What’s holding back the economy?

By Bruce Firestone | Architecture

May 26

In a ground-breaking study[1], University of Chicago Booth School of Business economist Chang-Tai Hsieh and University of California at Berkeley professor Enrico Morerri reported that restraints on new housing prevented people, especially young talent, from moving to or staying in clusters of innovation. They found that such constraints: “lowered aggregate US growth by 36 percent from 1964 to 2009.”

Hsieh was quoted saying this about their research:

“If you compare it to all the things our political system talks about, this is just huge relative to everything else.”

You can think about it this way—if zoning codes were as permeable and permissive in 2009 as they were in 1964, the US economy would be more than one third bigger.

That’s an enormous increase in economic wellbeing amounting to nearly $7 trillion per year[2]. To put that in perspective, that’s an additional $21,432 USD per year per person (based on US population estimate for 2017 of 325.7 million persons). For a family of four, it represents a nearly unimaginable $85,728 a year of extra income… forever.

According to Bloomberg Businessweek correspondent Peter Coy[3]:

“The good news is that cities don’t have to be prohibitively expensive. The trick is to form a broad coalition for what pro-housing activists call YIMBY (yes in my backyard) by ensuring that the benefits will be enjoyed by all, or almost all.”

Harvard economist Edward Glaeser adds[4]:

“Arguably, land use controls have a more widespread impact on the lives of ordinary Americans than any other regulation. These controls, typically imposed by localities, make housing more expensive and restrict the growth of America’s most successful metropolitan areas. These regulations have accreted over time with virtually no cost-benefit analysis. Restricting growth is often locally popular.  Promoting affordability is hardly a financially attractive aim for someone who owns a home.  Yet the maze of local land use controls imposes costs on outsiders, and on the American economy as a whole.”

James Howard Kunstler’s advice to local governments in Home from Nowhere[5] was to essentially burn all your zoning codes[6]. Short of this, local governments that adopt proactive zoning codes (sometimes referred to as performance zoning) where everything is permitted unless expressly forbidden instead of traditional zoning where everything is forbidden unless expressly permitted, will develop an experimental environment where people can allow their creativity to flourish. Public safety codes and public input on things like site plan control can take care of nuisances and correct mistakes as well as improving overall urban design which should be, like any creative pursuit, an iterative process anyway.

Once upon a time, town government or city-state government was based on the Athenian model of participatory democracy. Citizens and land owners met with town elders to plan the development of their communities—who lives where, what type of activities would be next to each other, where town markets would be, places of worship, fortifications, tanneries, milliners, coopers, blacksmiths, artisans, guild workers, merchants, nobles, and so forth.

Problems between neighbors arose from time to time.

“Mary’s goat is eating my vegetable patch and it should be staked,” says Tom.

“He should fence his garden—my goat, Mabel, needs to be free to forage for food,” replies Mary.

Town elders would meet with Tom and Mary, hear both sides and then render a decision (Mary’s goat shall be free to wander—but she shall pay half the cost of fencing in Tom’s garden).

Speedy resolution of such issues stopped them from festering and making
enemies amongst neighbors. Once you start arguing with your neighbor, one of you has got to move. Nothing is worse than coming home from a workday and not being able to look your neighbor in the eye, wave “hello” or stop to have a chat.



[1] Housing Constraints and Spatial Misallocation, Chang-Tai Hsieh and Enrico Moretti, University of Chicago Booth School of Business, last updated 2018, https://faculty.chicagobooth.edu/chang-tai.hsieh/research/growth.pdf.

[2] US GDP in 2017 is estimated at $19.39 trillion USD. Source: World Bank. 

[3] Big City Housing Doesn’t Have to Be So Expensive, Bringing down prices requires a combination of affordable homes and upzoning, Peter Cory, Bloomberg Businessweek, August 27, 2018,

https://www.bloomberg.com/news/features/2018-08-27/big-city-housing-doesn-t-have-to-be-so-expensive.

[4] Reforming land use regulations, Edward Glaeser, Brookings Institute, April 24, 2017, https://www.brookings.edu/research/reforming-land-use-regulations/.

[5] Home from Nowhere: Remaking Our Everyday World For the 21st Century, James Howard Kunstler, Simon & Schuster, March 1998.

[6] What he actually said is this: “The model of the human habitat dictated by zoning is a formless, soul-less, centerless, demoralizing mess. It bankrupts families and townships. It disables whole classes of decent, normal citizens. It ruins the air we breathe. It corrupts and deadens our spirit.”

Zoning change, official plan amendment, sub-division application, site plan control and other public processes can either be looked at as confrontations or as opportunity for affirmation of a project amongst stakeholders. A switch to performance zoning, negative property taxes (where neighbors pay for deleterious effects superimposed on adjacent property owners—these are called special assessment zones) and the use of public safety codes to greenlight, amend or stop a development will produce superior results in every way—including faster, more sustainable economic development and higher property tax revenues for local governments as well as more harmonious communities.

