An Economist Looks at SOAR

The growth of the population of California has been relatively high and continuous over the last 50 years. Annual rates in excess of 2% per year--double the rate of increase for the United States--have been routine. Although the rate of population growth has declined sharply during the 1990s, the sheer number of Californians--33.5 million as of July 1998--is quite large relative to the seemingly paltry 24 million Californians in 1980.

Over the past 10 years, there has been an emergence of a new populist movement in California with the intent to control or curtail new development. Called "slow growth," "no growth" or "growth control," this is not a statewide movement but one consisting of a series of networked but independent actions by local groups addressing growth in hundreds of communities throughout the state.

The coastal communities of California, along with the San Francisco Bay Area and the Sierra counties near Lake Tahoe, have the most growth constraints in effect. Through 1993, cities within Ventura County had an average of four growth-control or growth-management measures enacted. That was significantly more than the Southern California region average of 1.8 local growth controls and management programs per city.

With the current expansion of the California and local economies now in year five, there has been a push for new development within the cities and the unincorporated areas of Ventura County. There has also been a simultaneous desire to preserve green or open space in the county, despite the fact that new development has actually been relatively austere during the decade of the 1990s.

On Nov. 3, 1998, a form of growth control ordinance was adopted by public referendum in Camarillo, Oxnard, Simi Valley and Thousand Oaks, and in Ventura County. Moorpark passed a similar ordinance in January, 1999; the city of Ventura did so in 1995. The measure adopted in the county prevents farmland and open space outside cities from being rezoned for developments without voter approval.

All of the ordinances concentrate future development within existing planned areas for development in the cities and unincorporated areas. Zoning changes, presumably from an agricultural designation to commercial or residential, are disallowed except by the vote of the people. The ordinances run to the year 2010 or 2020. The county measure was originally called Save Open Space and Agricultural Resources, or SOAR. The city measures are also commonly referred to by that same name.

What implications will the growth controls have on the value of land in Ventura County? Will housing costs also rise in an attendant fashion?

The Record on Zoning

Zoning is typically thought of as a flexible network of restrictions but principally (and simply) a land-use constraint. Much of the previous literature has presumed zoning to be flexible, that is, changeable. If zoning is not flexible, it becomes a tighter constraint with less chance of alteration. Zoning is effectively a form of growth control. Inflexible zoning is a growth constraint.

There is a large body of empirical literature documenting the effects of growth controls on housing and land values. The evidence to date conclusively establishes that growth controls raise housing prices in communities where they are imposed. Additional evidence suggests that by delaying or banning eventual development, imposition of growth controls lowers the value of undeveloped land near the city.

Garrit Knapp conducted a study of the Portland, Ore., urban growth boundary. Oregon state legislation requires that urban areas define growth boundaries around their perimeters to prevent sprawl and preserve farmland. Knapp found that non-urban land values were higher within the urban growth boundary than outside of it.

Much of the economic literature clearly shows that agricultural zoning that restricts development opportunity will decrease land prices. For example, Francois Vaillancourt and Luc Monty examined the effect of exclusive agricultural zoning on the value of land in a Montreal suburban fringe area, about 15 miles from the central city. The agricultural zoning was imposed by provincial law and is said to be one of the strongest in North America. Using statistical analysis of 1,200 sales of land before and after the zoning, the authors found that the parcels subject to the new restrictions lost 15% to 30% of their value compared to similar unrestricted land.

The research teams of J. Thomas Black and James Hoben, and Daniel N. Chambers and Douglas B. Diamond found that among 30 metropolitan areas, those that had more restrictive land-use controls also had higher land prices. The land was developable residential acreage, ready lots for quarter-acre single-family use, or unimproved acreage suitable for residential subdivision.

Previous studies in general confirm that land-use regulations raise housing and developed or developable land prices within a locality. Furthermore, most studies of growth controls usually conclude that controls have an undesirable effect, specifically, on the affordability of housing. A higher price for housing is not by itself necessarily undesirable, especially for homeowners. However, higher housing costs imply that the poor are adversely affected. More of their income (and the income of non-homeowners) will go toward housing. Furthermore, the poor are prevented from living in certain communities or must commute longer distances and incur higher transportation costs to work.

The SOAR Initiatives

The SOAR measures effectively mandate non-flexible zoning, or zoning that would require a relatively solid mandate of the people for change. The economics literature is replete with evidence that growth controls have spillover effects on communities in which the control is directed, and in adjacent communities that are not subject to the controls.

Although the SOAR ordinances do not directly constrain new development today, their adoption will have limiting impacts on development in the future. This is an important point because SOAR was intended as a growth control. Effectively, SOAR limits the amount of land in the county for development to the currently prevailing land-use designation. With few exceptions, buildable land cannot be increased by rezoning. Buildable land then becomes a finite resource, subject to scarcity.

However, whether that constraint is applicable now or in the not-too-distant future is irrelevant to the predictability of possible effects.

If they are not exempted, proposed development projects that require alternative land-use designation are, for the time being, dead. Values of existing commercial and residential land may rise, with the steepest increases occurring where the supply of vacant commercial and industrial land is most limited and most demanded. Over time, as vacant buildable land is developed, the supply of vacant land grows exceedingly scarce.

In a capitalist economy, scarcity is overcome by rising prices. Consequently, vacant land with zoning that enables development rises in value. Acquisition costs of that land rise, and that cost is largely capitalized into the value of structures, including commercial buildings and homes.

Values of Land, Structures

The immediate effects of inflexible zoning are neither obvious nor necessarily present. Agents in the market, however, will begin to rationally plan for probable effects one, five, 10 and 20 years hence. Decision-making today in anticipation of future impacts can result in impacts today. Hidden Creek Ranch may be one such example.

