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Friday Interview: The Planning Penalty

Economist Randal O'Toole discusses how planning hurts homeowners

In today’s Friday interview the John Locke Foundation’s Mitch Kokai discusses planning penalties with economist Randal O’Toole of the Thoreau Institute and the American Dream Coalition. He recently completed The Planning Penalty: How Smart Growth Makes Housing Unaffordable, a national report. The interview aired on Carolina Journal Radio (click here to find the station near you).

Kokai: So first of all what is a planning penalty?

O’Toole: Well, a planning penalty is the extra amount of money you have to pay when you buy a house because of restrictive land-use planning. Some people think it’s really a tax when really what is going on is that we are taxing low-income people who are trying to buy their first houses and rewarding the wealthy people who already own homes by giving them more — making their homes more valuable. So we’re taxing the poor and giving it to the rich without the intervention of government — except for the government is the one that’s causing the regulation.

Kokai: And the planning penalty comes about because of these restrictive growth policies? Is that it?

O’Toole: That’s right. Just as an example, if you wanted to buy a four-bedroom, two-and-a-half-bath house on a quarter-acre lot with a two-car garage and a large family room, if you were in Houston, Texas, you could buy that house for $150,000. In the Raleigh-Durham area it would be about $220,000. If you went to Boulder, Colorado, where they have really restrictive land-use planning: $550,000. And if you go to the San Francisco Bay Area, over $1 million. And we are talking about exactly the same house. And the reason why it’s more expensive in San Francisco and Boulder than it is here [Raleigh-Durham] and in Houston is because of all the regulatory land-use planning.

Kokai: Now we sometimes hear this planning process referred to as Smart Growth or using the Smart Growth principles. It doesn’t sound too smart to be able to make these changes that cause such substantial increases in the housing price.

O’Toole: No, and they say that they are trying to promote urban livability, but how livable is a place if you can’t afford to live there? You know, very few people can afford to buy a house in the San Francisco Bay Area today. Most of the people who are there, if they didn’t already own their home for 30 years, they couldn’t afford to buy a house there. So they are forcing people to commute 100 miles to be able to live in a place where they can afford to have a house and work in the San Francisco Bay Area. And we’re seeing the same thing happen in other places — forcing longer commutes, forcing people to move way away from where their schools, their families want to be — just because in the name of livability, in the name of Smart Growth, which is really dumb growth, they have driven up housing prices.

Kokai: In putting together your national report, what are the parts of the country that have the worst record in terms of this planning penalty?

O’Toole: Well, California is definitely the worst. Nationwide, I estimate that people paid about $300 to 350 billion in extra costs for housing in 2005 because of the planning penalty. Half of that was in California. And almost all the rest was in 11 other states, including Oregon and Colorado and Florida and Massachusetts — states that have the most restrictive land use planning.

Kokai: Now it’s probably no surprise to people in the South, or who have looked at housing prices in the South, that the South has not been a region that has had as much of a problem with the planning penalty as some other areas. But that trend might be changing?

O’Toole: Well, that trend is changing. In 1985 Florida passed a growth management act requiring all cities and counties in the state to write comprehensive growth management plans by 1995. And they did so, and starting around 1995, housing prices began sharply increasing upwards. And so housing in Florida — the second or third most populated state in the country — had very affordable housing in 1990. By 2000 it was starting to become unaffordable and today is very unaffordable. We are seeing the same things happen in selective areas in other states. Here in North Carolina you are seeing it happen in Wilmington and Asheville and I think Hickory is going to be the next on the list. And we might even start seeing it in the Raleigh/Durham area as well. Housing prices are escalating fast here and if you’re not careful, you are going to make housing unaffordable for the typical family.

Kokai: You mentioned two major cities on both ends of the state — Asheville and Wilmington — that are already exhibiting a significant planning penalty. How did that come about?

O’Toole: Well, I wish I knew the answer to that question. I would have to look at the specific land use rules that they have passed, but Asheville does have an urban growth boundary and that definitely has limited the amount of land that is available. Other things that cities can do that will limit development are impact fees. If you charge an impact fee, you not only increase the cost of new housing, you increase the cost of all housing because if somebody is selling a used house, they know that the new houses cost $5,000 more because of the impact fee. So they raise the price of their housing by $5,000. Another thing you can do is create an onerous planning process — or permitting process — that takes months and months to get a permit. Every time you double the amount of time it takes to get a permit to do a subdivision or to do a home construction, you decrease the amount of affordable housing by 15 percent. That is calculated by a professor at Harvard University. So all kinds of things can be done to make housing less affordable. The way to make housing more affordable is to relieve those land use planning rules.

Kokai: That led into my next question which is, what should governments be doing — or the people who have a chance to lobby their government officials — what should they be doing to ensure that we are making our housing as affordable as it can be and still livable and the type of housing that people would want?

O’Toole: Well, I think we need to take a look at what is it we really are trying to achieve here with all these rules? And aren’t there better ways of achieving those things that don’t impose a lot of cost on people. The rules end up being very costly and providing minimal benefits, really. But if we are really trying to achieve something like making sure that there is safe transportation for pedestrians and things like that, let’s just do those things rather than focusing on imposing high costs on home builders and high costs on new development, because when you do it through, regulation you make it very costly and you don’t really provide the benefits that you can provide in other ways.

Kokai: Based on your experience, is this process of a planning penalty getting better? Getting worse? Should we be worried about it?

O’Toole: I think we should be very worried about it. There is a huge movement out there promoting these ideas. North Carolina recently legalized the use of tax increment financing, which is a hidden tax on people because it’s taking tax money away from new development that would ordinarily go to schools and fire and police and making you pay either by having poorer quality schools, fire and police, or by increasing your taxes to pay for their school, fire and police. And then using that money from these new developments and instead of paying for schools, fire, and police, we are subsidizing the developments. We’re subsidizing planners’ utopian visions of how we ought to live rather than how Americans really do want to live. So we need to get away from this utopian idea, this idea that we can envision the future in 2020 or 2040 and then impose that vision on the future. That’s not the way the future wants to live. It’s not the way we want to live.