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An expectations model of neighbourhood change Cameron, James Glenn 1979

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AN EXPECTATIONS MODEL OF NEIGHBOURHOOD CHANGE by JAMES GLENN CAMERON B . S c , The U n i v e r s i t y of B r i t i s h Columbia, 1972 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF. SCIENCE in Business Administration i n THE FACULTY OF GRADUATE STUDIES (Commerce and Business A d m i n i s t r a t i o n ) We accept t h i s t h e s i s as conforming to the r e q u i r e d standard THE UNIVERSITY OF BRITISH COLUMBIA October 1979 © James Glenn Cameron, 1979 In presenting th i s thesis in par t i a l fu l f i lment of the requirements for an advanced degree at the Univers ity of B r i t i s h Columbia, I agree that the Library shal l make i t f ree ly avai lable for reference and study. I further agree that permission for extensive copying of th i s thesis for scholarly purposes may be granted by the Head of my Department or by his representatives. It i s understood that copying or publ icat ion of th i s thesis for f inanc ia l gain shal l not be allowed without my written permission. „ i , r Commerce and Business Administration Department of The Univers ity of B r i t i s h Columbia 2075 Wesbrook Place Vancouver, Canada V6T 1W5 October 15. 1979 ABSTRACT Most models of neighbourhood change have been developed i n a U.S. setting. The c i t i e s of Canada and the U.S. have developed under d i f f e r e n t degrees or types of federal involvement i n urban a f f a i r s and exhibit very d i f f e r e n t general c h a r a c t e r i s t i c s , leading one to expect that the impelling factors of neighbourhood change, i f i t exists at a l l i n Canada, w i l l show d i s s i m i l a r i t i e s to the income and r a c i a l motivation important i n many U.S. theories. Evidence i s presented that U.S. models of neighbour-hood change are not e n t i r e l y appropriate to the Canadian s i t u a t i o n . The main thrust of the research, therefore, i s to u t i l i z e those elements of previous models that remain relevant to develop a more general model of neighbourhood change that i s capable of explaining why some areas are i n rapid decline while others remain healthy and s t i l l others are rejuvenated. Thus, i t w i l l deal with both s t a b i l i t y and change. The thesis has three main objectives: (1) to i d e n t i f y and i s o l a t e conceptually the forces promoting change and/or s t a b i l i t y i n Canadian neighbourhoods (2) to develop an explanatory model of neighbourhood change and J (3) to tes t and validate the model's predictive power against competing models. To serve t h i s purpose, the research focuses upon the role of the public sector i n influencing expectations. I t i s believed that government intervention i n the United States has acted upon i i i p rices and expectations by bringing a number of d i s t o r t i o n s into the urban system. These are thought to be largely absent i n Canada. In t h i s manner i t i s f e l t that the government plays a key role i n formulating expectations and thus i n d i r e c t l y influenc-ing the course of neighbourhood change. A working hypothesis i s that the more the government involves i t s e l f i n urban a f f a i r s , the greater w i l l be the cost to urban neighbourhoods i n increased uncertainty and i n s t a b i l i t y . To construct a more general model, the St. Louis arbitrage model was developed i n a stock-flow context and extended to include a broader set of expectations hypothesized to be influenced by d i f f e r e n t degrees of government intervention. Investment and reinvestment behavior, turnover rates and transaction price information were used as i n d i r e c t measures of these expectations. Expectations entered the model through t h e i r influence on the l e v e l of the demand schedule for housing units which, i n turn, induced supply s h i f t s (bringing arbitrage into play). The main contention of the thesis i s that the s e n s i t i v i t y with which expectations are revised i n the face of change i s due to previous (harmful) government a c t i v i t y i n housing markets. In the t y p i c a l American case, uniformly negative expectations by residents can bring about a complete boundary s h i f t i n occupancy and a refusal to invest i n or near areas undergoing neighbourhood change. In the opposite case, under po s i t i v e expectations, an oversupply of less desirable housing would trigger a gradual movement of house-holds and investment d o l l a r s to i t s loca t i o n . The r e s u l t i s continued s t a b i l i t y or a movement towards s t a b i l i t y . i v The model had several implications for stable neighbourhoods which were l a t e r expressed as e x p l i c i t hypotheses for a neigh-bourhood undergoing some form of change (a rezoning): (1) reinvestment behavior i n housing should remain constant or increase (2) turnover rates should remain stable (3) average r e a l housing prices should be constant or increasing. Each of these was tested i n turn for Kerrisdale, a neighbourhood i n Vancouver, B.C., and i n each case the r e s u l t implied unchanged expectations and thereby continued s t a b i l i t y for the neighbourhood. To ensure that differences i n housing c h a r a c t e r i s t i c s and neighbourhood e f f e c t s did not account for some of the observed va r i a t i o n i n prices, detailed information was gathered on each housing unit (and i t s surroundings) that had sold over the 1955-1966 study period. Multiple regression analysis was used to test three related hypotheses about housing prices and the rezoning: (1) the implementation of the zoning change had a negative e f f e c t on the prices of the surrounding properties (2) the e f f e c t of the supposed externality diminishes with distance and (3) the rezoning had a pos i t i v e influence on rezoned property values. The f i r s t two hypotheses were rejected and the t h i r d was accepted leading to the conclusion that the rezoning from V p r i c e s of the surrounding single-family residences but the rezoning did have a p o s i t i v e influence on rezoned property values. There wasn't any i n d i c a t i o n from these t e s t s e i t h e r , that residents' expectations were unfavourably a f f e c t e d by the rezoning or that there should have been any r e v i s i o n i n expectations. Thus the r e s u l t s are consistent with the implications of the expectations model and the tests were unable to refute i t . Of course, the t e s t s also would not refute the St« Louis arbitrage model i f one accepts that i t i s capable of explaining p o s i t i v e neighbourhood change as well as decay. The objectives of the research have been accomplished and it i s concluded that •the i n c l u s i o n of general expectations and the r o l e of government has been a step i n the r i g h t d i r e c t i o n i n the development of a general model of neighbourhood change. v i TABLE OF CONTENTS Page A b s t r a c t i i L i s t of Tables v i i L i s t o f F i g u r e s v i i i Acknowledgements i x Chapter 1 SETTING THE STAGE 1 I n t r o d u c t i o n . 1 D e f i n i t i o n s 1 The Role and Importance of the Neighbourhood . . 8 The U.S. and Canada Compared 9 2 A REVIEW OF THE LITERATURE 16 Some P r e l i m i n a r y Observations 16 Neighbourhood Change and Related Models . . . . 18 The Role of Zoning . 27 3 THE ARBITRAGE MODEL REVISITED 3 3 B a s i c C o n s i d e r a t i o n s 33 Supply and Demand 34 The G e n e r a l i z e d E x p e c t a t i o n s Model 4 2 An I l l u s t r a t i o n 45 Summary 48 4 THE MODEL IN OPERATION 52 An Example 52 I m p l i c a t i o n s . . . . . . . . . 57 M a i n t a i n i n g S i n g l e - f a m i l y Property 58 . The A n a l y t i c a l P l a n ' . . 61 5 THE RESEARCH DESIGN 69 The S e t t i n g . 69 S t r u c t u r e of the Study 7 3 The Data 77 L i m i t a t i o n s and Sources, o f E r r o r 8 2 6 THE RESULTS 8 6 I n d i r e c t Tests of Ex p e c t a t i o n s 86 Regression A n a l y s i s 100 Some Concluding Comments 112 S e l e c t e d References 119 v i i LIST OF. TABLES Table Page I K e r r i s d a l e Apartment Area . . . . . . . . . . . . 72 I I T r a n s a c t i o n s over the P e r i o d 1955-1966, by L o c a t i o n 8 0 I I I Heating Permits, B u i l d i n g F e r m i t s , and Unauthorized Changes, by Ring, by Year: 1954-1968 87 IV T o t a l Number of Investments, by Group: 1955-1966 89 V Turnover Rates, by Ring by P e r i o d . 90 VI Average P r i c e s , by Lot S i z e and L o c a t i o n : 1955-58 92 VII Average P r i c e s , by Lot S i z e and L o c a t i o n : 1958-61 93 V I I I Average P r i c e s , by Lot S i z e and L o c a t i o n : 1961-63 94 IX Average P r i c e s , by Lot S i z e and L o c a t i o n : 1963-66 95 X Summary of P r i c e Changes 96 XI Changes i n Family Income, by Enumeration Area: 1961-1971 . . 99 XII V a r i a b l e s i n the Data Set 101 XIII Regression R e s u l t s f o r Va r i o u s S p e c i f i c a t i o n s o f the P r i c e Equation . 105 XIV Sample C o r r e l a t i o n M a t r i x f o r Run 3 106 XV Regression R e s u l t s Using Assessed.Land Value per Square Foot as Dependent V a r i a b l e . . . 110 XVI C o r r e l a t i o n M a t r i x f o r Run 5 I l l v i i i 'LIST OF FIGURES Figure Page 1 Neighbourhood Change Continuum . . 5 2 Neighbourhood Stages V 3 The Supply and Demand for Housing Units . . . . 37 4 The Stock-Flow Model 41 5 A Simplified View of the Participants i n the Neighbourhood Change Process 44 6 The Canadian Setting i n the Short-run .54 7 The E f f e c t of Negative Expectations on the Stock i n the Short-run 54 8 The Response of the Business Sector to Change . 56 9 Map of the Re zoned Extension 71 10 Map of the Census Tracts of Kerrisdale . . . . . 75 11 Boundaries of the Experimental and Control Groups by Ring 76 ix ACKNOWLEDGEMENTS The author i s indebted to Mr. Doug Wright of the Vancouver City Archives s t a f f who assisted i n locating the data used i n th i s study and to members of the s t a f f of the B.C. Assessment Authority for generously providing access to the data and as s i s t i n g i n i t s inte r p r e t a t i o n . Financial support for the study came from the Canada Mortgage and Housing Corporation, the Real Estate Council of B.C., the Urban Land Economics D i v i s i o n , and the University of B r i t i s h Columbia. This assistance i s g r a t e f u l l y acknowledged. Sincere thanks are extended to Professors Mike Goldberg and Jon Mark of my thesis committee for t h e i r h e l p f u l comments, encouragement and d i r e c t i o n throughout the course of the research, and to John Mercer for agreeing to serve on the committee on such short notice. Naturally a l l remaining errors remain s o l e l y my own. In addition, I wish to thank a l l members of the Urban Land faculty for sharing t h e i r knowledge over the past two years. October 1, 1979 1 CHAPTER 1 SETTING THE STAGE Introduction In recent years, increasing attention has been directed toward the structure of the neighbourhood and to change within i t as i t relates to the h a b i t a b i l i t y of an urban area. This may be partly attributed to an increase i n urbanization and pa r t l y to s o c i a l and economic s t r e s s . 1 The pressures of high unemployment, i n f l a t i o n , r a c i a l unrest and reduced population growth have i n t e n s i f i e d urban problems i n many c i t i e s . These problems, usually i d e n t i f i e d i n the American context, include the physical deterio-ration and abandonment of buildings, a declining economic base, f i s c a l d i f f i c u l t i e s , poverty, crime and a s h i f t i n g population. Families that could afford to do so moved out of the central c i t y , leaving behind a population composed of the old and the poor (often black). The ov e r a l l loss of population reduces the demand for s o c i a l and r e t a i l services and undermines the s o c i a l d i v e r s i t y required for the maintenance of an a t t r a c t i v e r e s i d e n t i a l envi-ronment. The tax base i s eroded at the very time when there are increased costs of providing s o c i a l services to the remaining residents. The re s u l t i s often cutbacks i n such areas as education, police and f i r e protection and garbage c o l l e c t i o n , and continuing decline. Income and r a c i a l changes have been put forward by some authors (for example, L i t t l e , 1976) as the motivation for the urban dynamic process of which the observed mobility pattern described above i s a part. Expectations by residents of income 2 and r a c i a l changes are also thought to have an influence. These factors have doubtless contributed to urban problems. However, i t w i l l be argued l a t e r that expectations must be viewed i n a broader context. In general, Canadian c i t i e s do not have the same problems as are found i n the U.S. This i s p a r t i c u l a r l y true of housing. Many viable r e s i d e n t i a l areas are located i n and around the 2 central c i t y . Housing there i s maintained and.desirable rather than deteriorated and substandard, the l a t t e r condition often 3 ch a r a c t e r i s t i c of American central c i t i e s . Housing markets have generally exhibited excess demand, with resultant upward movement in prices i n a l l locations-, rather than the abundant supply of 4 cheap housing found near the core of U.S. c i t i e s . In Canada, a c c e s s i b i l i t y to the CBD i s highly valued and has contributed to the excess demand experienced by c l o s e - i n neighbourhoods.