United States: Apartments boost local property tax base
Many cities restrict apartments and other multifamily housing, often citing concerns they'll strain local budgets by having lower property values than single-family homes. However, a 2016 study (The fiscal externality of multifamily housing and its impact on the property tax: Evidence from cities and schools, 1980–2010) challenges these assumptions, finding that apartments may have higher per-capita property values and generate more tax revenue per resident.
Why it matters
The findings suggest common justifications for zoning policies limiting multifamily development may be misguided. Such restrictions could promote an inefficient oversupply of single-family homes while exacerbating housing affordability challenges. Fiscal zoning based on these assumptions may lead to suboptimal outcomes.
By the numbers
The study, published in Regional Science and Urban Economics, analyzed census tract and local government finance data from the 1970s through 2010. It found:
Apartments' value per resident was comparable to or higher than single-family homes nationally over the past 40 years
In 2010, apartments had an average value of $678,100 per school-aged child compared to $511,000 for single-family homes
A one standard deviation increase in the apartment share of a school district's housing is associated with a 14-18% decrease in property tax rates required to fund a given level of per-capita spending
These results hold even after controlling for neighborhood and municipal characteristics, as well as potential endogeneity using instrumental variable models
How it works
Standard fiscal zoning theories assume smaller housing units strain property tax-funded services because they have lower total property values. However, the study argues that per-capita home value is often the more relevant metric, especially for services like education distributed on a per-capita basis.
While apartments have lower total values than single-family homes on average, they also tend to have significantly fewer occupants per unit
As a result, apartments frequently have higher property values per resident, providing a larger effective tax base for funding local services on a per-capita basis
The analysis focuses on the distinction between apartments/condos in multifamily structures and single-family homes. Additional models show the results are robust when comparing small housing units (< 5 rooms) to large ones.
Between the lines
The findings suggest that communities with the tightest apartment limits could potentially see the greatest fiscal benefits from easing restrictions, as new multifamily development may have especially high marginal value in these markets due to artificial scarcity.
Yes, but
Hostility to apartments and other small housing units is likely often motivated by factors beyond solely fiscal concerns, such as exclusionary desires to limit the entry of lower-income and minority households. More research is needed into what drives restrictive zoning despite the apparent costs.
The bottom line
Common assumptions that apartments strain municipal budgets while single-family homes "pay for themselves" appear flawed. Fiscal zoning policies discouraging multifamily housing may promote inefficient, suboptimal outcomes while worsening housing affordability challenges in many cities. Policymakers should reconsider these restrictive practices in light of the empirical evidence.