On October 25, 2019, the Minneapolis City Council approved the “Minneapolis 2040” plan. City officials produced it to guide the development of Minnesota’s largest city into the mid-21st century. The plan focuses on a variety of developmental areas, such as jobs, education, the environment, and transportation.
The plan’s objectives for each of these areas didn’t raise much controversy, except in one: housing.
The controversy arose because the Minneapolis 2040 plan does something that no other major American city has ever attempted: it shifts zoning practice away from real-estate parcels for single-family use. No, it doesn’t abolish them altogether, thus forcing homeowners to build condos or apartment buildings. Rather, the plan permits homeowners in the least developed parts of Minneapolis to upgrade their lots into duplexes or triplexes. Landowners living along transit corridors will have even greater development options. This policy, referred to as “upzoning,” is popular among urban advocates, and until now cities have only implemented it piecemeal. The plan’s purpose for these ambitious changes includes increasing the availability of affordable housing, reducing rents, and helping realize the mayor’s goal of racial justice.
Unsurprisingly, then, the plan’s opponents alleged it would destroy their neighborhoods, while housing advocates, pleased the plan passed at all, lamented that the option of building quadraplexes on single-house lots had been negotiated away. With so much at stake, it’s worth asking whether the plan will increase the housing supply as the advocates hope, or will this attempt to create affordable housing falter as others have?
The short answer is, as I predict: it will falter.
Now for the long answer. First of all, let’s be clear: The Minneapolis 2040 plan doesn’t require anyone to do anything any time soon. It doesn’t change incentives as rapidly as a tax could. We know this because according to Minnesota Public Radio, there aren’t many projects pending the City Council’s final approval of the plan.
Now that we know that, in fact, the Minneapolis 2040 plan will not lead to a building boom, why should we be skeptical of its housing plan on theoretical grounds?
First of all, “upzoning,” as the Minneapolis 2040 plan calls for, does not work, and for counterintuitive reasons. Sure, adding more housing to a city with a fixed area should make shelter cheaper. Yet, in reality, this isn’t how attempts to expand affordable housing have worked. The greatest challenge isn’t in adding more units, but in adding the right kinds of units, at the right costs, and for the right people. Creating housing is easy, but creating it for the poor is not.
Relying on the established norms of land economics, developers will buy up real estate, build fairly expensive buildings, and the neighbors will benefit from the spillovers of higher land values. Poor households will not be able to afford the new residences. In fact, it may be even worse than this: One study in Chicago, Illinois found that after five years upzoning increased property values without expanding the housing supply.
So what approaches can cities try as effective alternatives to upzoning?
Fundamentally, if upzoning alone doesn’t pay to house the poor, then the solution is to make it pay. One recent discussion paper found that the best option was to make “inclusionary zoning” more efficient. (The Minneapolis 2040 plan does have some inclusionary zoning provisions, but they’re negligible.) Inclusionary zoning is a series of regulations that require developers to set aside some amount of space in their new properties for below-market rental units. Would-be residents would participate in a lottery and then meet an income qualification threshold. Inclusionary zoning could be made more efficient by reducing that threshold and requiring tenants to requalify every few years, in order to keep lower-income households in the units.
The trick, though, is making inclusionary zoning affordable. Developers, who want to build expensive housing for high-income residents, claim it isn’t economical to set aside units for below-market tenants. If their criticism is correct, then one option U.S. urban planners can look at, to the extent their state governments allow it, is to abate the building tax on new structures for a certain period of time, or, ideally, to eliminate it altogether.
One city facing a housing crisis took this approach: New York City in the 1920s.
Back then, New York City allegedly had a 0 percent vacancy rate and rents were sky high. Governor Al Smith signed a law that modified the state’s property tax system largely in the manner discussed above. The results were dramatic: New York City rapidly built new housing, and the city’s population grew even during the Great Depression, in the following decade, when housing growth in other regional cities stopped. It does not appear that inclusionary zoning played any role in the law’s land-value taxation system. Interested readers can learn more by reading economist Mason Gaffney’s essay, “New Life in Old Cities.”
Like most other states, Minnesota property-tax law does not authorize municipalities to treat buildings differently from the land they sit on, but there is a bill before the Minnesota House of Representatives that would permit them to do so. Consequently, Minneapolis lacks the legal authority to make the Minneapolis 2040 plan work better . If the plan does falter, as I predict it will, maybe housing advocates should look back to the last century for guidance.
Matt Leichter is a lawyer and writer living in Minneapolis, Minnesota. His writing on legal education, student debt, land reform, positional goods, and popular culture can be found at The Last Gen X American.