^ With such d i f f e r e n t general c h a r a c t e r i s t i c s i n the c i t i e s of the two countries, i t might be expected that the impelling factors of neighbourhood change, i f i t exists at a l l i n Canada, w i l l show d i s s i m i l a r i t i e s to the income and r a c i a l motivation important i n many U.S. theories. The question i s thus posed: "Are U.S. models of neighbourhood change appropriate to the Canadian situation?" Evidence w i l l be presented i n Chapter 2 that they are not t o t a l l y applicable. The main thrust of t h i s research i s to u t i l i z e those elements of previous models that maintain t h e i r relevance i n a Canadian setting to develop a more general model that i s capable of explaining why some areas are i n rapid decline while others 3 remain healthy and s t i l l others are rejuvenated. Thus, i t w i l l deal with both s t a b i l i t y and change. Although developed i n a Canadian context, p a r t i c u l a r l y for the City of Vancouver, i t i s expected that i t w i l l have some a p p l i c a b i l i t y to other urban settings. E x p l i c i t l y , the objectives of t h i s these are three-fold. (1) to i d e n t i f y and i s o l a t e conceptually the forces promoting change and/or s t a b i l i t y i n Canadian neighbourhoods (2) to develop an explanatory model of neighbourhood change and (3) to test and validate the model's predictive power against competing models. Before proceeding further, several d e f i n i t i o n s are i n order. Definitions For the purposes of t h i s study, neighbourhood change i s defined as the dynamic process whereby actual or expected changes i n a neighbourhood's attributes (for example, income, race or density) r e s u l t i n the area becoming more or less desirable to i t s residents (depending upon whether the change i s perceived to be p o s i t i v e or negative by the majority). Thus i t encompasses the term " r e s i d e n t i a l or neighbourhood succession", which has generally been taken to mean a downward change i n the income lev e l s of the occupants over time, and generalizes upon the customary d e f i n i t i o n i n which change has only a negative connota-ti o n . A stable neighbourhood i s characterized by a constant 4 d e s i r a b i l i t y (zero or p o s i t i v e neighbourhood change). Stable areas may be old and established or new and t h r i v i n g . Since positive neighbourhood change i s usually the process whereby area s t a b i l i t y i s maintained or achieved, i t i s conceptually possible 8 to think of s t a b i l i t y as a central region of a continuum. Figure 1 presents one author's view of the stages of change and s t a b i l i t y . Note that i t i s most appropriate as a rough means of c l a s s i f y i n g neighbourhoods rather than implying that every neighbourhood w i l l proceed through these stages or that every c i t y contains neighbourhoods that experience these c h a r a c t e r i s t i c s . Indeed the majority of neighbourhoods i n Canadian and many American c i t i e s would be c l a s s i f i e d as stable and viable. This leads to an alternate d e f i n i t i o n that neighbourhood change.is a change either within or between the stages shown i n figure 1. Figure 2 summarizes the above. 5 FIGURE 1 NEIGHBORHOOD CHANGE CONTINUUM Stage 1: Stable and Viable. These are healthy neighborhoods that are either r e l a t i v e l y new and t h r i v i n g or r e l a t i v e l y old and stable. No symptoms of decline have yet appeared, and property values are r i s i n g . Some neighborhoods remain i n t h i s stage for decades, i f they have a t t r a c t i v e locations near major amenities and/or i f they continue to at t r a c t residents able and w i l l i n g to perform high-quality maintenance. Stage 2: Incipient Decline. These are generally older areas experiencing some functional.obsolescence. As older families with grown children move out, younger ones with fewer resources move i n . Minor physical d e f i c i e n c i e s i n housing units, plus some r i s i n g density, begin to appear. Property values are stable or only increasing s l i g h t l y , and a high proportion or mortgages are f e d e r a l l y insured because many buyers have not yet accumulated substantial equity. The l e v e l of public services and the s o c i a l status of the neighborhood often decline somewhat. Stage 3: Clear Decline. If the Stage 2 i n s t a b i l i t y i s not • corrected, the changes that began then can become more d e f i n i t e . Renters become more and more dominant, and tenant-landlord relations deteriorate with r i s i n g absentee ownership. Social s h i f t s to lower-status groups occur. Minor physical deficiences multiply u n t i l v i s i b l e everywhere. Conversions to higher-density use increase, and o v e r a l l confidence i n the area slackens. Some housing abandonment1 may begin. 6 Stage 4: Heavy Decline. By the fourth stage, housing becomes very deteriorated and even dilapidated, requiring major repairs for most structures. Properties are now marketable only to the lowest socioeconomic groups.through contract sales. P r o f i t i b i l i t y of rental units declines and cash flows wane. More and more subsistence-level households move into and dominate the area. Pessimism about i t s future becomes widespread and i s accompanied by abandonment. Stage 5: Unhealthy and Nonviable. Neighborhoods of t h i s type have reached a terminal point at which massive abandonment occurs. Expectations about the area's, future are n i l . Residents are those with the lowest s o c i a l status and lowest incomes i n the region, and the neighborhood i s considered an area to move out of, not into. Source: Donald S. Cannon, M. Leanne Lachman, Arlyne S. Bernhard, "Identifying Neighborhoods for Preservation and Renewal," Growth  and Change, VII, 1 (January 1977), 36. • FIGURE 2 NEIGHBOURHOOD STAGES NEGATIVE NEIGHBOURHOOD CHANGE POSITIVE Unhealthy & Non-V i a b l e Heavy Decline' C l e a r D e c l i n e I n c i p i e n t D e c l i n e S t a b l e and V i a b l e Growing Source: Adapted from F i g u r e 1 8 C o n s i d e r i n g t h e f r e q u e n t u s e o f t h e w o r d , i t i s a l s o n e c e s s a r y t o d e f i n e n e i g h b o u r h o o d . Downs a n d L a c h m a n (1972) a s c r i b e f i v e d i f f e r e n t m e a n i n g s t o t h e w o r d ; e a c h a s s o c i a t e d w i t h a s p e c i f i c p e r c e p t i o n o f t h e n e i g h b o u r h o o d . H e r e , n e i g h b o u r h o o d w i l l mean t h e c o m p o n e n t o f a c i t y t h a t h a s a c q u i r e d a r e c o g n i z a b l e i d e n t i t y b e c a u s e o f t h e d i s t i n c t i v e f e a t u r e s c o n t a i n e d w i t h i n . A r r a n g e m e n t o f e l e m e n t s w i t h i n t h e n e i g h b o u r h o o d i n c l u d e b o t h t h e p h y s i c a l f a c i l i t i e s a n d a t t r i b u t e s o f t h a t . p l a c e , a n d t h e human a c t i v i t i e s s i t u a t e d t h e r e . T h e s e m u s t c o m b i n e t o p e r f o r m some f u n c t i o n s w i t h i n t h e l a r g e r c i t y . I t s f u n c t i o n s r e l a t e t h e n e i g h b o u r h o o d t o o t h e r n e i g h b o u r h o o d s a n d t h e c i t y a t l a r g e , a n d p r o v i d e i t w i t h s u s t e n a n c e . T h e R o l e a n d I m p o r t a n c e o f t h e N e i g h b o u r h o o d T h e p a r t i c u l a r c h a r a c t e r o f t h e g o o d s a n d s e r v i c e s o f f e r e d p r o v i d e s t h e s p e c i f i c r o l e o f a g i v e n n e i g h b o u r h o o d . I f i t i s a r e s i d e n t i a l a r e a , t h e n e i g h b o u r h o o d may be t h o u g h t o f a s c r e a t i n g a n d o f f e r i n g r e s i d e n t i a l o p p o r t u n i t i e s a t t r a c t i v e t o a p a r t i c u l a r s egment o f t h e m a r k e t f o r a m e t r o p o l i t a n r e s i d e n c e . A n e i g h b o u r -h o o d may h a v e a c o m m e r c i a l r o l e r e l a t e d t o a n d s u p p o r t i v e o f t h e r e s i d e n t i a l r o l e . T h i s r o l e i s d e t e r m i n e d b y t h e k i n d s o f e n t e r -p r i s e a n d i n v e s t m e n t a t t r a c t e d a n d t h e i r r e s p o n s e t o c e r t a i n m a r k e t n e e d s . W h a t e v e r i t s r o l e o r c o m b i n a t i o n o f r o l e s , e a c h n e i g h b o u r h o o d h a s a n i m p a c t o n t h e c i t y a t l a r g e . T h r o u g h t h e p r o c e s s o f s y n e r -g i s m , t h e q u a l i t i e s a n d p e r f o r m a n c e s o f a n y c i t y a r e g r e a t e r t h a n t h e sum. o f t h e q u a l i t i e s a n d p e r f o r m a n c e s o f i t s v a r i o u s n e i g h -b o u r h o o d s . H o w e v e r , n e i g h b o u r h o o d s do a f f e c t t h e v i a b i l i t y o f 9 c i t i e s . A.healthy neighbourhood has found an economically viable r o l e . Assembled within are a combination of physical features and f a c i l i t i e s , people and enterprises that are compatible with, and supportive of, that r o l e . On the other hand, neighbourhood decline, whatever the underlying dynamic, i s associated with the d i s s i p a t i o n and weakening of the neighbourhood's functional r o l e . New investment evaporates. Maintenance and repairs decline. People and enterprises leave. Expansions of commercial a c t i v i t i e s i n previously viable neighbourhoods takes place elsewhere. These symptoms of decay, disinvestment and outmigration of people and business a c t i v i t i e s , i f l e f t untreated, are l i k e l y to spread. Economic and s o c i a l progress i n an urban nation r e f l e c t what i s happening, both good and bad, i n the neighbourhoods of metropolitan communities. Thus i t i s v i t a l l y important that an understanding be gained of the dynamic underlying neighbourhood change. 9 The U.S. and Canada Compared A tentative hypothesis of t h i s research i s that American neighbourhood change models are not e n t i r e l y relevant to the Canadian s i t u a t i o n due to d i f f e r e n t values and expectations of the residents of the two countries and due to differences i n urban structure between the two countries. Consequently, the major differences between the two countries, and t h e i r c i t i e s , w i l l be outlined below to provide support for t h i s hypothesis. Canada has a very d i f f e r e n t set of p o l i t i c a l constraints with regard to urban p o l i c y compared to those e x i s t i n g i n the U.S. Direct involvement i n urban development by the Canadian 10 federal government i s e f f e c t i v e l y prevented by the B r i t i s h North America Act. Federal agencies with wide-sweeping powers oyer urban areas (such as HUD i n the U.S.) are non-existent. There i s , of course, some i n d i r e c t federal government involvement through such means as the Canada Mortgage and Housing Corporation and various assistance plans. P r o v i n c i a l l y , the governments gen-e r a l l y e s t a b l i s h a Ministry with r e s p o n s i b i l i t y for urban a f f a i r s and/or housing. The scale of involvement"*"^ of the two le v e l s of government i s much smaller though, than would be found i n the U.S. There has not been the large i n j e c t i o n of d o l l a r s into the system for urban transportation, renewal,development and public housing projects. Because of t h i s , c i t i e s have had to grow out of private investment and l o c a l and p r o v i n c i a l tax revenues. A major benefit of not receiving, or accepting, large c a p i t a l grants i s that Canadian c i t i e s have foregone the huge additional operating costs that generally accompany them. Such operating costs have been a contributing factor to the near-bankruptcy of several U.S. c i t i e s . A second e f f e c t of U.S. government funding p o l i c y has been i n the d i s t r i b u t i o n of benefits, with a resultant impact on c i t y structure. For example, the a v a i l a b i l i t y of highway funds has e f f e c t i v e l y subsidized suburban landowners and developers at the expense of central c i t y property owners. Suburban land that was previously inaccessible, now served by a highway network, becomes more valuable. The increase i n the supply of land serves to reduce prices i n the central city.. In a 1973 study, de Leon and Enns found that federal highway improvements led to the dispersion 11 and location of jobs and population. Another contributor to the decentralization process has been the subsidization of homeowner-ship through the d e d u c t i b i l i t y of mortgage i n t e r e s t and property taxes i n federal income tax c a l c u l a t i o n s . This p o l i c y has not yet been implemented i n Canada. The above serve to make the suburbs more desirable and draw residents and jobs from central locations. Other government p o l i c i e s add an extra push. Urban renewal, public housing and freeway construction have a physical impact on the central areas. A large amount of serviceable housing i s removed from the stock. The