I recently had the pleasure of presenting to the New Brunswick Association of Real Estate Appraisers (NBAREA) at their Annual General Meeting in Saint John, NB. Working with Alexandra Baird Allen of our Economic Intelligence Unit, we took the room through an exploration of regional demographic trends and their influence on real estate values. We illustrated that we are at the cusp of a demographic sea-change; things are going to be fundamentally different in the future from what we’ve seen in the past. Be wary of making decisions based on past trends!
One of the hallmarks of this demographic transition is that it is impacting us faster than we think. The stagnation and slow decline in population projection for Atlantic Canada is not the primary concern. Rather, it’s the rapid change in population composition as a wave of boomers starts cresting over the age of retirement. This increase in our population dependency ratio is happening much faster than the lethargic economic/demographic pace we are used to in Atlantic Canada.
Planning and Economics
In the second part of our presentation, I argued that the way we plan our communities needs to adapt. To give us the best chance of success, our planning system needs to become more agile and responsive, more sophisticated in the use of fiscal analysis and tools, and offer more tangible involvement to our citizens. I suggested that our approach to economic organisation holds some lessons for our approach to planning.
If you boil down planning and economics as social sciences, they’re really both about the same thing: making the best use of the resources we have to improve our overall conditions. Planning talks about the disposition of land, economics talks about the transaction of goods and services. Planning talks about the public good, economics talks about the welfare of society.
It’s really not surprising that they are so analogous since economies and communities themselves are similar. Both are a complex system of numerous and interrelated actors, simultaneously pursuing their own independent goals. The final outcome is the cumulative result of these individual behaviours; it emerges from the bottom-up. Our approach to economic organisation, the free-market, is successful largely because it works with the nature of the problem; it uses price signals, subsidies and taxes to influence individual behaviour and leaves markets to allocate the resources accordingly to create emergent results. However, in planning we still rely heavily on a coercive, centrally-organised approach that attempts to will a desired outcome into existence through policy and regulation. As a result, planning is susceptible to fads, and risks failure when there is a disconnect between the ideas of decision-makers, and the realities of the complex community.
An Economics Approach to Planning
So how can planning emulate some of the most successful properties of our economic system to help us build communities that are resilient in an uncertain and resource-limited future?
(1) Better Information
Markets allocate resources efficiently when provided with complete and accurate information. It’s the reason we have access to the accounting of publicly traded companies and protections against false advertising. Municipalities derive nearly all of their revenue from taxes and fees levied on private real estate. At the same time, nearly all their expenses are generated in providing services to the occupants of private real estate. Thus the location, use and form of land development (a domain over which they have nearly complete control) is central to a municipality’s sustainability, and their capacity to adapt to changing circumstances. Yet, where is the fiscal analysis in the plan-making or development approval process? Under present practice, municipalities are making long-lasting decisions with, at best, a vague idea of whether those choices enhance or undermine their long term viability.
As a result, our communities often find themselves in a self-made pyramid scheme, justifying present development on expectations of future growth, or suddenly collapsing when reality turns out different from the version that was supported by “accepted wisdom.”
(2) Price Based Incentives
Markets allow the collective choices of individuals to find the optimal balance of supply and demand at a given price. Governments step in to influence this price when the market fails to account for negative and positive externalities. Municipalities are often challenged to encourage or control certain types of development in different locations. The typical approach to this is to implement static policy and regulations; boundaries and targets. These only work to the extent that they are congruent with the market-based needs of the development industry. Using price signals, such as development charges, more prolifically and accurately (marginal cost rather than average cost) works with the market to determine the optimal mix of development required to satisfy demand. Rather than creating rigid regulatory limits that exist outside of the context of land development economics (and which are prone to becoming out-of-date), affecting price allows the market to self-regulate without restricting choice.
(3) Managing Change – Leveraging Self-Interest
How tall should a new building be? Depending on who you ask, there will be a multitude of correct answers, but if you ask the person who lives beside it, chances are they’ll say “no larger than my house.”
One of the most challenging aspects of planning is managing the process of neighbourhood change, and the public reaction to it. Environmental psychologists tell us that satisfaction with one’s neighbourhood is better than satisfaction with one’s socio-economic status as a predictor of overall life satisfaction. This sense of contentment with your residential environment can be effectively undermined by making you feel excluded from the forces affecting it, or feel a lack of personal investment in it. In essence, to rob you of your agency to exercise control over your interest in the neighbourhood.
In response, good planning often includes some form of public engagement. A process that treats the community with respect and offers opportunity for direct input goes a long way to engendering acceptance of change. However, this can be further improved through the addition of policy tools which translate change into direct local benefit. Adding policy tools like density bonusing or community amenity contributions allow a community to trade increased development on a site for direct funding of public benefits such as park space, public art etc. It is a way of ensuring new development has a wider direct benefit for the residents that have to accept it.
Going one step further, a governance mechanism that sees a fixed percentage of all property tax reserved for investment in the area it is collected according to resident’s priorities would transform the public’s relationship with change and new development. If we are going to ask the public to help guide the use, appearance and scale of development in their neighbourhood (and we should), the more of their skin in the game the better. “How tall should a new building be?” becomes a much different question if a neighbour can imagine what they might stand to gain, rather than only what they risk to lose.
For more on the impact of changing demographics on real estate values, please contact the Manager of our Planning Division Neil Lovitt at 1 (902) 429-1811 or firstname.lastname@example.org.