Notes on Shane Phillips’s The Affordable City

Recently I read Shane Phillips’s book The Affordable City. The book and the author, who is a housing policy analyst at UCLA, are both really well-regarded in pro-housing circles. (At Asheville For All we’ve cited his research and his podcast before; Opticos included his research in their Missing Middle Study for Asheville too.)

I thought I’d share some brief passages that I had highlighted as I read. I don’t mean these to be representative of the book’s main points—these are just sections that really struck me in the moment. And just to emphasize that I don’t mean this to be too rigorous of an exercise, here they are in “listicle” form!

1. Developers Aren’t the Biggest Adversary to Housing Justice

In Asheville we know that any kind of corporation can come with an evil stripe, even those that make plant-based foods! But the trope of the “greedy developer” is a well worn cliche that does harm to the goal of seeing more homes built amidst a national and local shortage.

This one’s a bit of a cheat—Shane Phillips didn’t turn me on to this idea. (I raised it here in fact.) But he phrases the matter quite succinctly:

Developers have a bad reputation, but they put their time and money into creating something essential to society: places for people to live. Landlords invest money in existing property and collect rents based on their ownership of the land and structures (and, admittedly, labor). Homeowners invest and collect appreciation based in large part on neighborhood improvements, increasing scarcity, or both, not improvements to their home itself. Right now we reward the latter two groups far out of proportion to their contributions, and that needs to change. . . .

The profits of landlords and homeowners come directly at the expense of renters and future home buyers: landlords’ income comes on the backs of renters, and homeowners’ appreciation means higher prices for the next generation of buyers. Every successive generation is less able to participate in this form of wealth creation. This trajectory—where the rich get richer and the poor get left behind—isn’t sustainable. . . .

Buying and holding property simply shouldn’t be competitive with other investments such as starting a business or building something new.

It’s become so common to hear that the developers are to blame for the country’s high housing costs, that we ignore what should be a bit of Economics 101: that one of the greatest threats to a functioning, productive, or egalitarian society is when people accumulate wealth simply because they own something—what economists call “rent-seeking.”

This bit of economics is actually so fundamental that every political economist from Adam Smith to Karl Marx to Henry George (whose writings inspired the board game Monopoly) believed it. It’s an axiom that was agreed upon by Thomas Paine (who championed the French Revolution) and Milton Friedman (who championed the Reagan Revolution)! (Vladimir Lenin even had his own distinct derogatory phrase for it: “coupon clipping.”)

But something about housing, as it is sometimes said, “breaks people’s brains.” It’s good to have Shane Phillips to remind us then, that if seeking housing justice demands that we “follow the money,” we should look to the ways that landowners—whether landlords or ower-occupiers—benefit from and/or exacerbate the status quo.¹

2. Property Taxes Are Good

Property taxes are funny. It’s the one kind of tax, it seems, that everyone will complain about, no matter their political orientation.

As a professor of American history, I’m familiar with the “property-tax revolt” of the 1970s, its racist roots, and the damage that it sought to cause to “Great Society” government programs. I’m also inclined to believe others who have written that limits on property tax increases imposed in the 1970s and 1980s are a big cause of the nationwide housing shortage today, at least in California.

But lately even I’d been starting to get worn down by all of the anti-property-tax sentiment around me. Amidst reports of unfair tax assessments from Buncombe County, and fervently argued threads on Asheville’s various political discussion forums about how property taxes affect Asheville’s “natives,” I began to wonder if there wasn’t at least something to the complaints.² Wouldn’t it be better if everything was just income taxes and capital gains taxes instead?

I suppose you just don’t see many statements in favor of property tax increases these days. Anywhere. So I was genuinely struck by what Phillips has to say:

Property taxes are superior to other government revenue sources in many ways, including their ability to disincentivize passive real estate investment and land hoarding.

Unlike sales taxes, property taxes are naturally progressive and based on the value of someone’s home, commercial property, or land. Unlike income and business taxes, both of which can be progressive, property taxes also discourage harmful behavior: hoarding of property and speculation. Excessive business taxes may genuinely force local businesses to close their doors, not to be replaced; the same can’t be said for landlords, who can always sell to someone else willing to operate under a new regulatory regime. . . .

Property taxes deter behavior that leaves valuable land underutilized. They make it very expensive to hold property for speculative purposes because the year-to-year carrying costs are too great. Acquiring property—and this is distinguished from developing or improving property—doesn’t create anything new, and if one person doesn’t purchase a given property, someone else almost always will, for the right price. Higher property taxes ensure that underutilized property goes to buyers who actually want to do something useful with it.

(Phillips goes on to make more points, for example, that property taxes are a levy on wealth rather than income, which makes them more progressive. And he also suggests that higher property taxes are, to a degree, counterbalanced by a reduction in home values, because ultimately someone seeking a mortgage is interested in the bottom line sum of their monthly mortgage costs, which would incorporate escrow payments to pay for property tax. I’m not sure how much I buy this last point, to be honest. On the other hand, I am inclined to believe that in a housing market such as ours, increasing property taxes is unlikely to raise rents, since our high rents are overwhelmingly a product of high demand and short supply.)