attractiveness and l i v e a b i l i t y of the c i t y i s reduced and some of the s t a b i l i t y of the area i s l o s t . The demand for central housing weakens further with resultant decline i n p r i c e . Even i f the r e s u l t has been unintended, the in d i c a t i o n i s that these U.S. government p o l i c i e s have contributed greatly to urban d i s f i g u r e -ment. In addition to the physical e f f e c t s of these p o l i c i e s on urban structures they also influence the expectations of'the participants i n land and housing markets and introduce uncertainty into the market process. Rapid change i s brought about by implementing large-scale p o l i c i e s over a short period of time. Central neighbourhoods begin to decline as new suburban areas grow. The occupants of the core areas expect these trends to continue, based on the history of ongoing highway improvements and the undesirable a l t e r a t i o n of the character of t h e i r neigh-bourhoods through such means as urban renewal and public housing. R e s i d e n t s 1 1 of these areas come to expect decreased demand and 12 f a l l i n g p r i c e s . New private investment i s u n l i k e l y to be f o r t h -coming i n the presence of uncertainty about future development in the urban area. Mortgage lenders i n the past have d i s c r i m i -nated against older central areas (the so-called red l i n i n g 12 phenomenon) due to the r i s k that they perceive i n making such loans. The presence of r a c i a l discrimination adds further imperfection to the market and more uncertainty. The opposite has been true in-Canada. The above-mentioned factors are lar g e l y missing i n our c i t i e s . Government p o l i c i e s have not wrought massive d i s l o c a t i o n s . Expectations for the future tend to be p o s i t i v e . Private investment i s abundant. People expect prices and values to at l e a s t keep up with i n f l a t i o n , as they have i n the past, and thus there i s a tendency towards c a p i t a l gains from housing rather than c a p i t a l losses. Lower expected r i s k has l i k e l y led to the use of a lower c a p i t a l i z a t i o n rate ( i . e . the lower the c a p i t a l i z a t i o n rate, the higher the property value) i n determining prices and values. Contrast t h i s with those American c i t i e s whose residents, given the prospects of large scale U.S. government intervention, expect a stable or downward, trend i n property value i n the central c i t y . The greater expected r i s k has led to these prices being discounted at a higher rate. The discounting process leads to a s e l f - f u l f i l l i n g prophecy that decline w i l l continue. Negative expectations feed upon themselves; causing near-panic s e l l i n g and drive down prices and expectations further. To summarize the section, government intervention i n the United States has acted upon prices and expectations by bringing, 13 either a c t i v e l y or passively, a number of di s t o r t i o n s into the urban system. These are thought to be largely absent i n Canada. In t h i s manner i t i s f e l t that government can play a key role i n formulating expectations, and thus i n d i r e c t l y influence the course of neighbourhood change. It i s hypothesized that the more the government involves i t s e l f i n urban a f f a i r s , the greater w i l l be the cost to urban neighbourhoods i n increased uncertainty and i n s t a b i l i t y . Framework, of the Study The preceding sections have presented some basic considera-tions of neighbourhood change and b r i e f l y theorized, about i t s motivating factors. In addition, the li n k between the neighbour-hood and i t s metropolitan area was explored to provide a rationale for the present study. Lastly, the d i f f e r i n g scale of government intervention i n Canada and the U.S. was shown to influence the course of t h e i r c i t i e s . The next chapter w i l l present an overview of some of the leading models of neighbourhood change; i n p a r t i c u l a r , the arbitrage model. These models w i l l be reviewed with regard to th e i r s u i t a b i l i t y to the Canadian context. Also, since the role of government involvement has been stressed, one form of negative land control; zoning, w i l l be examined for i t s potential impact on the neighbourhood. The important consideration i s how government intervention., i n th i s case a zoning change, can influence expectations. . Chapter 3, i n l i g h t of the d e f i c i e n c i e s of some U.S. based models of neighbourhood change, constructs a more generalized 14 model. It presents a broader view of expectations than has here-tofore been used and u t i l i z e s investment and reinvestment as a measure of these expectations. Chapter 4 extends the concepts presented i n Chapter 3 through the use of an example. In addition, implications of the model for the participants i n the housing market are s p e c i f i c a l l y stated, giving an i n d i r e c t means of testing the model. The f i n a l section d e t a i l s these t e s t s . In Chapter 5, one s p e c i f i c area of Vancouver i s chosen as a testing ground. This area, Kerrisdale, i s described. The sampling procedure and choices of, and sources for, the data are detailed. Possible sources of error and the li m i t a t i o n s of thi s data are also given. Chapter 6 presents the res u l t s of t h i s research. I t concludes with several implications for governments with regard to t h e i r perspectives and p o l i c i e s and a b r i e f summary of the study. 1. The trends and attitudes described i n t h i s section are documented i n more d e t a i l i n Chapter 1 of Leven et a l , 1976 and i n Bourne, 1978. 2. For example, the Kerrisdale area of Vancouver and the Rosedale area of Toronto are both old, established neighbourhoods on the outskirts of the inner c i t y . Their d e s i r a b i l i t y i s evidenced by the fact that average housing prices i n these areas are consistently among the highest i n Canada. 3. Some inner c i t i e s i n the U.S. exhibit a scale of housing abandonment that i s staggering. For example, i n St. Louis the U.S. Department of Housing and. Urban Development (1973) estimated that over 10,000 or 4 percent of the t o t a l housing sold was vacant and d e r e l i c t . The percentages rose to over 20 percent i n some neighbourhoods. 15 4. Goldberg, 1977, states: "Excess demand, through rapid increases i n demand, appears as the major c u l p r i t i n r a i s i n g Canadian house prices above U.S. l e v e l s . " p.230 5. Goldberg, 1977. 6. Mercer (1979) describes many of the s i m i l a r i t i e s and differences between Canadian and American c i t i e s . 7. Increasing d e s i r a b i l i t y would represent a change toward s t a b i l i t y . 8. One might argue that i t i s possible to have s t a b i l i t y at other points along the continuum i n the absence of change. However, i t i s more metastable i n the sense that the very nature of the areas makes the process of further decline (and i n s t a b i l i t y ) inevitable without some form of outside intervention 9. This section draws heavily upon Goldberg (1977) . 10. The d i s t i n c t i o n should be made here between the quantitative and q u a l i t a t i v e aspects of government involvement. Even i f the r e l a t i v e number of urban programs i s the same i n both countries, i t i s being suggested that the magnitude of the harmful ef f e c t s i s much greater i n the U.S. 11. The i m p l i c i t assumption i s that residents are owners. If i n fact the majority of residents are renters, decreased demand may not matter to them. 12. Ten. d i f f e r e n t studies of urban disinvestment and red l i n i n g are described i n Todd,. R.H. et a l , Housing and  Business Investment i n Nebraska, (Omaha, Nebraska: Center for Applied Urban Research, University of Nebraska, 1976) . 16 CHAPTER 2 A REVIEW OF THE LITERATURE  Some Preliminary Observations Many hypotheses have been put forth over the years to account for urban and neighbourhood change. Their very number would suggest that d i f f e r e n t factors impel change at p a r t i c u l a r stages i n history and perhaps, p a r t i c u l a r locations. As yet, none of the theories can claim to be universal. The previous chapter detailed some of the differences between U.S. and Canadian c i t i e s . The allowable l e v e l of government involvement i n urban a f f a i r s i n the two countries advanced as a major potential factor i n accounting for these differences. At that time, reservations were expressed about the a p p l i c a b i l i t y of American neighbourhood change models to the Canadian c i t y . The reasons are outlined below. The long-run pattern of change i n American central c i t i e s , p a r t i c u l a r l y those i n the northeast and north central regions, i s : of housing, s o c i a l services, infrastructure and i n d u s t r i a l base becoming aged and obsolescent; of land uses competing through central business d i s t r i c t expansion of commercial functions and greater demands by highways and i n s t i t u t i o n a l uses; and of demographic t r a n s i t i o n , notably an aging population and the loss of family households.''" In the short-run, some neighbourhoods have undergone rapid r a c i a l change, often coupled with a. severe decline i n income l e v e l , and th e i r housing stock has quickly depreciated, leading to abandonment. Given these h i s t o r i c a l patterns, i t i s not surprising that U.S. models of neighbourhood change have 1 7 variously incorporated such factors as the aging of the stock, the preference by higher income groups for suburban location, and r a c i a l change with accompanying f a l l i n g income l e v e l s , into t h e i r explanations. However, i n the Canadian s i t u a t i o n , the above factors have l i t t l e meaning. Centrally located older housing i s generally well-maintained, despite i t s age, and i s i n strong demand. The most desirable r e s i d e n t i a l neighbourhoods often border on the core. High income residents of Canadian c i t i e s value accessi-b i l i t y to the CBD more highly than t h e i r American counterparts; partly attributable to the added time and d i f f i c u l t y of commuting without comprehensive freeway networks. Racial composition has never been proven to introduce imperfections into the Canadian housing market. If race has any influence at a l l , i t i s very s l i g h t . I t i s not necessary to assume that f i l t e r i n g (down) inevitably leads to neighbourhood decline or that household movement i s i n only one d i r e c t i o n . - to the suburbs. Indeed, some American c i t i e s have seen a reversal of t h i s trend, with an increasing number of households moving to central locations. Thus, a d i f f e r e n t outlook i s needed i n developing a model of neighbourhood change that allows for the above discrepancies. The foregoing discussion i s not meant to imply that e x i s t i n g models are valueless. Some explain quite well the process of change i n the context i n which they were developed and consider-able insight into the nature of change can be gained by examining these models i n some d e t a i l . Consequently, the following section w i l l focus on some of the more important models of neighbourhood 18 change, and t h e i r proponents, and w i l l , show how t h i s procession of thought has evolved over time. This w i l l provide the necessary-background to the formal development of the model i n Chapter 3. Wherever appropriate, the d e f i c i e n c i e s as well as the strengths of the models w i l l be noted. The f i n a l section digresses somewhat from the main topic to a discussion of zoning. I t has been hypothesized that govern-ment intervention i n land markets i s a contributing factor to neighbourhood change. One p a r t i c u l a r l y v i s i b l e form of govern-ment intervention i s i n the establishment and r e v i s i o n of zoning bylaws. Consequently, the role of zoning as i t contributes to neighbourhood change and resident expectations w i l l be explored. Neighbourhood Change and Related Models Much of the early work related to neighbourhood change took place i n the f i e l d of human ecology. Here, the urban structure was viewed as having a "natural" evolution, similar to b i o l o g i c a l communities. These recently arrived and those unable to compete gravitated towards the older inner parts of the c i t y . The focus was on the description of e x i s t i n g physical and s o c i a l structures of r e s i d e n t i a l areas of the c i t y and the examination of changes i n the s p a t i a l d i s t r i b u t i o n of these areas over time. Burgess, Park and McKenzie (1925) viewed the land use structure of c i t i e s as being s t r a t i f i e d into concentric zones of increasing s o c i a l status outward from the CBD. This i s the r e s u l t of a dynamic process brought about by a growing c i t y population due to in-migration, r i s i n g incomes and geographic expansion of 19 the CBD through economic growth. As t h i s growth occurs, and the housing stock i n any one ring ages, the ring w i l l undergo succession to lower-income households. I t was argued that since the aging of housing units reduces the housing services produced, and since housing demand.is a p o s i t i v e function of income, the lower-income occupancy must necessarily occur. The o r i g i n a l population w i l l have moved to a more distant ring i n order to increase, or at l e a s t maintain, t h e i r l e v e l of housing services received. The assumptions of the model of rapid urban growth, in-migration, an i n d u s t r i a l economy and the r e l a t i v e absence of planning weaken i t s generality. Hoyt (193 9) developed the sector theory i n which the growth patterns of the urban area were described as wedges emanating from the central business d i s t r i c t rather than concentric rings. Once established, a wedge expands by accretions to i t s outer edge as the highest income residents within that sector vacate aging housing and move to the edge. As that movement occurs, the old, obsolescent housing i n the inner r i n g w i l l " f i l t e r down" to lower income households. Thus, he did recognize that concentric zonal patterns e x i s t within each sector due to variations i n the age and modernity of buildings and was the f i r s t to e x p l i c i t l y state the concept of f i l t e r i n g . Note that the l a t t e r was viewed as a consequence of r i s i n g demand for housing with Increased income and of depreciation of dwelling units with increasing age. Also of i n t e r e s t i s that Hoyt's analysis of the e f f e c t of entry of blacks into neighbourhoods represented the beginnings of a neighbourhood ext e r n a l i t y theory of neighbourhood change. 