Measure T was a referendum on the development agreement between the city of Moorpark and the Hidden Creek Ranch project of 3,221 homes. The project was approved, pending formal annexation of the ranch by Moorpark. A yes vote on Measure T was a vote in favor of the development.

However, Measure T was defeated by voters Jan. 12 by a 2-1 margin. In tandem with the defeat of Measure T was the approval of Measure S, which was the local Moorpark version of SOAR. Measure S disables the city's ability to extend its sphere of influence, without a public referendum.

More obvious examples of the immediate effects of SOAR may never be known. Because of expected higher costs and the probable inability to expand in the future, a business that would have moved to Ventura County may now decide otherwise. A firm in the county that was planning to expand may now plan to expand elsewhere. A developer trying to build new office or industrial space may now choose to seek opportunities elsewhere. In all of these cases, jobs and income that would have been created will not be created in Ventura County.

Agricultural Land

To the extent that a premium on the value of agricultural or open-space lands existed because of the potential for rezoning to commercial or residential, that premium would now disappear. It has been shown elsewhere that strict agricultural zoning is capitalized into land prices. The direction of that effect varies with the characteristics of the parcel and the political setting in which zoning is adopted. However, the potential for rezoning of agricultural land to alternative residential or commercial use, which (in Ventura County) is higher valued, produces a positive premium on farmland. Under SOAR, that premium disappears.

'Buildable' Land

Effectively, the value of agricultural land falls and the value of vacant buildable commercial, industrial and residential land rises.

Land zoned "buildable," i.e., commercial or residential, now develops a premium. Structures also rise in value because of potential supply limitations. If vacant buildable land is not scarce, the premium on structures will be negligible. As buildable land becomes scarce, the premium rises. Consequently, values for commercial and industrial structures will rise over time.

When prices for commercial land and structures rise, compared to adjacent areas with dissimilar restrictions in place (such as Agoura, Newhall, Valencia, etc.), firms face higher leasing costs. If they chose to remain in the higher-cost environment, they must reduce costs elsewhere if they are in a competitive industry in which service or product prices are market-determined. Their demand for labor can and often does fall.

The SOAR effect on home values is reasonably simple to predict if the rate of new home building is significantly affected by the new controls. The intent of SOAR was to reduce the potential for new development in the unincorporated areas, by fixing zoning, and the cities of Ventura County, by preventing future annexations. A constraint, simple or complex, will ultimately affect the value of assets or resources that are effectively constrained, regardless of whether that asset or resource was the principal target of the constraining mechanism, in this case, SOAR.

Agricultural Production

No probable impact on the rate or value of agricultural commodity production is necessarily predictable. Production levels and values will continue to be driven by state, national and world markets for farm products.

Fiscal Effects and Implications

With lower values for agricultural land, assessed values of farmland and open space should decline over time. Declining land values imply lower property tax assessments and a lower property tax obligation on farm and open space landowners.

In the same manner that farm and open space land values decline, buildable or built-upon land values should rise, due to scarcity. Property tax obligations for commercial and residentially zoned landowners should increase over time.

With less land available for improvement, less property tax revenue would be generated over time in Ventura County. Furthermore, with less potential for development, there would necessarily be fewer development fees, school fees and special fees for improving road construction and other community projects in the County. In the case of Hidden Creek Ranch, millions of dollars would be lost to the city of Moorpark that would have been used to finance road improvements and other infrastructure and community services.

Will schools, road improvements and other community facilities be needed if less development occurs?

Probably, because SOAR does not restrict population growth, the number of school-age children or the number of cars on the road. Growth measures in place in Ventura County restrict new development only. Municipalities in Ventura County will be forced to find new ways to generate general fund revenues to finance the growth of public services over time.

Benefits of Growth Controls

Land-use controls do provide some benefits that would be difficult to obtain under less coercive conditions. However, benefits are much more difficult to measure than the costs because they often include subjective valuations or those that cannot be quantified.

Local ordinances or tightened zoning that reduce development and population growth probably limit traffic congestion and noise and preserve more open space and green space. It is arguable whether growth controls enhance environmental diversity (flora, fauna) because existing measures addressing those concerns are already in place in California. Measurement of traffic, noise and open space benefits are typically complicated and very difficult to conduct without ambiguity.

It is frequently argued that the higher housing prices associated with communities that impose growth controls are more the result of supply constraints than the enhancement of amenities (benefits) in the region. As a result, affordable housing grows more scarce and poorer families are discriminated against.

In a response to this result, cities have attempted to institute programs to encourage affordable housing, but the results have been mixed and not entirely satisfying. Frequently the affordability argument has been used to negate or neutralize any perceived benefits of growth controls.

A Matter of Timing

The empirical evidence in the economics literature demonstrates that local land-use regulations do have an effect on land values and housing prices, especially in suburban communities.

Most of the studies show that growth controls have both benefits and costs that are capitalized in property values. Growth-control devices include the tightening of traditional zoning laws. Inflexible zoning can and often does affect property values.

Growth controls tend to raise the value of existing housing and sites on which development is still allowed and lower the value of undeveloped land and properties that might be profitably redeveloped. Although higher housing prices are seen as benefits by their owners, this spillover effect is clearly a cost to potential migrants to the controlled region, and to renters. Furthermore, under full employment conditions (such as those prevailing today), higher housing prices reduce the candidate pool of new migrants who could fill new and vacant jobs in the region.

The SOAR measures recently adopted in Ventura County fall within the category of tightened zoning and effectively serve as a constraint on growth in the unincorporated area. Because many of the cities in the county now preclude extending their spheres of influence, growth is also effectively limited to existing city boundaries.

The implications of growth constraints found elsewhere are a predictable byproduct of the SOAR measures now operating in Ventura County.

Therefore, it is not the incidence of these byproducts that is in question, but only their timing.

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