Dear Winnipeg

A Fun Blog About Infrastructure and Municipal Finance

No, We Don’t Need More Density

Dear Winnipeg,

What if your financial advisor came to you with an investment opportunity like this?

It won’t cost you a dime to buy in, and each investment will pay you $10,000 per year for about 25 to 30 years, after which it will COST you $10,000 per year, forever.

The catch? You are never allowed to sell it.

After the initial (profitable) honeymoon period, you must continue to own it, paying $10,000 per year, until the day you die, after which you must pass it on to your kids, who will continue to pay $10,000 per year until the day they die and pass it on to their kids. And so on, forever.

How much of this investment would you want to buy?

Because this is the investment cities throughout North America have been buying since the 1950s.

[And now the story of a wealthy family who lost everything, and the one son who had no choice but to keep them all together. It’s Arrested Development.]

I know, I can hear many of you now: “Yeah, sprawl sucks! Boo sprawl. Boo suburbs. Down with single-family homes!”

But sprawl is not the problem, at least not in itself. For as long as there have been cities, those cities have expanded their boundaries as they’ve grown. Cities creeping outwards into the countryside is normal. Always has been.

So what is it about the growth of the past 75 years that makes it different? And if it is different, and sprawl is not the problem, then is density the answer? [Narrator: It’s not.]

Let’s talk a bit about density. There are two major problems with using density as a goal. The first is, if density is our goal, then how much is enough? There doesn’t seem to be an answer for that. So how can we have a goal that we won’t know when we’ve achieved?

Second, it’s not a good metric to measure financial success as a city. Density only measures, albeit indirectly, the income side of the equation, with no regard for the expense side.

Consider these two hypothetical investment opportunities, for example: Company A has $1 million in annual sales. Company B has $2 million in annual sales. Which do you want to own? The answer is, obviously, it depends. It depends on what the expenses are for each. If Company A’s expenses are $200,000 per year, then it generates a profit of $800,000 per year. If Company B’s expenses are $3 million per year, then it generates a loss of $1 million per year. Higher sales don’t necessarily mean higher profits.

Likewise with density. More density just means more stuff in one place, which means more value you can tax as a city. So density equals revenue. But unless we also calculate the expense side of servicing that density, we still won’t know if it’s a good investment or not.

A prime example here is Waverley West, which is some of the densest new development in Winnipeg. Unfortunately, that’s not enough to prevent it from being a money-loser for the City. Checking the density box on a development plan tells us nothing about the expense side of servicing that development. And squeezing single-family homes closer together in one area, plopping down a few apartment buildings in another, and laying out a bunch of big-box businesses surround by oceans of parking in another, while dense, still requires massive amounts of infrastructure to make it all work, since separating all those uses ensures that almost everyone will have to drive everywhere for every trip.

So having density in a place doesn’t actually tell us whether that place is financially productive. But it gets even worse. Because you can have places that aren’t dense and yet are still financially productive.

Consider a rural house on a multi-acre lot out in the country. Not dense by any measure. But it can still be financially productive for its municipal government.

That house is more than likely on a gravel road. Land drainage is provided by ditches, and the owner probably has their own well for drinking water, and their own septic field for sewage. They may have to haul their own garbage to the dump, and it is protected by a volunteer fire department.

Not a lot of revenue, no. But not a lot of expenses either.

So if dense places can still be insolvent, and not-dense places can still be successful, then why is anyone advocating for “more density” as a solution to our financial woes?

Look, it’s ok. I completely get why people think we need density to have a successful, sustainable city. A quick gander at the most successful, sustainable cities around the world, and you’ll see: they all have density in common.

But it’s important to understand that density is a by-product of successful cities, and not the cause.

And that’s because of how land is valued, and how the value of that land determines what is worthwhile building on it.

When we say a piece of land is “worth” a certain dollar amount, what that is actually a shorthand representation of, is how desirable that property is to people, or put another way, how many people would like to be on that land.

And what largely determines how desirable a piece of land is, apart from any natural resources it may contain, is how close it is to other “stuff” that people like (as well as how far it is from “stuff” that people dislike). It’s like the old adage: location, location, location!

You see it in real estate ads all the time: “Close to schools, parks, and shopping!” is a selling feature. “Right next to a freeway, garbage dump and nuclear waste site!” is not.