20 The major s i m i l a r i t y between these two models i s that they both recognize that housing demand i s a p o s i t i v e function of income and that aging tends to reduce the housing services produced. The importance ascribed to income and age of dwelling unit recur i n l a t e r models. An obvious weakness to these theories i s that they are c l e a r l y oversimplified and i n i s o l a t i o n do not explain adequately the r e a l i t y of contemporary c i t y structure and change. However, the implied dynamic remains v a l i d . Recognizing.that r e a l land use patterns are much more complex than those postulated i n the concentric zone and sector theories, Harris and Ullman (1945) developed a multiple nuclei model. They believed the complexity of these patterns to be a function of the grouping of a c t i v i t i e s around several discrete centres. Factors such as s i t e c h a r a c t e r i s t i c s and the presence of e x t e r n a l i t i e s were emphasized rather than a c c e s s i b i l i t y to the CBD. This was the most important contribution of the model. The above recognize that systematic patterns of neighbour-hood change e x i s t . A neighbourhood i s viewed as having a natural l i f e cycle, over the course of which i t w i l l be occupied by d i f f e r e n t demographic groups and characterized by f a l l i n g income lev e l s as the neighbourhood ages. I t was a l o g i c a l progression to apply the same reasoning about a l i f e cycle to the i n d i v i d u a l housing unit and thus arrive at the concept of f i l t e r i n g . The f i l t e r i n g concept enters many descriptions of neighbourhood change and a broader version underlies the model developed l a t e r i n t h i s research. Thus, i t i s useful to follow the evolution of t h i s mechanism. 21 As mentioned, Hoyt described f i l t e r i n g as empirical i n nature. However R a t c l i f f (1949) attached a s o c i a l value to f i l t e r i n g , arguing that a l l participants i n the housing market would eventually receive an improvement i n housing when the construction of new housing released older units to the f i l t e r i n g process. Lowry (1964) c r i t i c i z e d t h i s view on two grounds: (1) i f housing did depreciate with age, f i l t e r i n g wasn't l i k e l y to produce any durable improvements i n the q u a l i t y of housing occupied by the poor and (2) since housing maintenance i s a function of income, any improvement i s the quality of.dwelling unit for the poor would, at best, be temporary. Smith (1964) redefined f i l t e r i n g i n terms of.the physical q u a l i t y of the dwelling unit: "a. unit f i l t e r s only i f i t declines more i n price than i n physical q u a l i t y . " With a d e f i n i t i o n focussing on s t r u c t u r a l c h a r a c t e r i s t i c s , generality i s r e s t r i c t e d . L i t t l e (1974) revised the concept to a more general d e f i n i t i o n . As restated i n a l a t e r paper ( L i t t l e , 1976, p.68): "households rather than housing units are the active,participants i n the f i l t e r i n g process with f i l t e r i n g defined by household preferences. If a household experiences a change i n i t s housing leading to 'an increase i n i t s u t i l i t y , independent of changes i n i t s income, i t s housing i s said to have f i l t e r e d upwards." This i s the d e f i n i t i o n that w i l l apply i n the current research. U n t i l t h i s l a s t important work, the f i l t e r i n g theory had been developed i n too narrow an analytic framework. It was widely believed that the process of relocation led to an improve-ment in welfare for urban fa m i l i e s . However, by focussing on the dwelling, unit i t s e l f , and e s p e c i a l l y on i t s physical character-i s t i c s , the theory of f i l t e r i n g was limited i n a welfare r o l e . 22 A l l facets of the housing bundle must be accounted for. Thus, the f a i l u r e to take neighbourhood e x t e r n a l i t i e s into account was a major weakness of the e a r l i e r f i l t e r i n g models. Bailey (1959) was the f i r s t to treat neighbourhood exter-n a l i t i e s at a t h e o r e t i c a l l e v e l . He considers the case of a u n i l a t e r a l nuisance that i s associated with p a r t i c u l a r groups. In so doing, he develops a model capable of explaining how a neighbourhood can undergo a change i n owner occupancy from one group to another. He assumed two population groups that may be thought of as being of high and low income or white and black (although such s p e c i f i c l a b e l l i n g i s not required), and for sim-p l i c i t y s h a l l here be c a l l e d x and y respectively. The assumption i s that the x's prefer to be surrounded with t h e i r own group while the y's prefer to be near the x's. Given t h i s preference pattern, and the further assumption that x's and y's are i n i t i a l l y segregated, properties near the y's w i l l be discounted by the x's and properties near the x's could be sold to the y's for a premium pr i c e . A process of escalating prices on the y side could be started by any increase i n housing demand. If at any time, prices on the y side are bid up past the prices i n e f f e c t at the boundary adjacent to the x side, then a change from type x to type y occupancy w i l l occur. Thus, a new boundary w i l l be defined within the x side. Whether t h i s process continues, or reaches a state of equilibrium follows from subsequent assumptions. This mechanism, although developed i n the context of imperfections i n the. market introduced by r a c i a l and income differences, has general v a l i d i t y and forms the basis of the arbitrage model 23 discussed l a t e r . Muth (197 3) developed a d i f f e r e n t view of the change process. His Vintage model presented i n formal terms the idea that the flow of housing services produced by a dwelling unit diminishes as i t ages. This i s p a r t i a l l y attributed to the increase i n maintenance outlays that may r e s u l t with increased age. Neigh-bourhoods with a large proportion of older housing are assumed to provide lower quality housing services than other neighbour-hoods which i n turn leads to lower income residents being attracted as the areas age. The reason, of course, i s that low-income residents cannot compete for higher qua l i t y housing against high-income households.. Over time, the model suggests that aging areas w i l l change i n occupancy from higher to lower income groups. This need not be the case; counterexamples being Vancouver i n Canada and the recent experience of Seattle i n the U.S. The arbitrage model (Leven et a l , 1976) i s the f i n a l descriptive model that w i l l be discussed i n t h i s section. I t extends the Bailey model, s p e c i f i c a l l y incorporating r a c i a l factors into the market process and the f i l t e r i n g concept. The b e l i e f that household preferences depend on a large number of neighbour-hood socio-economic, housing and public service c h a r a c t e r i s t i c s rather than only i n d i v i d u a l housing unit s t r u c t u r a l c h a r a c t e r i s t i c s i s central to t h i s model. A change i n these non-structural c h a r a c t e r i s t i c s could possibly lead to "a change i n the preference rank of these units and a consequent change i n occupancy and prices." (p.38). 24 3 Expectations as to the future of "housing bundles" are also said to a f f e c t households' decisions. Consequently, any expected change i n c h a r a c t e r i s t i c s such as income or race could also lead to change i n occupancy and p r i c e s . Such expectations can, i n fact, speed up the t r a n s i t i o n process. This assertion i s a key feature, of the arbitrage model and provides a basis for the generalized expectations model to be developed i n a l a t e r chapter. It i s believed that i n order for the model to be applicable to neigbourhood change i n Canadian and some American c i t i e s , a broader view of expectations i s required. Other studies have sought to v e r i f y (and extend) some of the models earlier" presented. Brueckner (1977) attempted to relate the occurrence of r e s i d e n t i a l succession to explanatory variables suggested by several theories (those of Bailey, Muth and f i l t e r i n g ) . He concluded that the Muth model explained the process better, at the chosen l e v e l of aggregation. However, his sample consisted of data from 8 c i t i e s , by composite census t r a c t . With such aggregate data, i t would be expected that neighbourhood influences would have l i t t l e e f f e c t . L i t t l e (1976) asserted that rapid price and occupancy changes can be viewed as a market response to a s i g n i f i c a n t change i n the preference rank of a l l units located i n a p a r t i c u l a r neighbourhood. He found that attributes other than age and physical c h a r a c t e r i s t i c s , i n p a r t i c u l a r socio-economic composition, were important variables In the household's decision function. Leven and Mark (1977) attempted to sort out the r e l a t i v e influence of a variety of neighbourhood c h a r a c t e r i s t i c s by analyzing a sample of moving fa m i l i e s . They 25 found that median family income was the strongest single i n f l u -ence on the choice of neighbourhood while r a c i a l composition, access variables to work and age of the housing stock were not as s i g n i f i c a n t . Thus, the importance of neighbourhood considera-tions i s established, but the focus above remains on age of dwelling, income and race. Two other models of neighbourhood change should be mentioned because of t h e i r d i f f e r e n t approach to the problem at hand. They take a systems (or stage) approach rather than a descriptive approach. In a study of New Haven, Connecticut, Birch et a l (1974) u t i l i s e d h i s t o r i c a l data to develop a computer model for the region that could reproduce the past and make r e l a t i v e l y successful predictions for the future of each neighbourhood. I t was a behavioral model (in that things happened only when someone decided to do something) as d i s t i n c t from a s t a t i s t i c a l model that extrapolates numbers of people, housing units and employment over time. Its major drawbacks are that a large number of inputs are required and i t does not e x p l i c i t l y include the socio-demographic c h a r a c t e r i s t i c s of neighbourhood residents. Schliewinsky (1975), i n one of the few Canadian neighbour-hood change studies, develops a p r o b a b i l i s t i c computer model to deal with change that overcomes these d e f i c i e n c i e s . He concept-ualizes a neighbourhood as a closed urban subsystem i n which manifestations of change are examined i n terms of physical and socio-demographic c h a r a c t e r i s t i c s . The system's structure and behavior are analyzed as i f the only things known about the system are the values of c e r t a i n variables or external quantities 26 recorded at various points i n time (a so-called."black box"). His model was quite successful i n c l a s s i f y i n g change of state i n Toronto neighbourhoods over the 1961-1971 period. Its greatest weakness for the present study i s that a black box model f a i l s to provide an interpretation of a set of data although i t may provide a l o g i c a l l y s a t i s f a c t o r y explanation and prediction (Moore and Gale, 1977) . Schliewinsky reaffirms the importance of neighbourhood variables but since the present study i s concerned with the mechanism of neighbourhood change rather than s o l e l y with prediction, the most appropriate basis for research i s deemed to be found in.the descriptive models of