The effects of land-use regulations on property values.

• Author: Jaeger, William K.
• Position: Oregon

Land-use regulations can affect property values in a variety of complex ways. In the context of laws like Oregon's Measure 37, requiring that landowners be compensated if regulations reduce property values, the economic effects of land use regulations on property values have been widely misinterpreted because two very different economic concepts are being confused and used interehangeably. The first concept is "the effect of a land use regulation on property values" which measures the change in value when a regulation is added to many parcels. The second concept is "the effect of an individual exemption, or variance, to an existing land use regulation," which measures the change in value when a regulation is removed from only one parcel.

The effect of a land-use regulation on property values can be positive or negative, whereas removing a land-use regulation from one property can be expected to have a positive effect. Indeed, many land-use regulations actually increase property values by creating positive "amenity effects" and "scarcity effects. "As a result of these differences, a positive estimate for removing a land-use regulation cannot be interpreted as proof that the other concept was negative. Despite this, a positive value for an individual exemption to a land-use regulation continues to be interpreted as proof that compensation is due under Oregon's Measure 37. Indeed, this mistaken interpretation may be partly responsible for public sentiment that land-use regulations tend to reduce property values.

1. INTRODUCTION II. SCARCITY EFFECTS OF LAND-USE REGULATIONS III. AMENITY EFFECTS OF LAND-USE REGULATIONS IV. EMPIRICAL EVIDENCE OF SCARCITY AND AMENITY EFFECTS V. THE VALUE OF AN INDIVIDUAL EXEMPTION FROM LAND-USE REGULATIONS VI. DYNAMIC INTERACTIONS VII. WHEN LAND-USE REGULATIONS REDUCE PROPERTY VALUES VIII. SUMMARY AND CONCLUSIONS IX. APPENDIX: POTENTIAL MARKET EFFECTS OF LAND-USE REGULATIONS I. INTRODUCTION

   Land-use regulations can affect the market value of property in a variety of ways. Although some of the effects may be straightforward, in most cases they are complex and can easily be misunderstood or misinterpreted. In particular, it has been assumed that land-use regulations invariably reduce property values when, in fact, they often have positive effects.

   The positive effect of a land-use regulation on property values can occur two ways. One way is an "amenity effect'--when land-use regulations protect, enhance, or create amenities or services that benefit property owners. Perhaps the most transparent example of this is the property tax: many communities use property taxes to finance public services like police and fire protection, public schools, and infrastructure such as roads and utilities. These public services help these communities prosper, and make them an attractive place to live, which in turn raises property values. (1)

   Similar kinds of positive amenity effects arise with other kinds of land-use regulations such as regulations to protect environmental amenities, open space and farmland, or to control objectionable conditions such as noise, congestion, and pollution. (2) Like a property tax, these land-use regulations impose costs or restrictions on landowners' actions, but they also generate beneficial effects. Indeed, the motivation behind most land-use regulations is to protect or enhance amenities that contribute to a community's health, safety, and welfare.

   The other way that land-use regulations can increase land values is through their "scarcity effects." (3) By increasing the scarcity of land available for a particular use in a particular location, the prices for those lands are bid up in the market. For example, a limit on the land available for development in one location is likely to increase the price of developed and developable lands. These effects can be very large, and they can have spillover effects on land prices in other locations.

   Since the cause-and-effect connection between a land-use regulation in one location and heightened demand for lands in other locations is indirect, it is unlikely to be apparent to most landowners. What landowners will recognize, however, is the value of an individual exemption. The value of an individual exemption is defined here as the increase in value for an individual property, currently subject to a binding land-use regulation that would occur if it were given an exemption or waiver to the regulation. If a land-use regulation constrains landowners from actions or uses that would increase their land's value, then it follows that an exemption to that regulation will increase the property's value. Evidence that an individual exemption would increase a property's value has been widely interpreted as evidence--or even proof--that the land-use regulation had reduced the property's value in the first place. This is erroneous, however. Indeed, an exemption to a binding land-use regulation can be expected to increase a property's value even in cases where the regulation has raised property values.

   The purpose of this paper is to examine the direct and indirect ways that land-use regulations can, and do, increase property values as a result of their amenity and scarcity effects. A second purpose of the paper is to clearly distinguish between two very different economic concepts: the effect of a land-use regulation on property values, and the value of an individual exemption to a land-use regulation. It win be shown that the latter concept can be expected to he positive whether the former concept is positive or negative.

   These issues are important in the legal debates at the national level involving takings cases, and they are highly relevant to Oregon's Measure 37, passed by voters in November 2004. (4) Measure 37 requires that when a land-use regulation "has the effect of reducing the fair market value of the property," then either a payment must be made to landowners equal to the reduction in the fair market value, or a waiver must be granted from the regulation. (5) Determining whether land-use regulations have had positive or negative effects on land values is, of course, a central question in this context. These same issues have arisen in the context of many federal regulatory takings cases. (6) And, while U.S. courts have long recognized that landowners frequently benefit from land-use regulations because of their "mutual reciprocity of advantage," (7) other assessments, such as a 1999 Congressional Budget Office report, have failed to recognize or acknowledge the potential positive amenity and scarcity effects. (8)

   As Oregon's state and local governments respond to claims under Measure 37, the way they interpret these relationships could have a profound effect on how governments respond to claims, and how costly those responses are to the public. (9) In Oregon's case, the second concept, the value of an individual exemption, has commonly been interpreted as being identical to, or a proxy for, the first concept.

   In the next two sections of the paper, the two ways in which land-use regulations may affect property values are discussed, starting with the scarcity effects in Part II, followed by the amenity effects in Part III. Part IV presents empirical evidence that land-use regulations often raise property values. The distinction between the value of an individual exemption and the effect of land-use regulations on property values is elaborated upon in Part V. Part VI discusses the dynamic and interconnected interactions between land-use regulations and other private and public actions. Part VII describes the kinds of circumstances in which land-use regulations can lower property values. Concluding comments are presented in part VIII.

2. SCARCITY EFFECTS OF LAND-USE REGULATIONS

   The purpose of this section is to describe the scarcity effects of land-use regulations by presenting a simple framework for thinking about how land markets adjust to land-use regulations--a framework that can be applied to different kinds of regulations for a range of market conditions. A standard approach in economics for evaluating the effect on market prices of a policy change is to consider the market outcome with the change, and to compare it to the hypothetical alternative: what would have happened without the policy change. This "with versus without" method considers the changes in supply and demand, and evaluates how those changes affect prices in one or several markets.

   In the case of land-use regulations, the "with versus without" approach will require an analysis beyond the standard methods of property appraisal because appraisal methods are not designed or intended to estimate the scarcity effects caused by these kinds of market shifts. Appraisers rely on observed market transactions involving similar or "comparable" properties, making adjustments for characteristics of the property that have been observed to increase or decrease the value of a property compared to average characteristics in the area (e.g., larger acreage, smaller house, view, etc.). But these methods implicitly assume that a property identical to other properties that sold for a price X, will also be worth X, no matter how many such properties were to be put on the market.

   To clearly see how land-use regulations may affect market prices, consider a situation where a land-use regulation limits the kind of use allowed on specified lands. As a result of this, the supply of land available for the "allowed use" is likely to remain higher than it otherwise would have been without the regulation, and the supply of land available for the "disallowed use" is likely to be lower than it otherwise would have been without the regulation. With these supply shifts, land prices for one land use may rise following the enactment of the regulation, and land prices for alternative land uses may decline following the regulation's introduction.

   These market adjustments will give rise to a...