet within the city’s I-610 Loop. Later, in 2013, the rules inside the I-610 Loop were extended to the entire city.
In the study, I compared land values outside the I-610 Loop to land values inside, where the current minimum lot size rules were implemented 15 years earlier. Controlling for a number of factors, I found no evidence that the 2013 reform increased land values or reason to think it worsened the affordability of existing housing. In fact, when I limited the analysis to land very close to the I-610 border in those Census tracts most likely to see new housing construction as a result of the policy change, I found evidence that the reform reduced the value of the land it covered relative to land inside I-610. That was in the context of large increases in land value on both sides of I-610 — neither side declined in value over time.
Together, Houston’s 1998 and 2013 upzonings facilitated the construction of about 80,000 houses on lots less than 5,000 square feet. Small-lot development has allowed for less expensive housing than could otherwise be built and created opportunities for more people to live in desirable neighborhoods close to job centers.
My findings contrast with a 2020 paper measuring the effects of an upzoning in Chicago that was more like the hypothetical San Francisco example focused specifically on a small area. Chicago’s policy change allowed for denser multifamily housing to be built on about 6 percent of the city’s land close to certain train stations. The Chicago results indicate that the policy change — which has not led to an increase in housing supply so far — increased values of the upzoned properties because of their increased option value for potential future construction.
Opponents of upzoning have used this finding to oppose allowing more housing being built in existing neighborhoods in other cities. The Houston case shows that when land-use liberalization leads to widespread and diverse housing construction, more people can live where they need to without an unnecessary spike in the price of existing houses. It’s a win for policymakers and residents alike.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