neighbourhood change e a r l i e r discussed. A close examination of these models showed th e i r reliance on one or more of the following factors; aging dwelling units must provide a diminished flow of housing services, a preference for the suburbs by high income residents, r a c i a l imperfections and/or income leve l s f a l l i n g over the l i f e cycle of the neighbourhood. These factors have l i t t l e relevance to the Canadian s i t u a t i o n and t h i s observations makes i t imperative to develop a more general theory of neighbourhood change. I t was also seen how the focus shifted from the housing unit and i t s physical structure to household preferences and the entire c o n s t e l l a t i o n of non-structured as well as structured character-i s t i c s of housing. Expectations of r a c i a l and income change also came to be. recognized as playing a central role i n the change process. These l a t t e r would appear to be a step i n the r i g h t d i r e c t i o n toward a general model. However, i t has been argued 27 t h a t government i s an important agent i n the formation of ex p e c t a t i o n s and t h i s concept i s absent from the a r b i t r a g e model and other, models of neighbourhood change. Consequently, the o b j e c t i v e of the f o l l o w i n g chapter i s to extend the a r b i t r a g e model by examining e x p e c t a t i o n s i n a broader c o n t e x t . The end r e s u l t w i l l be a model of neighbourhood change t h a t i s more a p p l i c a b l e t o Canadian and some American c i t i e s and t h a t does not r e l y on f a c t o r s t h a t have g e n e r a l l y been shown to have l i t t l e r e l e v a n c e i n Canada. Having p r o v i d e d the background t o the development of the model, a t t e n t i o n now t u r n s t o an example of government i n t e r v e n t i o n t h a t w i l l l a t e r be used t o t e s t the model. The Role of Zoning As mentioned i n the i n t r o d u c t i o n , zoning i s one form of government i n t e r v e n t i o n in. la n d markets t h a t can p o t e n t i a l l y c o n t r i b u t e t o neighbourhood change. I t i s a n t i c i p a t e d t h a t any change i n the zoning of an area w i l l have an impact both on the rezoned area and those areas immediately proximate t o i t . The extent of the impact w i l l , i n p a r t , be determined by the degree to which a f f e c t e d r e s i d e n t s r e v i s e t h e i r e x p e c t a t i o n s about the f u t u r e u t i l i t y of t h e i r housing bundle. T h e r e f o r e , i t i s l a t e r intended t o use a r e z o n i n g t o a hig h e r d e n s i t y use as a micro-l e v e l case study i n which some of the i m p l i c a t i o n s of the model of neighbourhood change developed i n the next chapter can be t e s t e d . Furthermore, i t i s planned.that the data gathered t o t e s t the model a l s o be used t o t e s t s e v e r a l common a s s e r t i o n s about the e x t e r n a l i t y c o s t s s a i d t o be imposed.by non-homogenous uses. To p r o v i d e background and support f o r the above, t h i s 28 section f i r s t examines the nature of the government intervention ( i . e . the general rationale behind zoning) then proceeds to b r i e f l y review those few previous works that relate, zoning changes to neighbourhood change and expectations. The section concludes by focussing on recent empirical evidence about the influence of e x t e r n a l i t i e s on property values. The anticipated presence of s i g n i f i c a n t negative e x t e r n a l i t i e s would be a.valid reason for households to revise t h e i r expectations. 4 . Zoning i s a r e s t r i c t i v e form of land use control representing public intervention i n the operation of land and housing markets. Such intervention i s usually supported using two basic arguments; the f i r s t being that location and land use decisions involve e x t e r n a l i t i e s which are not i n t e r n a l i z e d into market decisions. The view that l o c a l governments are simply cooperatives which are organized for the provision of public goods and services provides the second rationale. Each of the "cooperatives" has . the objective of providing the best bundle of goods and services at the lowest possible p r i c e . To achieve t h i s objective, the l o c a l government may undertake " f i s c a l zoning"; zoning strategies which l i m i t the t o t a l population.of a j u r i s d i c t i o n or are designed to control the mix of users and non-users of a service (with the intent of lowering the cost of a given l e v e l of service to users). Examples would be large l o t zoning or exclusive single-family zoning. Another reason given for c o n t r o l l i n g the population mix i s that: "a change i n population of the j u r i s d i c t i o n which re s u l t s i n a d i f f e r e n t bundle of goods and services being provided (in 29 response to decisions of the new majority) i s undesirable to members of the majority p r e v a i l i n g before the population change." ( L i t t l e , 1978, p.15). This leads to land use r e s t r i c t i o n s which allow only those households having similar tastes and income to those p r e v a i l i n g i n the community. Thus, government i s b a s i c a l l y attempting to l i m i t the negative e x t e r n a l i t i e s , assuming they e x i s t , of non-homogenous uses and r e t a i n control over population change, assuming i t to be "undesirable." S t u l l (1975) was more blunt.when he stated some of the reasons why neighbourhoods should be averse to having high-density r e s i d e n t i a l structures: "I t i s generally assumed that such uses are undesirable intruders i n single-family neighbourhoods. The standard argument j u s t i f y i n g t h e i r exclusion from these area focusses on the noise and congestion that they allegedly create and the l i g h t and a i r that they allegedly block...(furthermore these) structures may a t t r a c t households with whom homeowners do not wish to associate." He l a t e r tested for ex t e r n a l i t y costs and found that the value of a t y p i c a l single-family property depended s i g n i f i c a n t l y upon community land use patterns; i . e . that s i g n i f i c a n t negative e x t e r n a l i t i e s are present i n urban land markets. This finding runs contrary to the evidence to be presented l a t e r . The above indicate that a zoning change to a higher density use i s assumed t o have a negative e f f e c t on the neighbourhood. It has already been emphasized that expectations play a c r i t i c a l role i n the succession process. Even i n the absence of fundamental supply and demand factors, the. expectation of change can by i t s e l f lead to the expected outcome. Thus a zoning change w i l l l a t e r be examined for i t s impact on resident 30 expectations. I t i s not important that the new use actually has minimal.negative external costs or that i t a t t r a c t s a similar population to i t s surroundings - i t i s the perception of the affected residents about the future impact of the new use and the costs imposed that w i l l determine the course of the neigh-bourhood. Bailey (1959) examined the economics of r e s i d e n t i a l zoning and arrived at the model that was e a r l i e r discussed. Recall the importance of e x t e r n a l i t i e s . The arbitrage model would predict that, i f the apartments were rented by people of lower income or supposedly i n f e r i o r e t h n i c i t y than those already i n the neigh-bourhood, prices would tend to f a l l i n the blocks adjacent to change. The expectations of further change could cause the occupancy i n the whole neighbourhood to change. Moore (1978) sp e c i f i e d the nature of the r e l a t i o n s h i p between zoning and neighbourhood change on the basis of empirical research for an area of Toronto. He found that zoning was e f f e c t i v e i n preventing change only i n those cases where the demand for the new use was weak. In a l l other cases, zoning,was unable to prevent change, fundamentally because i t could not control the underlying dynamics.of change (said by him to be demographic aging, the obsolescence of dwellings and c i t y growth). This seems to be i n t u i t i v e l y correct (because zoning, being a s t a t i s regulation, i s unable to respond quickly to changing market conditions) although his underlying assumptions and 5 methodology are suspect. Other authors have addressed the question of externality 3 1 cost. Crecine et a l 1967 and Reuter (1973), u t i l i s i n g s imilar methodologies, set out to is o l a t e the influence of cer t a i n e x t e r n a l i t i e s upon the market value of land i n various uses. A model was speci f i e d whereby in d i v i d u a l property value i s a function of a c c e s s i b i l i t y , amenities including neighbourhood ef f e c t s , topography, present and future uses, and h i s t o r i c a l factors. Since a l l of these except amenities are, or can be, held constant for a small area, the relationship reduces to one expressing value as the summation of the influences of property c h a r a c t e r i s t i c s , zoning e x t e r n a l i t i e s , non-zoning e x t e r n a l i t i e s , and a stochastic disturbance. The study does not demonstrate that e x t e r n a l i t i e s can not or do not ex i s t i n urban property markets, nor was i t intended to. However, .the research does suggest that there i s l i t t l e l i k e l i h o o d that a l l of the external e f f e c t s anticipated by zoning actually a r i s e . Maser et a l (1977) hypothesized that zoning has an e f f e c t on land prices. They regressed over time for various use categories the actual sale prices of land against: variables related to value, dummy variables designating zoning cagegory, dummy variables i n d i c a t i n g that other land containing some use that might produce an externality was v i s i b l e and dummy variables indicating that land contiguous to the subject s i t e was devoted to some use that might produce an ext e r n a l i t y . They concluded that there weren't any price effects attributable to zoning. They were also unable to detect the e x t e r n a l i t i e s which zoning i s supposed to prevent. The conclusions to be drawn from t h i s section are that 32 zoning probably cannot prevent change but an upzoning could p o t e n t i a l l y exacerbate change through i t s influence on the expectations of ex i s t i n g residents. S i m i l a r l y , downzonings, could change expectations downward. The rationale for zoning has been explored. Lastly, the l a t t e r three studies provide a basic methodology whereby the above ascertain and the presence or absence of externality cost, may be tested. Thus, the chapter has progressed from an i n i t i a l look at those factors i n models of neighbourhood change that have l i t t l e relevance to the Canadian s i t u a t i o n to an examination of those models i n greater d e t a i l and f i n a l l y to a discussion about one s p e c i f i c form of government intervention that could lead to neighbourhood change. The importance of household preferences and expectations emerges. With t h i s background, the next chapter presents a formal statement of the model. 1. Bourne, 1978. 2. Real Estate Issues. 3,3 (1979). 3. The term i s used to mean a l l non-structural ( a c c e s s i b i l i t y , scope and qual i t y of public services, socio-economic status of neighbours, and other indicators of neigh-bourhood q u a l i t y ) , as well as s t r u c t u r a l atributes that enter into a.household 1s decision. 4. Much of t h i s general discussion about zoning derives from L i t t l e (1978). Many other excellent references are also available; see for instance Siegan (1972), Peterson (1974) . 5. For example, he assumed that negative e x t e r n a l i t i e s are abundant i n urban property markets and these can be assigned a numerical value using an "Index of Environmental Quality." 33 CHAPTER 3 THE ARBITRAGE MODEL REVISITED  Basic Considerations The previous chapters have provided a b r i e f overview of the leading models that have been presented to explain the phenomenon of neighbourhood change and have shown some of the differences that e x i s t between c i t i e s due to the varying i n s t i t u t i o n a l con-s t r a i n t s of the countries i n which they are located. I t i s on th i s l a t t e r issue that attention must be focussed i f a more general model i s to be developed. I t has been hypothesized that the scale of government intervention i n urban a f f a i r s impacts upon the neighbourhood through resident expectations. There i s evidence to support the view that the declining American c i t y i s the i n d i r e c t and large l y unintended r e s u l t of a set of non-urban p o l i c i e s (primarily i n housing and transportation but taxation and immigration also c o n t r i b u t e ) . 