The value of a piece of land goes up as the amount of desirable stuff around it goes up, because more people want to be there. And the more people want to be there, the more worthwhile it is to build bigger and bigger “stuff” to go on that land.

That’s the mechanism behind why as land values go up, the economic case for building higher and higher intensity uses also goes up.

It’s why you don’t tend to see 50-storey apartment buildings built on a random tract of land out in the middle of the tundra. The value of the land isn’t high enough to support that level of development intensity. Or put another way, not enough people want to be there to be able to make a good investment case for building 300 apartments… you’ll never get your money back on the investment, because you won’t be able to rent the apartments for enough money, if you can even rent them at all.

Now consider how cities have grown over the past 75 years compared to before then.

Winnipeg got its start as a bunch of tents and inexpensive structures near the confluence of two rivers. River access was an important commodity back then for transportation and commerce, so that’s why the first ventures were close to the river, rather than somewhere random out in the prairie. The land was more valuable closer to the river, more people wanted to be there, so development followed. But land values still weren’t that high, so you weren’t going to get any skyscrapers. The land values didn’t support that level of investment… not enough people wanted to be there yet. And so, tents and shacks it was.

But having, say, that first money-lending tent there made the land beside it more attractive, more valuable, because it was now close to something useful. And so a saloon maybe went up beside it, which itself made the land under the lending tent more valuable, and so the tent was replaced with a small wooden structure to house a bank. At some point, the land values became great enough, the level of private investment high enough, that we could afford to grade the road and start to offer public services. And as the intensity continued to build, it made the land just outside that area a little bit more valuable, so more shacks were erected just on the outskirts, and the cycle continued. Land values grew, intensity grew, public revenues grew, public services grew. In that order.

This is how cities were built for thousands of years.

Then, somewhere following the second world war, we completely changed how we did things.

We experienced a period of rapid economic growth, and easy access to capital. So, instead of letting land values dictate what could be built, we just went out and built whatever we wanted. Entire neighbourhoods could be willed into existence on an empty piece of land, all at once, to a finished state.

We felt rich, and we acted like it. It was magic. [Illusion, Michael.]

But the basic rules of our economic system can’t be ignored. If we are to build to a higher intensity than the underlying land values can support, we’re going to need to subsidize it.

In the case of new suburbs built all at once, that subsidy takes the form of providing infrastructure and services that the land values can’t afford to pay for… we see it when we reach the end of the first life cycle of the infrastructure in that neighbourhood. It looks like deferred maintenance and/or public debt being taken on. It looks like cutting services in older neighbourhoods to pay for services in the new ones.

So when we misidentify the problem simply as “growth” or “sprawl”, instead of “the mechanisms in place that determine how we grow”, then we can see the damage in pursuing “density” as the solution.

When the problem is development that is disconnected from land values, simply adding density is not solving anything. It’s just “doing the wrong thing better“, because we’re still just trying to force more intensity than the underlying land values can support.

And that requires subsidies. For infill density, that looks like tax-increment financing, land swaps, and even direct monetary contributions, often from multiple levels of government.

Tall and sprawl. That’s all we get. And only if we subsidize it.

We’ve broken what makes a city grow successfully and sustainably.

So how do we go about fixing that? We start by re-introducing the mechanisms that make land, a place, more and more valuable over time. Or put another way, we work on making places that more people want to be.

And since we already know land derives its value by what’s around it, that means working on the stuff around the land we want developed. We need to focus on making the surrounding area a nicer place to be. A lot of that is relatively inexpensive to do, and more often than not, already stuff we’re committed to doing: add seating, slow traffic, clear snow, repair cracked sidewalks, fix lighting, plant trees. We just have to actually do it, because when funds are tight, it’s tempting to let those things go first.

But doing those things is what makes a place more attractive for people to be, which is what ultimately makes development economically possible.

The other key part we can’t forget about is changing our zoning rules to allow that gradual intensification to actually happen, everywhere. No sense in increasing land values to incentivize development if that development is functionally, or literally, illegal.

Which brings us back to density. Yes, the city we will have created will end up having density. But not because we sought it out. It will simply be a side effect of having built a successful and financially sustainable city.

Kisses,

Elmwood Guy