Cities are perhaps the most complex organisational entities on earth. This is most vividly manifest in how cities respond to changes in urban planning instruments. The impact of any change depends on the combination of instruments used, their nature, their respective extent/scope of application, the development stage of the city, and its context.
Let’s illustrate with the example of how affordable housing supply is impacted by urban planning instruments.
The supply of housing can happen at two levels. At the intensive margin, it’s about squeezing out more from the same land footprint by increasing the FAR and easing restrictions on height, road width, setbacks, etc. At the extensive margin, it’s about greenfield construction on vacant or under-utilised lands, new areas, and suburban expansions.
There are two duelling ideologies on this issue. The status quoists, especially among urban planners working with governments, tend to view increasing FAR and easing zoning regulations with suspicion. They argue that allowing more construction would clog the area’s infrastructure carrying capacity and result in congestion and scarcity, even a breakdown of utility services. The progressives, among the commentariat and experts, scorn suburban sprawls and favour high-rise densification through liberalised zoning regulations. They argue that liberalised zoning regulations will allow the market forces to play out and will result in densified developments.
I’m increasingly inclined to a third messier and nuanced view, especially for developing countries. Their social and political economy contexts, stage of development, and the diverse nature of their housing markets mean that both suburban sprawl and high-rise densification are relevant for them. Both are unavoidable and desirable.
Ideally, liberalised zoning regulations should incentivise vertically densified growth by lowering the marginal cost of adding a housing unit since it’s added on the same land footprint. The additional unit also ends up lowering the average cost of all the units in that complex. Econ 101 teaches us that these incentives will ensure vertically densified developments. But reality plays out very differently from theory.
Econ 101 overlooks practical realities that come in the way. For one, vertical densification beyond a threshold increases the construction and maintenance costs enough to offset the benefit of building on the same land footprint. Two, vertically densified development requires solving an important coordination (or market demand) problem. A certain critical mass of buyers is required for the development of high-rise apartment complexes. In general, cities in developing countries or smaller towns anywhere are unlikely to be able to mobilise such demand for any category of housing. Only a small proportion of the expansions, and that too mostly in the largest cities, meet this demand threshold.
Three, land ownership in the expansion areas is generally fragmented into small parcels. In the absence of consolidation, such expansions happen in a fragmented, staccato manner. And the aforesaid coordination problem prevents such consolidation. Fourth, the housing and land markets are heavily distorted by real estate’s investment attractiveness and the looming presence of black money, especially in the largest and rapidly growing cities of India. The result is that hoarding and speculative transactions among a handful of well-off and/or powerful people dominate these markets in India. Fifth, cultural and economic factors ensure the preference for low-rise developments. Finally, a combination and interaction of all the above means that the vast majority of new developments must invariably happen in fragmented, small land parcels, and the demand for vertically densified developments is justified only when property prices are beyond a certain level.
All this means that liberalised zoning regulations on their own are unlikely to lead to vertically densified growth in new growth areas, especially but not only in developing countries. Further, given their structural conditions, densified growth is unlikely to materialise in these areas in any significant manner, even with active use of urban planning instruments. Sprawls become inevitable.
So, what does all this mean?
There’s a strong case that, given their faster growth, cities in developing countries should be allowed to expand at both the extensive and intensive margins. At the extensive margin, cities should be allowed to grow outward, ideally as vertically densified communities, but also as lower-rise developments depending on the local market conditions. At the intensive margin, zoning regulations should encourage the regeneration of blighted and older areas and densified growth in general.
Both these types of growth will take time to play out. Apart from active intervention through public housing schemes for various income groups, the role of public policy in the housing market is to expedite these plays, both through enabling policies and opportunistic interventions. In the first phase, even with the most liberalised zoning regulations, for the aforesaid reasons, greenfield developments are more likely to be low-rise and lower density. Higher density will emerge only with time, through renewal, market maturity, and much increased demand. In the meantime, zoning regulations should be liberal enough to allow renewal in older and already built-up areas.
In conclusion, no matter the pathway of change, it’s a highly desirable requirement that zoning regulations be liberalised to incentivise new construction.
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