1 Thus any model of neighbour-hood change that i s to be applicable to a variety of situations must take into account the important role of the public sector. E a r l i e r , the arbitrage model was described as explaining quite well the experience of many American c i t i e s . I t s p e c i f i -c a l l y takes into account expectation of income and r a c i a l change as an impelling factor on the dynamic of neighbourhood change. It i s argued here that expectation of income and r a c i a l change have merely served as proxy variables for a broader set of expectations that have been influenced by government, without 2 recognizing t h i s role e x p l i c i t y . Consequently, a model w i l l be developed that i s an extension of the arbitrage model which 3 4 incorporates the broader considerations mentioned e a r l i e r . Of course i t must be recognized that income, r a c i a l , and s o c i a l changes are products of, as well as producers of, changes brought about by government. A l l are related yet remain separable. This fact makes i t necessary to r e l y only on the actions of various lev e l s of government as underlying expectations of change, as well as change i t s e l f . Supply and Demand Before progressing to a formal statement of the model, i t i s necessary to examine the participants who play a role i n the neighbourhood and the operation of housing markets. F i r s t and foremost i s the consumer of housing services. He may be an owner or a renter of any type of unit. It i s assumed that he wishes to maximize u t i l i t y subject to his budget constraint. U t i l i t y i s a function of housing services and a composite good. Housing services include both a consumption motive and an investment motive. The bundle of housing services i s composed of physical attributes of the s i t e and improvements, neighbourhood at t r i b u t e s , e x t e r n a l i t i e s present, access and public sector c h a r a c t e r i s t i c s . 3 The above leads to a demand schedule for housing services that 4 i s downward sloping and quite e l a s t i c . Aggregating i n d i v i d u a l households' valuation of the services provided by the available housing stock leads to the market demand for housing services. Consumer preferences primarily determine the shape of the curve while i t s l e v e l i s dependent on population c h a r a c t e r i s t i c s and the income d i s t r i b u t i o n . The demand for housing services i s one component of the 35 demand f o r housing u n i t s ; the other component b e i n g investment investment component) f o r the r i g h t to consume housing s e r v i c e s equal to the c a p i t a l i z e d value of the flow of s e r v i c e s a n t i c i p a t e d over the p e r i o d of occupancy. A l l households form a p a r t of the demand f o r housing s e r v i c e s s i n c e consumption of p a r t of the aggregate flow i s c o n t i n u a l l y o c c u r r i n g . I f the household decides to change.the q u a n t i t y , q u a l i t y or l o c a t i o n of housing 5 s e r v i c e s consumed, i t w i l l move. However, the m a j o r i t y of the demand f o r housing s e r v i c e s comes from the non-movers. T h i s , of course, i s t r u e because a t any p o i n t i n time the number of mobile households i s g r e a t l y outnumbered by immobile households. Since housing i s durable, the consumer w i l l a l s o base h i s b i d on the a n t i c i p a t e d proceeds to be r e c e i v e d from the f u t u r e s a l e of h i s house (the investment component). Consumers w i l l be w i l l i n g t o make a payment over and above the v a l u a t i o n of the flow of s e r v i c e s i f they expect market value to r i s e i n the f u t u r e . Of course, the converse i s a l s o t r u e . I f consumers expect market value to f a l l they w i l l d i s c o u n t t h i s payment. Value can be represented i n the standard d i s c o u n t e d cash-flow demand. A consumer w i l l b i d an amount (not y e t c o n s i d e r i n g the format: n r Net Present Value=, (Benefitsi-Costs-)+Market Value-Transaction 1 Costs^ i=l ( l + j ) 1 ( l + j) n where j r e p r e s e n t s the p e r s o n a l d i s c o u n t r a t e . 36 The above shows that a household's bid for housing units will.be a function of t h e i r measurement of benefits and costs, expectations about the future and t h e i r discount rate. When successful bids for available units are aggregated, the r e s u l t a i s the demand schedule for housing units. The supply schedule for housing services i n developed neigh-bourhoods i s quite i n e l a s t i c and i n any neighbourhood i s essenti-a l l y fixed i n the short run. This follows from the durable and immobile nature of the housing unit. Only a small proportion (usually less than three percent) of new units are produced i n a given year because structures are durable. I t also takes a considerable amount of time to construct a new unit. So with short-run supply fixed, the l e v e l of u t i l i z a t i o n of the available stock w i l l r e f l e c t changes i n the demand for the supply of housing services i n the short-run. Figure 3 shows how supply and demand in t e r a c t to determine pr i c e . The average price l e v e l i n turn, w i l l determine the rate of production of new units as well as the turnover rate of ex i s t i n g units. Since i t i s the t o t a l volume of housing units (whether traded or not) combined with t o t a l demand that determines market price, the price of new units derives from the average prices (both actual transactions and imputed prices) of the standing stock rather than vice versa. This i s the stock-flow model of price determination (so-called because the price of the stock determines the price of the flow and the number of new units constructed). The stock-flow model 37 FIGURE 3 THE SUPPLY & DEMAND FOR HOUSING UNITS P r i c e per u n i t Average P r i c e Po Supply of housing u n i t s |Qo Quantity a v a i l a b l e Demand f o r .housing u n i t s Quartfity of u n i t s 38 has never been v e r i f i e d empirically yet i t has conceptual usefulness as a short-run model. There are two other models of housing price determination that should be noted. The marginal cost p r i c i n g model views.housing prices as being set'by the intersection of the supply (equal to the marginal cost) and demand for new housing. In other words, the flow of new housing determines the price of the exis t i n g stock. This i s the opposite mechanism to the stock-flow model. The major implication of the marginal cost model i s that replacement costs matter; i f lower housing prices are desired then the prices of the factors of production (materials, overhead, financing, labour, p r o f i t s , land) must be reduced. David Nowlan (1977) developed a dynamic model of price determination which synthesized the best features of the two foregoing models. In addition to the interplay between new demand and new supply, and the given e x i s t i n g supply and a price-responsive ex i s t i n g demand, he introduced the notion of ef f e c t i v e demand which i s derived by adding (or subtracting) the excess (or shortage) of existing demand to new demand. The re s u l t i s a more r e a l i s t i c conceptual model. Its greatest drawback i s i t s complexity i n both verbal and graphical description. Consequently i t i s f e l t that one of the preceding two simple models w i l l better serve to i l l u s t r a t e the concepts to be presented below. With regard to choosing between the stock-flow and marginal-cost p r i c i n g models, i t i s believed that i n Canada, the stock of exi s t i n g housing i s more important than the new supply and thus 39 the stock-flow model should be used. For example, one of the assertions of t h i s research i s that i n Canadian c i t i e s , residents prefer older housing near the core to newer housing i n the suburbs. Further evidence i s provided by the recent history of the l o c a l Vancouver housing market. Over the 1976-77 period, there was a glut of new single-detached homes and condominiums 7 on the market which implied that prices should be f a l l i n g i n both new and e x i s t i n g markets by the marginal-cost p r i c i n g model. Such a decrease i n prices has not been observed. For these reasons, i t i s believed that the stock-flow model, despite i t s g shortcomings and l i m i t a t i o n s , i s the most applicable and useful model to use i n the present research. The stock-flow model has two important implications regarding c a p i t a l flow into the housing market. One i s that since housing units are immobile and durable, and i t i s not possible to store the flow of housing services, h i s t o r i c a l costs haven't any relevance and new investors and consumers w i l l bid according to t h e i r future expectations. The second relates to the process whereby new housing units are added to the stock. Developers too, respond to current and expected market prices but they also must pay heed to current and expected development costs. Their aggregate response to revenues and costs of development (appropriately discounted to the present) determines the quantity of units that w i l l be added to supply i n any period. In other words, an i n d i v i d u a l developer makes an investment decision based on the anticipated s e l l i n g price of new units less construction costs, financing costs, overhead, p r o f i t , and the price of land. 40 If land i s not available at a price that allows a normal p r o f i t , 9 development w i l l not occur. Figure 4 graphically i l l u s t r a t e s and summarizes the above. I n i t i a l l y new units are constructed at an average price p^. An increase i n the demand for housing w i l l bid up ex i s t i n g house prices to and new units w i l l be constructed to add to the available supply. If other costs remain constant, land prices w i l l be bid up i n response to competition by developers so that any excess p r o f i t i s bid away. The implied causality of the figure and the model has a serious flaw for the present purposes. Expectations with regard to new construction costs can work back to a f f e c t expectations about the value of the e x i s t i n g stock. Thus, i f expected marginal cost were r i s i n g , then demand for the standing stock should r i s e . : A l t e r n a t i v e l y , i f marginal cost f a l l s (as a r e s u l t of freeways dumping cheap land on the market for example), then stock demand should f a l l . ^ The fact that expectations about marginal costs do a f f e c t stock demand must be kept i n mind. To recap the model, there i s a housing stock that i s caused by the consumer mentioned e a r l i e r (and of course he may have an investment motive for doing so) or by the investor who rents out units presumably i n order to receive a p r o f i t (earn a return greater than his cost of c a p i t a l ) . The value of a unit of the stock i s the net c a p i t a l i z e d value of the future flow of benefits as perceived by consumers and investors. In new decisions the bid price w i l l be based on future expectations. Developers may decide to add new units to the ex i s t i n g stock. This may be done FIGURE- 4-THE STOCK - FLOW MODEL Average P r i c e p e r U n i t Average P r i c e p e r U n i t P2 PI S l S2 =Si+q1 Laboui •a, B-Labour fe! ^in#" P r o f i t LAND P r o f i t LAND ,ble Component C o s t s M a r g i n a l Supply-Curve New U n i t s C o n s t r u c t e d STOCK FLOW Source: Hamilton, S.W., Landlords and Tenants i n Danger -Rent Control i n Canada, p.46 42 either by building new units on vacant land or rereveloping e x i s t -ing areas at a higher density (which might require a rezoning). Thus there are three participants i n the neighbourhood housing market; households, investors and developers. A fourth would be the businessman. He may be active i n either the r e t a i l or service sector. He does not so much a f f e c t the neighbourhood (although the presence of a viable commercial area i s probably a desirable neighbourhood chara c t e r i s t i c ) as the neighbourhood affects him. Without a healthy environment, he can't survive. Influencing the actions of the other participants are the three l e v e l s of government. Each a f f e c t s the neighbourhood by attending to the welfare of the "actors" under i t s j u r i s d i c t i o n . As shown e a r l i e r , even the most well-meaning l e g i s l a t i o n i n intent might have undreamed of neighbourhood repercussions i n impact. Whatever Western nation we are discussing, the federal, state or p r o v i n c i a l , and l o c a l governments influence neighbour-hoods both d i r e c t l y and v i a expectations about t h e i r past behavior. Where past behavior, has contributed to uncertainty about the future, a high degree of r i s k to investment i s present. This naturally leads to decreased s t a b i l i t y of the urban system and to the neighbourhood. Figure 5 demonstrates the importance of government and expectations i n the change process and acts as a summary to t h i s section. The Generalized Expectations Model The model developed here i s b a s i c a l l y an extension of the St. Louis arbitrage model. The participants that influence the neighbourhood have already been b r i e f l y discussed. Now l e t the 43 focus return to households for the model r e l i e s on the nature of household preferences and expectations. Any household considering a move w i l l compare the prices on close substitutes with the value i t places on i t s own units. Re-c a l l that the value to the household i s the present value of net benefits expected from the dwelling that i t currently occupies and that t h i s value