“Zoning changes can be looked at in one of two ways—as potential for conflict and confrontation with your neighbors or as an affirmation of a project’s suitability for neighborhood and community,” Sheila McKee, former Township of West Carleton councilor

***

Reality check

First, let’s ask this question: What are some factors holding back the economy?

Here are some of those factors:

1 low birth rate
2 low productivity growth
3 lower workforce participation
4 lack of lifetime learning
5 underemployment
6 skills misfit
7 early retirement/force out over 50 (over 40 in tech)
8 lack of startups and PB4Ls (personal businesses for life)
9 poor urban design, urban planning, NIMBYism

To estimate the cost of NIMBYism, we looked at just one variable—adding more density to existing residential areas by permitting coach houses (tiny “granny” flats in your backyard).

Coach houses (which used to be called less politically correct “granny” flats because most of their residents were female elders who tend to survive their male partners by eight or more years) have been permitted in Ottawa since the city changed its bylaws and Official Plan in November 2016. It will have a profound impact not only on the urban fabric of Ottawa, but also on an individual homeowner’s ability to take care of themselves and their families, mostly from a financial point of view.

How so?

Let’s assume you own an existing house in Ottawa that is worth a city-wide average of $380,000 (circa 2017). You decide to add a 2-bedroom, 1-bath coach house in your backyard covering 40% of the area there. The thought is that it’s going to add extra income for you when you retire at 55! (Remember Freedom 55?)

Now, let’s suppose it costs you $180,000 to build your new coach house and you use a design like the one shown below created by architectural technologist Leo Clement and coach house builder Chris Long.

The turning circles you see on the main floor are for wheelchair (or walker) access—having a 0-step entry, wider corridor/doorway widths, and a roll-in or step-in shower are important elements. Why? Because CMHC predicts that by 2032 nearly a quarter of Ottawa’s population will be seniors so why build something that excludes as much as 25% of your potential marketplace?

Two bedrooms are essential as well—not just because most couples by the time they are in their 50s, 60s, 70s and 80s are sleeping in separate rooms—but also because then it’s set up for roommates (young or old) to occupy.

They also added a loft-sleeping platform accessed by a ship’s ladder—that’s for visitors to use, most probably grandkids.

So, what is your ROI, return on investment, if you build something like this?

Here’re those calculations:

cost of construction: $180,000                      

rental income:  $1,600.00 per mth including utilities

tech package (Netflix, basic cable, net phone, internet, wi-fi, large screen TV): $115 per mth                      

total rental income:  $1,715.00 per mth        

operating costs, utilities, property management, tech package, administration, insurance, vacancy allowance, maintenance and repairs: ($514.50) per mth based on 30% of total rental income

NOI, net operating income: $1,200.50 per mth or $14,406 per annum            

             cap rate: 8.0% per annum              

E&OE

Hence, your cap rate (capitalization rate, a measure of return based on you making this investment as if it was funded in cash, ie, without adding to your mortgage) is 8% pa. When you compare this to what you get on your savings at your bank (anywhere from .99% to 1.7% pa today) or what many mutual funds return (around 4%), it looks satisfactory. There is also the hope that your real estate will go up in value over time, which compounds your return. A cap rate only measures cash returns not inflation or mortgage principal paydown (if you have a mortgage).

Now $14,406 of extra annual income might not sound like a lot but when you compare it to the average CPP (Canada Pension Plan) payout of around $550 per month, it can make a big difference, especially to elders living on fixed incomes.

Alright, so far so good.

But changing bylaws is not sufficient to see a new industry bloom in Ottawa. We have to be cautious in our early assessment because the coach house idea is not new.

A Kanata subdivision (called Briarbrook) was developed more than 25 years ago by Terrace Investments Limited, the first parent company of the Ottawa Senators. The zoning there allowed granny flats—on larger pie-shaped lots, the ones that are created when a roadway turns a corner.

None was ever built. How come?

Because the city of Kanata (long since absorbed by Ottawa) imposed rules that made their construction impossible—rules such as you could only rent them to related persons, you could only get a “temporary” building permit of five years (presumably after which you’d have to remove the structure or tear it down), and you had to pay a full development charge to help fund off-site infrastructure even though none was needed.

The coach house bylaw passed by Ottawa city council in 2016 includes a development charge (around $6k for transit development) and it prohibits having both a coach house and an in-home suite… something the city has said they will review in time.

Essentially, for now, you have to choose between a legal basement apartment, and a coach house in your backyard. This is a difficult choice.

So why not allow both?

Well, city planners and local councilors live in perpetual fear of the NIMBY movement, not in my backyard political activists, who are concerned about almost any change in their neighborhoods. Their concerns? More traffic, more pressure on infrastructure and schools, negative environmental consequences such as tree removal, more policing costs (due to “undesirables” taking up residence in basement suites or coach houses). But in reality, it all boils down to one thing—money. They fear that their property values will drop.

“The pseudoscience of planning seems almost neurotic in its determination to imitate empiric failure and ignore empiric success,” Jane Jacobs

But in almost every instance, greater densities and intensities result in higher property values not lower ones. Take the Glebe, for instance. A desirable Ottawa neighborhood to live in, n’est-ce pas?