Phillips is writing about property taxes in order to answer an important question: how do we raise revenue in order to subsidize rent for those that need such assistance.

In Asheville, we are facing the prospect of a bond this fall that would subsidize the construction of below-market-rate homes. More than ever, Phillips has me convinced that Asheville can and should spend more taxpayer money on subsidies to build homes in high-opportunity, high-amenity areas, and in turn to ensure that those homes feature socio-economic diversity. Not only is it the right thing to do—effectively taxing the wealth that some people have accumulated simply by having the privilege to sit on some land in the right place and the right time, making such land scarce and inducing a rise in housing costs for others, in order to aid those who are less fortunate (and in many cases, work the jobs and provide the services that make Asheville an attractive and valuable place to live)—but it may also incentivize better and more democratic land use.

(To be sure, Phillips also mentions the importance of other taxes in other parts of the book—for example, he is in favor of striking the rule that prevents most capital gains from home sales from being taxed.)

In an ideal world, I think we’d substitute the property tax with a “dual tax,” in which the value of land is taxed at a higher rate than is the value of the “improvements” on top of the land.³

One of Shane Phillip’s key points though—and a key point of the pro-housing movement in general—is that none of this works if we aren’t significantly increasing the supply of housing in high-demand, high-opportunity neighborhoods via land use reform (aka “upzoning”) and permitting reform. (In other words, getting more apartments in and near downtowns and close to employers.) That’s for a bunch of reasons, but I’ll mention a couple of them.

First, the more we increase the city’s zoned capacity in high-demand areas, the more bang for the buck that local governments get when they spend public funds. That’s because competition for developable land decreases if more land is suitable and ready to see more housing built on it. Shane Phillips discusses this matter in terms of “capture.” When a city only allows very few areas to be built up, the land in those areas command sky-high prices, and so the value that more housing will potentially bring to cash-strapped renters is “captured” by the landowners of those sites to be developed.

And second, if we do believe that to some extent, empty-nesters and retirees can feel the squeeze when their tax burdens go up, we need to increase their options for housing. To be clear, when someone is land-rich and cash-poor, they are still rich, and there are mechanisms by which they can make their home equity liquid. But practically speaking, the same opposition to pro-housing reforms that might have made their fortunes also does limit their ability to downsize, especially if they want to remain in the same neighborhood that they live.

The fact that empty-nesters are having trouble downsizing because of a shortage of condos, townhomes, etc is one of the reasons why the biggest advocate of “missing middle” reforms at the national level is the AARP!

Broadly put, if we want to reduce the “hoarding” of land and the “rent-seeking” outcomes of owning a lot of it, we need to build off-ramps for homeowners by increasing the supply of diverse housing types—specifically, types that monopolize less land. If we do see property taxes as the kind of tax that is meant to reduce certain behaviors and reward other behaviors—this is sometimes called a Pigouvian tax (think of taxes on soda or cigarettes)—we need to make the desired behavior, that is, downsizing one’s footprint, available.⁴

3. Cities Shouldn’t Sell Their Land

Not long after discussing property taxes as an important tool for raising government funds, Phillips advises:

[G]overnments should avoid selling their land, instead offering ground leases to interested developers whenever possible.

In Asheville and Buncombe County, we’ve been hearing a lot lately about the prospects of selling city- and county-owned land at discounted rates to developers, in exchange for below-market rate homes for those who need them. We saw Asheville City Council approve homes at 319 Biltmore Ave. last year, and the county is looking at multiple pieces of property that it owns for potential sale and development.

It’s all generally seen as a good idea, and I agree. (I’m particularly curious to see what will happen with the Coxe Ave. project that was updated recently.) But I’ve never heard anyone suggest this alternative route that Phillips is suggesting, which might be even better.

The discussion in the book gets a little technical, but in short, the idea is that when a city leases land rather than selling it, it gives up a smaller amount of short-term gain for more long-term income. Cities, Phillips notes, can handle a longer-term fiscal horizon, much more so than private developers, so this is a good bargain. And it’s certainly a better deal than giving land away. Home construction has a lot of upfront costs, and so developers may be eager to take on longer term, routine costs if they gain a benefit up front. Because the land remains in the city’s hands, the city could maintain certain affordability requirements in perpetuity, all while keeping land—which presumably will only appreciate in value over time—in the hands of the public.

While Phillips proposes leasing land to developers (who may, in turn, hand over such leases to landlords or property managers), I can’t help but think about the implications of what he is saying with respect to a renewed discussion around what is called social housing. That might be the subject of a different discussion altogether! But recent news out of Maryland suggests that far from a radical or utopian idea, social housing might be a practical tool for cities and counties to both increase overall housing supply (especially in periods of economic downturn and/or high lending rates) and to subsidize below-market-rate rents for those working families that need it.⁵

Social housing might not be coming soon to North Carolina, but I’d be curious to know if it’s possible, or if it makes sense, to hang on to city or county-owned land here and lease it to owners that might build and/or manage mixed-income apartments.