represents the family's appraisal of the c o l l e c t i v e value of a l l the elements i n i t s housing bundle; including the c h a r a c t e r i s t i c s of the property today as well as 12 i n the future. . Most studies addressing the question of mover behavior have done so i n a household u t i l i t y maximization frame-work. It can be shown that i n a world with two types of goods; housing services and a vector of a l l other goods, that a necessary condition of u t i l i t y maximization i s that the r a t i o of the marginal u t i l i t y of housing services to the .price of housing services must be equal to the r a t i o s of the marginal u t i l i t y of a l l other goods to t h e i r respective p r i c e s . This represents a state of equilibrium. However any change i n household character-i s t i c s , such as size or family income, or i n the housing bundle, such as adverse neighbourhood e f f e c t s , would cause d i s e q u i l i -brium. A pos i t i o n of disequilibrium could also be reached i f the r e l a t i v e prices of any of those commodities contained i n the u t i l i t y function change. Even i n a po s i t i o n of d i s e q u i l i -brium, a household may not move due to the presence of trans-actions costs (both tangible and inta n g i b l e ) . Those costs can be s i g n i f i c a n t and a f f e c t the decision to move such that: "a move might be expected i f adjustment costs are exceeded by the FIGURE 5 A SIMPLIFIED VIEW OF THE PARTICIPANTS ( IN THE NEIGHBOURHOOD CHANGE PROCESS GOVERNMENTS BUSINESS •EXPECTATIONS Increased or constant d e s i r a b i l i t y and decreased r i s k Decreased d e s j j j g b i l t y i n c r e a s e d r i s k 45 expected losses due to the disequilibrium s i t u a t i o n " . (Boehm and Mark, 1979, p.3). If t h i s condition i s met, and households do move, the r e s u l t i s a s h i f t i n supply between housing submarkets. Of course, a demand s h i f t also occurs. A change i n the housing bundle (for example, lega l i z e d conversion) so that the neighbourhood can serve other residents i s another way i n which supply can s h i f t . The mechanism of s h i f t i n g supply i s known as the arbitrage process. Its most important feature i s that expectations as to the future nature of housing bundles may a l t e r the housing bundle c h a r a c t e r i s t i c s of a l l units i n the neighbourhood, bringing about a change i n the preference rank of these units and thus change prices and occupancy. I t i s the main contention of t h i s thesis that s h i f t s i n the demand schedule for housing units are p a r t i a l l y determined by expectations and i n turn the s e n s i t i v i t y with which expectations are revised i n the face of change i s due to previous 13 (harmful) government a c t i v i t y i n housing markets. Changes i n  demand are matched by supply (bringing arbitrage into play). An I l l u s t r a t i o n In a s i m p l i f i e d world with only two types of households, the process would appear as follows. Assume one set of house-holds i s characterized as those who are able to compete for but not necessarily achieve t h e i r preferred form of housing (Type A) and the other as those who are not able to compete for housing -(Type B). This preferred form of housing may be either new or used, rental or ownership. Further assume that each type comprises a d i s t i n c t housing submarket. Note that there i s n ' t 46 any presumption of segregation by income l e v e l or race. It i s conceptually possible but uncommon to have some A's l i v i n g i n 14 i n f e r i o r housing to the B's. Both groups vary i n t e r n a l l y with regard to t h e i r a b i l i t y and willingness to compete. To the extent that they are able, households w i l l s h i f t i n response to changing market conditions. Prices w i l l depend upon the available stock of housing r e l a t i v e to the number of house-holds i n each group. If there i s an increase i n the demand for low-priced accommodation (for example brought about by the demolition of substandard housing or by increased immigration), i t w i l l have the following impact. In the short-run, increased demand w i l l bid up the price of the formerly lowest priced accommodation. Once the price exceeds the average price l e v e l e x i s t i n g at the boundary of a t y p i c a l neighbourhood composed mainly of Type A occupants, there w i l l be a supply response from the A's (who l i v e among or closest to a neighbourhood with mainly Type B occupants) to take t h e i r p r o f i t (arbitrage the excess) and move to another neighbourhood. It i s here that expectations  e x p l i c i t l y enter the model. In the St. Louis model, the whole boundary s h i f t s into areas that formerly commanded a premium for t h e i r location, causing income to decline and placing downward pressure on property values i n the immediate area. The lower income implies declining maintenance and deteriorating housing. Expectations of a continuing declining trend i n prices and values (brought about by a decrease i n demand) force the boundary to keep s h i f t i n g . "High income" people f l e e to the suburbs u n t i l the central c i t y 47 has a massive oversupply of deteriorated and abandoned housing. The introduction, and e a r l i e r chapters, have outlined the role of government i n t h i s process. Investors, discounting prices i n central locations due to the higher r i s k that has been pa r t l y 15 attributed to government actions, refuse to invest. This leads to a s e l f - f u l f i l l i n g prophecy and decline continues. Note that i t i s the r e l a t i v e merit of the central c i t y as an area i n which to invest (which i n turn was influenced by expectations) that led to decline. In the model posited here, households s h i f t without a massive d i s l o c a t i o n of any boundary. A boundary, could only s h i f t i f a large majority of households held the same negative expectations about the future. Under conditions of less uncertainty (such as 16 i n Canada), where prices and values are expected to at least keep up with i n f l a t i o n and where i t i s not expected that govern-ment actions w i l l lead to a c a p i t a l loss, the r e s u l t i s much d i f f e r e n t . The Type A households who have chosen to move under the conditions c i t e d above bring about an increase i n demand for housing units. As a consequence, prices r i s e and the development industry w i l l meet some of the demand by constructing new housing i n the suburbs at that p r i c e . But at some point, the higher prices and the preferred central c i t y location make i t p r o f i t a b l e to arbitrage - that i s , some of the A's (who now include developers) w i l l seize the opportunity to outbid the B's for what were previously undesirable locations. There, they w i l l invest i n the renovation or r e h a b i l i t a t i o n of e x i s t i n g units, or i n the construction of new units. Lenders (who i n the States contributed ( 48 to area decline by witholding funds) are w i l l i n g to advance funds for such purchases because they share the same set of favourable expectations. Thus, the process of t r a n s i t i o n that has been described as arbitrage can r e f l e c t the conversion of housing stock to occupancy by households of higher as well as increasingly lower economic status. Different households require d i f f e r e n t price d i f f e r e n t i a l s before they w i l l arbitrage; implying a process of neighbourhood change that i s very slow. The moving behavior of these households, and i t s resultant impact on the non-movers, ensures that investment and reinvestment w i l l continually be occurring i n a given neighbourhood. . This i n turn, contributes to the s t a b i l i t y of the neighbourhood. The basic difference i n outcomes under the two scenarios may be attributed to d i f f e r i n g sets of expectation. Summary This chapter has extended the St. Louis arbitrage model by developing i t i n a stock-flow framework and by u t i l i z i n g a broader set of expectations hypothesized to be influenced by d i f f e r e n t l e v e l s of government intervention. The roles of the participants i n the neighbourhood change process were outlined, the operation of the housing market was described, and the mobility of households was examined to provide support for the above. The model was seen to r e l y on the influence of expecta-tions on the l e v e l of the demand schedule for housing units which in turn induced supply s h i f t s . I t was shown how i n the t y p i c a l American case, demand for low-priced housing bid up prices to a point where i t became p r o f i t a b l e . f o r households i n a previously 49 "premium" area to add units to available supply - the arbitrage motive, causing a s h i f t i n occupancy to occur. Uniform negative expectations by residents can set i n motion a continual encroach-ment into the premium areas and a ref u s a l to invest i n or near the affected areas. The r e s u l t was decline and a massive over-supply of cheap housing, often abandoned ( r e f l e c t i n g the lack of demand for these areas). In the opposite case, under posi t i v e expectations, an oversupply of less desirable housing with a correspondingly lower price was shown to trigger a gradual movement of households and investment d o l l a r s to i t s location. The r e s u l t i s maintained s t a b i l i t y or a change rowards s t a b i l i t y . The following chapter w i l l serve to c l a r i f y the model just described by using the stock-flow framework to i l l u s t r a t e a p a r t i c u l a r example of the model i n operation. Several implications of the model, p a r t i c u l a r l y the importance of investment and reinvestment, have been alluded to above, and these w i l l be e x p l i c i t l y stated. The concluding section w i l l d e t a i l the empirical tests that should be made i n support of the model. The o v e r a l l intent of the chapter i s to forge the l i n k s between the model and i t s implications, hypotheses and t e s t s . 1. This i s described by Bourne (1978) as the "unintended" po l i c y hypothesis. Bourne notes that: "These p o l i c i e s were designed to achieve other results and objectives, such as transportation improvements, but when combined have had the side e f f e c t of creating or accelerating many of the t r a d i t i o n a l inner c i t y problems." p.36. 50 2. This set of expectations was described i n Chapter 1. B r i e f l y , they relate to the e f f e c t that such p o l i c i e s as urban transportation, renewal, development, and public housing have on the expectations of participants i n the housing market with r e s u l t i n g increase or decrease of uncertainty i n the market process. These are manifested by trends i n housing prices and values, and i n expected investment r i s k . 3. The following discussion about the workings of housing markets and the stock-flow model i s drawn from a r t i c l e s by David Nowlan (notably 1977) and S.W. Hamilton (notably 1975). 4. Empirical studies on the price e l a s t i c i t y of demand for housing (De Leeuw, F., "The Demand for Housing: A Review of Cross-Sectional Evidence," Review of Economics and  S t a t i s t i c s , 53, 1, pp. 1-10) have arrived at values of approximately -1. 5. Section 2 takes a more detailed look at moving behavior. 6. The discount rate i s p a r t i a l l y determined by the amount of r i s k perceived to be inherent from government actions. 7. Canadian Housing S t a t i s t i c s , 1976-1978. 8. These w i l l be detailed wherever appropriate. 9. In the stock-flow model, land i s viewed as a residual with the price of housing determining the price of land. Another important feature i s construction and development costs are said to s i g n i f i c a n t l y e f f e c t the price of new housing; rather these costs determine the rate at which new units are added. 10. My thanks to M.A. Goldberg for making t h i s point. 11. This same analysis could be carried out focussing on the consumers of business services rather than the supplier. 12. Two excellent examples are Fredland (1974) and Kain and Quigley (1975). 13. Forms of harmful government a c t i v i t y (actions that reduce the d e s i r a b i l i t y of a neighbourhood) were discussed i n Chapter 1.- B r i e f l y , urban transportation, renewal, development and public housing p o l i c i e s i n the U.S. were seen to sometimes cause massive disruptions i n the neighbourhood with concommitant f a l l i n g prices and increased r i s k . 51 14. An example would be the household (Type B) whose wealth mainly consists of t h e i r home. They would not l i k e l y be w i l l i n g to s e l l to a Type* A household for market value, even i f i t were the preferred bundle for the l a t t e r , because the presence of transactions costs would make i t d i f f i c u l t to maintain or increase t h e i r housing services i n the event of a sale. 15. Government actions negatively a f f e c t expectations when residents of and investors i n central c i t i e s , based on a history of ongoing highway improvements and the a l t e r a t i o n of the character of t h i e r neighbourhood through such neans as urban renewal and public housing, come to expect decreased demand and f a l l i n g p r i c e s . 