Incentives for Mixed-Use Developments

Followers of the New Urbanism movement in city planning believe policies should be undertaken to encourage people to move into city centers and discourage sprawl. A New York Times article reports:

Urban-style development may be the brightest spot in a generally gloomy market. A recent survey of developers and investors by the Urban Land Institute for its annual Emerging Trends in Real Estate report found that urban redevelopment had the best prospects among all types of housing, while urban mixed-use properties and town centers scored high among niche property types. “These are the places that will be creating and holding value,” Ms. [Shelley] Poticha [the president of a transit-oriented nonprofit] said. She said proximity to public transit could raise property values significantly.

[. . .]

That often requires collaboration between local governments and private developers. Local governments might invest in transit, parks and infrastructure, revise zoning laws and offer financial incentives in return for a developer taking the risk of building in an unproven area.

If in fact consumer preferences are changing, shifting demand toward higher density, mixed-use housing and away from suburban single-family homes, of course it makes sense for developers to cater to these desires.  Some urban planning scholars see benefits in these types of residences such as increased quality of life or a more ecologically sound lifestyle. Home buyers likely see these same benefits, which may explain why some people are wanting to leave the suburbs for areas that they see as having superior amenities.

When consumers’ tastes in housing change, developers do not need incentives from any level of government to create housing products that satisfy their customers; in fact, they will have to build houses that meet changing demand conditions in order to stay in business.

Relaxing zoning code in order to allow for more mixed-use development in some cities may allow builders to better provide housing of the sort people want and may make cities that allow for mixed-use development more desirable places to live. However, proposed government incentives for specific types of developments, whether enacted at the local, state, or federal level, will move the market equilibrium away from optimal variety and quantity of housing which is demanded, making the politically-supported new developments cheaper relative to existing housing stock than they otherwise would be.

Particularly now, as many analysts think that the current housing stock is still in excess of what consumers want to buy at prevailing prices, it seems bad policy to create incentives that will allow builders to profit off of new housing in a way unsupported by market demand. The fallout of the mortgage market should have made it abundantly clear to everyone, especially urban planners, that incentivizing home building is not without risk.