It has lots of sideyard, backyard and basement apartments plus coach houses, metal bashing (auto repair) shops, garage mechanics, restaurants, offices, arena, stadium, and traffic galore, but a home in that area is not going down in value. The caveat on this is that order and peace are maintained, the sine qua non of creating value in any society or town. Fortunately, Ottawa-Gatineau is still one of the safest million+ population places in the world to live in.

If we are still afraid of NIMBY attack, maybe we could do worse than borrow a concept from radical English prime minster Theresa May—who found a way to turn NIMBY activists into PIMBYs (please in my backyard) supplicants. She did it by making sure that any so called “undesirable” use pays a royalty, which instead of going into the coffers of municipal, provincial, state or federal governments goes instead directly to neighbors affected by the change.

As a reality check then, we calculated what would happen if other cities, towns and villages followed Ottawa’s example and started to permit coach houses.

There are about 195 million dwellings in the US and Canada, and if 20% of those are suited to adding coach houses, and if all of them did so, then it would add $1.8 trillion per year to GDP in those two nations[1].

Hsieh and Moretti’s $7 billion per year increase in GDP can now be put into perspective. If simply having one fifth of existing dwellings add coach houses boosts GDP in the US and Canada by $1.8 trillion, then their number looks believable.

Now imagine what could happen if clever urban planners got into the “engine room” of their city-state to diversify, simplify and relax their zoning codes to reflect 21st century preferences for towns and cites and villages that put people first and commuting second?

Here’s the thing—the tech industry does amazing things for a town like Ottawa. It’s also great to have other economic engines running flat out such as government sector, tourism, education, health, and entertainment. But there is no industry bigger than the real estate industry—everyone needs a place to live, shop, work, learn, make, play, earn… so if we could take planning shackles off urban designers, homeowners, tenants and real estate investors, they’d be able to create a much more vigorous environment for everyone else (including themselves) to generate wealth in.

This is what is meant by creating a platform upon which creatives can do their thing. It’s not necessary, nor is it worthwhile, to even try to identify industry winners and losers. Simply get preconditions right and stand back. Talented people will shape the future just fine provided they are given more rope to do it with.

They did it in Rotterdam, a failing industrial port city in the Netherlands, which is now a world-leading hotbed of highly experimental, sustainable urban development and design. Ottawa could do worse than follow their lead—so what about co-opting an entire neighborhood here where creative new solutions to off-grid energy issues, grow local, and building more mixed-use communities, ones that are neo-urbanist, economically and environmentally sustainable, walkable, animated, livable districts where people—LIVE-WORK-PLAY-CREATE-MAKE-LEARN-ENTERTAIN-SHOP-EXERCISE-GROW-SOCIALIZE in one neighborhood. This will do more to reduce congestion and revive “dead” office and industrial districts than anything else… place-making, where not every trip is a car trip.


[1] You can download the spreadsheet and experiment with the numbers yourself, https://www.dropbox.com/s/6ywyf3gab1g8ox8/whats-holding-back-the-economy.xls?dl=0

Cube Houses in Rotterdam viewed from Blaak metro station
[1] You can download the spreadsheet and experiment with the numbers yourself, https://www.dropbox.com/s/6ywyf3gab1g8ox8/whats-holding-back-the-economy.xls?dl=0

[1] High density housing by architect Piet Blom. Its main purpose is to maximize interior space. Image courtesy of Wikimedia Commons, a free media repository. One owner apparently opened his furnished home to the public; there is sufficient interest such that he makes his living from these visitor tours.

***

An excerpt from Economic Development & Ottawa’s Official Plan by Bruce M Firestone, PhD

Bruce M Firestone, B Eng (civil), M Eng-Sci, PhD
Real Estate Investment and Business coach
Century 21 Explorer Realty Inc broker
Ottawa Senators founder
1-613-762-8884
bruce.firestone@century21.ca
twitter.com/ProfBruce
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brucemfirestone.com

-MAKING IMPOSSIBLE POSSIBLE
-FREEDOM VIA REAL ESTATE INVESTMENT AND PB4L, PERSONAL BUSINESS FOR LIFE
-FEHAJ, FOR EVERY HOME A JOB
-MAKE YOUR HOME WORK FOR YOU, INSTEAD OF YOU WORKING FOR IT
-HIGHER ROI NOT JUST FOR OWNERS AND INVESTORS, BUT FOR TENANTS, GUESTS, VISITORS, NEIGHBORHOODS, COMMUNITIES, TOWNS, VILLAGES, AND CITIES TOO

postscript:

“Local governments may not be able to influence the economy much,” says CFIB chief economist Ted Mallett, https://business.financialpost.com/entrepreneur/heres-the-best-canadian-city-to-start-a-small-business-in-no-its-not-toronto-or-waterloo 

#Wrong 

What’s really holding back the economy is exactly that–overly intrusive/restrictive zoning regulations. That’s what this article is seeking to demonstrate.

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About the Author

Bruce is an entrepreneur/real estate broker/developer/coach/urban guru/keynote speaker/Sens founder/novelist/columnist/peerless husband/dad.

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