Sep 13, 2023Liked by David M Levinson

I became passionately interested in this issue as a kind of hobby some years ago. I quickly formed some ideas about where everyone was going wrong. Before long I was admitted to the esteemed Transportation Modeling Improvement Program listserve, and posted my concerns. I had an interesting few months of participation but came away with minimal hope that the big obstacles to accurate modeling were going to be mastered.

Besides "endogenous changes in land use" there are also endogenous changes in land RENT or price. But it is important to understand it as economic rent.

And land rent changes in response to policy inputs or evolution of the economy or society, can vary quite widely from one jurisdiction to another, with the greatest variability being due to the extent of rationing of available land to the urban economy as a whole. Rationing the land supply results in a SYSTEMIC change in urban land rent, not just a change by some "factor".

When you have land available to the urban economy that is superabundant in quantity and the next competing use is rural, all that is necessary for developers to add that land to the urban economy, is to outbid rural land users. This land price is so cheap that it barely matters for the resulting "developed" housing or commercial premises. Then the existence of this land supply and the competitive developments that pass this land on at minimal capital gain, suppresses the potential capture of economic rent everywhere else in the urban economy. Land rents under these circumstances are "differential"; the base is the competing rural land price; and then "differentials" are added according to local productivity and location advantage relative to the exurbs.

This is what underpins house price median multiples of 3 or little more, everywhere they exist.

When urban land supply is rationed, usually by explicit "anti sprawl" regulations (but numerous proxies exist) urban land rent is derived "extractively". Instead of a value being added on top of the competing rural land-user's bid, every site in the urban economy has a price derived from "the maximum that can be extracted from the ultimate consumers of the site".

Under these conditions, policy changes and public investments are reflected in extractive site rents extremely aggressively. For example, if housing supply is mandated (even if assumed to be only to some extent) to be via intensification rather than "market price" driven "sprawl" the result is always a new housing unit that is priced at least at double that of the "differential rent" or median-multiple-3 market. The housing unit might be considerably smaller, stacked and packed, and of lower quality, but it will always cost in real terms, more than double the price of the McMansion that is the "median home" in the counterfactual situation.

What this means is a more dramatic "pricing out" effect that negates the intentions of the planners for mode shift that assumes co-location efficiencies. Hong Kong is not an outlier, in that its housing price median multiple is around 5 times higher than a median multiple 3 city while its density is 20 times higher - and its average commute is a monster, not the planners imagined elevator ride, stroll down the street, and the use of a subway for a few stops. The land price is literally thousands of times higher, with the price elasticity to allowed density running "the wrong way".

Everything that can capitalize into site prices will capitalize more aggressively in an "extractive rent" urban economy. Upzoning will cause site rents to rise so much faster than actual housing provision, that the outcomes will be more expensive housing, both the new high-density units AND the as-yet unredeveloped houses with gardens and yards. Grimes and Aitken (2010) should be better known for their assessment that "all the profit potential from redevelopment is captured in rising site prices" so that actual builders of new housing are squeezed between site acquisition costs and what end consumers can be gouged for housing.

My line for describing urban planners than do not understand this process, is that they are like rocket scientists who do not understand gravity. Economic rent is like the "gravity" in an economic system. What I have found is that the urban planning profession prefers to remain in a state of denial that their models have been failing for causes UNKNOWN for decades now; let alone taking the next step of trying to work out if there is a BIG reason why!

Ironically, if you look at upzoning and more liberal redevelopment and changes of existing urban land use allowed in the median-multiple-3 city, you will find that these have outcomes that are NOT thwarted by extractive economic rent and "pricing out" - the locations remain in competitive tension with those locations where prices are suppressed by the availability of superabundant cheap land.

Those attracted to Planning as a profession, hate the idea that participants in an economy might CHOOSE what THEY, the Anointed, do not approve of. Hence those location choices that attract participants by reason of the massive consumer surplus in their price, must be removed by regulatory force. The unintended consequences that follow, are an economics lesson in unintended consequences that really should have a book written about them. Maybe we are not even as clear as we should be about the unintended consequences of Central Planning "instead of markets" in the great Communist experiment (see Bertaud and Renaud, "Cities Without Land Markets"). But we desperately need to understand "unintended consequences" where land markets are allowed to amass economic rent throughout them, by "the land market" being rigged to do so.

If we rationed the supply of land for food production back to the amount that existed for each local economy before refrigeration and rail freight, we would find that extractive economic rent could return to food-producing land to such an extent that once again it would consume 50% of household budget. Maybe we wouldn't stand for it. We shouldn't stand for it in housing either. But it is not just a question of housing affordability - Britain's mysterious "productivity gap" for decades has to be due to their Town and Country Planning system, which was adopted some decades before other first world countries adopted similar policies of rationing urban land. The best economists have acknowledged this; most just still regard it as "a mystery".

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Sep 12, 2023Liked by David M Levinson

...and we haven't even talked about the data collection issues!

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Thanks David! This is a useful discussion.

It is important that everybody who uses modelling results understand their direction of bias. My research indicates that models often incorporate the following distortions that tend to exaggerate roadway expansion benefits and undervalue improvements to non-auto modes and TDM incentives:

* Most models underestimate induced travel impacts, and so exaggerate congestion reduction benefits, and understate the increases in external costs (downstream traffic and parking congestion, crashes and pollution emissions), from highway expansions.

* Few models accurately reflect walking, bicycling and public transit conditions, and so fail to value qualitative improvements in these modes such as better sidewalks, reductions in vehicle traffic speeds, and more comfortable transit vehicles.

* Most models ignore the additional delay that wider roads and increased traffic volumes impose on pedestrians and bicyclists (called the "barrier effect"), which exaggerates the net benefits of highway expansions.

* Many models use very low price elasticities (i.e., "coefficients"), based on short-term fuel price elasticity studies performed in the 1990s, which have proven far too low for current long-term planning. This undervalues the impacts and benefits for pricing reforms such as increased fuel taxes, efficient parking fees and road tolls, and distance-based insurance and registration fees.

These and other biases are discussed in my new report, "Transportation Planning Distortions and Reforms: Guidance for Reducing Automobile Dependency and Sprawl" (https://vtpi.org/distort.pdf ). It is important that practitioners understand these biases and take them into account when applying them to planning decisions, particularly benefit/cost analysis.

What do you think? Do you agree that current models significantly overstate roadway expansion benefits and undervalue non-auto mode improvements and TDM incentives? Do practitioners and policy makers understand these biases?

Todd Litman (litman@vtpi.org)

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