16. The noted differences are of course largely endogenous to the model. 17. The r e d l i n i n g phenomenon was c i t e d i n Chapter 1. Todd et a l (1976) provide an excellent discussion. 52 CHAPTER 4 THE MODEL IN OPERATION An Example It may be informative to study the operation of the model i n d e t a i l as i t relates to a s p e c i f i c example i n order to elaborate upon some of the concepts presented i n the previous chapter. Suppose there i s an increase i n demand for rental accommodation so that the l o c a l government decides to rezone a single-family area to multi-family use. With single-family housing no longer the highest and best use (assuming there i s demand for the new use i n t h i s s p e c i f i c area), developers w i l l buy up properties i n the rezoned areas and demolish the single-family houses (remove them from the stock). In t h e i r place, new units w i l l be con-structed at a higher density. The developer behavior i n determining the t o t a l quantity of new units constructed and the rate at which t h i s construction occurs was described i n Chapter 3. B r i e f l y , "the decision to invest new c a p i t a l . . . i n the development of new units w i l l be based on the discounted value of expected market values (or rents) and the current costs of development and/or a c q u i s i t i o n and operation." (Hamilton, 1975, p.53). The stock-flow model predicts that increasing the stock of units has l i t t l e e f f e c t on e x i s t i n g price l e v e l s i n the short-run. In the long-run, an equilibrium s i t u a t i o n between quantity of units demanded and quantity supplied i n the rental and ownership sub-markets (these tenure sub-classes have been combined for s i m p l i c i t y i n the diagram) should occur. 53 The above considerations are presented graphically i n Figure 6. The increase i n demand to 1 leads to the construction of new units at a cost p^. The net impact i s a s h i f t to the rig h t i n the supply schedule to S H'. The c i a l question now i s : How do expectations a f f e c t the demand for housing schedule around the rezoned area during and afte r the addition of the new units to the stock? It has been argued that i n the Canadian setting., the e x i s t -ing residents' expectations about the continued v i a b i l i t y of th e i r neighbourhood do not necessarily a l l change. They do not automatically expect further dislocations i n the housing stock. It may be true that some residents w i l l perceive the new use to lower the u t i l i t y of t h e i r housing bundle. If the costs of moving are less than t h e i r expected loss of u t i l i t y , then these households w i l l chose to move. However, t h e i r place may be taken by others who don't hold similar expectations. The demand for housing schedule might remain at ' which would i n f e r that prices at least remain stable and possibly r i s e , and that there should be l i t t l e change i n investment behavior. In the U.S. setting, the zoning change would probably be viewed as a harbinger of things to come.1 Residents of the central c i t y adjacent to the future apartment zone would l i k e l y expect t h e i r property to be devalued because of uncertainty about i t s future use. The greater the uncertainty, the higher the personal discount rate. Conditioned by the past history of continued government intervention i n the housing market (detailed i n Chapter 1), at f i r s t a few, and l a t e r many inner c i t y residents • FIGURE 6 THE CANADIAN SETTING Average P r i c e per U n i t Average P r i c e per U n i t FIGURE 7 THE EFFECT OF NEGATIVE EXPECTATIONS ON THE STOCK IN THE SHORT RUN Average P r i c e per U n i t A v a i l a b l e Supply 55 would expect a u t i l i t y loss greater than moving costs and thus decide to relocate i n an area promising greater s t a b i l i t y (probably i n the suburbs). The demand schedule would begin to f a l l from D ' as shown i n Figure 7. Prospective residents would be more l i k e l y to hold these same expectations and choose not to move i n at a l l or require a considerable discount to the previous o f f e r i n g price as an inducement to move. Prospective residents of the new apartments see the owner occupiers " f l e e i n g " and t h i s makes the area less desirable to them. I t also further serves to depress the demand schedule. The probable end r e s u l t i s the schedule for housing demand w i l l f a l l to a l e v e l such as D^" and there w i l l be an excess quantity of housing supplied for the available demand. These occurrences would be manifested by f a l -l i n g prices to p' 1 and lowered investment and reinvestment l e v e l s . If a l l the above leads to residents developing uniform negative expectations about the neighbourhood, demand w i l l weaken further and a complete boundary s h i f t i n occupancy can occur. S i m i l a r l y for businesses, increased density should lead to increased demand for t h e i r services which w i l l , under unchanged expectations and per capita spending power lead to other firms entering the market to bid away the excess p r o f i t . This i s shown diagramatically i n Figure 8. I n i t i a l l y , the demand for businesses and the supply businesses are i n equilibrium with Bo businesses earning an average rate of return R. The increase i n demand to D ' raises the rate of return to these firms which i n turn a a t t r a c t s new firms u n t i l the rate of return i s lowered to i t s o r i g i n a l l e v e l . The r e t a i l sector w i l l now contain an increased 56 FIGURE 8 THE RESPONSE OF THE BUSINESS SECTOR TO CHANGE number of firms (B 1). However, i f the business sector has > 2 unfavourable expectations about the change, the increased rate of return w i l l be perceived as merely compensating for the greater r i s k involved. New firms are un l i k e l y to enter and some exist i n g firms may i n fact leave. The number of businesses w i l l remain the same, or possibly decrease to B''. Implications The foregoing has several implications for households, investors, businessmen and developers. It has been seen that under expectations of neighbourhood.stability and concommitant investment safety, that r e a l price lev e l s should be stable or increasing either with respect to a reference neighbourhood or to the neighbourhood at some point i n time. I t has been pre-dicted that the r e t a i l i n g sector of the neighbourhood would expand. Turnover rates should generally remain constant i n a si t u a t i o n of s t a b i l i t y as opposed to decline. The a b i l i t y to absorb change might r e s u l t i n a greater d i v e r s i t y of buildings and households i n an i n d i v i d u a l neighbourhood. There might be more neighbourhood a c t i v i s i m and a sense of community. This i n turn might r e s u l t i n more b e a u t i f i c a t i o n projects and community f a c i l i t i e s . F i n a l l y i t would be expected that investment and reinvestment behavior would be greater i n a more stable environ-ment . This l a t t e r can e a s i l y be shown using an investment analytic approach. The f i r s t section of Chapter 3 presented a formula for the net present value of housing services. S i m i l a r l y the net present value of housing maintenance over the l i f e of 58 of the property can be represented by: Net Present Value of Maintenance Benefits of Maintenance.- Cost of Maintenance. 1 1 i = l where j = cost of c a p i t a l or discount rate. A stable area w i l l have a lower discount rate because of i t s lower r i s k and thus more funds would be available for investment. Looking at i t from a d i f f e r e n t angle, i f the household has po s i t i v e expectations about the future of the dwelling unit and neighbourhood, and expends the same amount on maintenance as a household i n a r i s k i e r area, c e t e r i s paribus i t w i l l receive a larger t o t a l amount, of benefit. Consequently i t i s more l i k e l y to maintain or increase expenditures. Reinvestment behavior w i l l l a t e r serve as the main proxy for household expectations, and.thereby expectations i n general. Due to i t s importance i n the model, and i t s p a r t i c u l a r relevance to the impact of the change to be studied l a t e r , expected reinvestment behavior i n the l i g h t of an upzoning w i l l be examined below. 4 Maintaining Single-family Property Some reservations have been expressed about allowing multi-family housing i n single-family areas. The fear i s that e x i s t -ing property owners and future investors i n these areas w i l l be encouraged to l e t properties deteriorate i n a n t i c i p a t i o n of i t s future redevelopment or because of i t s perceived downranking i n 59 v a l u e (and s a t i s f a c t i o n ) . The d e t e r i o r a t i o n t h a t c o u l d o c c u r i s o f two t y p e s ; d e t e r i o r a t i o n o f i n d i v i d u a l u n i t s w i t h i n n e i g h b o u r h o o d s a n d d e t e r i o r a t i o n o f n e i g h b o u r h o o d s . D e t e r i o r a t i o n r e s u l t s when t h e b e n e f i t s d e r i v e d f r o m m a i n t e n a n c e o f a p r o p e r t y no l o n g e r e q u a l o r e x c e e d t h e c o s t o f t h a t m a i n t e n a n c e . T h i s c a n be s e e n b y r e f e r r i n g b a c k t o t h e f o r m u l a o n p a g e 5 8 . Once t h e i n c r e m e n t a l f l o w i n t h e . i t h y e a r i s n e g a t i v e , n e t p r e s e n t v a l u e i s b e i n g r e d u c e d . T h e r e a r e two b a s i c ways i n w h i c h t h e b e n e f i t s o f m a i n t e n a n c e c a n b e m e a s u r e d . The f i r s t i s t h e g r a t i f i c a t i o n w h i c h i s d e r i v e d f r o m t h e u s e a n d e n j o y m e n t o f t h e i m p r o v e m e n t p r o d u c e d , a n d a p p l i e s t o b o t h r e n t e r s a n d o w n e r - o c c u p i e r s . The s e c o n d i s t h e i n c r e a s e d i n c o m e w h i c h i s d e r i v e d f r o m s e l l i n g o r r e n t i n g an i m p r o v e d p r o d u c t . The v a l u e o f t h e i m p r o v e m e n t w i l l u l t i m a t e l y be d e c i d e d b y t h e u s e r a n d c o m p e t i t i o n , a n d w h a t t h e u s e r i s w i l l i n g t o f o r e g o i n o r d e r t o e n j o y t h e b e n e f i t s o f t h a t i m p r o v e m e n t . T h e r e a r e a l s o two b a s i c c o s t s t o i n c l u d e . T h e s e a r e t h e m o n e t a r y o u t l a y a n d t h e l a b o u r o u t l a y r e q u i r e d t o p r o d u c e t h e i m p r o v e m e n t . N o t e t h a t t h e c o s t o f m a i n t e n a n c e i s g e n e r a l l y i n c u r r e d a t t h e t i m e work i s p e r f o r m e d w h i l e t h e b e n e f i t i s r e c e i v e d o v e r t h e l i f e o f t h e i m p r o v e m e n t . I f t h e h o u s e h o l d h a s n e g a t i v e e x p e c t a t i o n s a b o u t t h e f u t u r e o f t h e p r o p e r t y ( t h u s r e d u c i n g t h e e x p e c t e d p e r i o d o v e r w h i c h b e n e f i t s w i l l be r e c e i v e d ) a n d t h e n e i g h b o u r h o o d , t h e t o t a l amount o f b e n e f i t i s d e c r e a s e d w h i l e t h e c o s t w o u l d r e m a i n t h e same. The r e s u l t w o u l d be 60 decreased expenditures on maintenance. To summarize the foregoing, investment and reinvestment behavior.is important i n the model because the demand for housing i s not only manifested by purchases or rentals i n the market for r e s i d e n t i a l space but also i n the outlays for repair, maintenance, alternation and improvement of the ex i s t i n g stock. Taken together, these almost equal expenditures for new housing. I t i s possible for reinvestment expenditures to exceed the o r i g i n a l construction cost over the l i f e of the improvement. Thus, important insight into market dynamics can be gained that could otherwise only be inferred from data on rents, prices, and home building a c t i v i t y . It has been seen that people care about the neighbourhood i n which they l i v e as well as t h e i r housing unit. If they perceive t h e i r neighbourhood to be downranked i n some way, then there i s incentive to seek housing elsewhere. If an immediate move i s not possible, a l o g i c a l response i s to cut back maintenance investment. S i m i l a r l y for landlords faced with tenants anxious to move out of a neighbourhood, these investors would be unwilling to maintain th e i r properties. Once some owners reduce maintenance or reinvestment standards, the r e s u l t i s that other's may perceive the neighbourhood to be further downranked and they too w i l l lose incentive to invest i n property maintenance, further leading to decline.^ The previous sections have presented various outcomes predicted by the model for the neighbourhood. Several of these are not e a s i l y quantifiable, such as neighbourhood a c t i v i s i m or d i v e r s i t y of the building stock. However others may be stated 61 as e x p l i c i t h y p o t h e s e s : 1. A n e g a t i v e r e v i s i o n o f h o u s e h o l d e x p e c t a t i o n s w o u l d be r e f l e c t e d a f t e r a s u i t a b l e l a g b y a. d r o p i n r e i n v e s t m e n t ( m a i n t e n a n c e a n d r e n o v a t i o n ) e x p e n d i t u r e s . 2 . I n c r e a s e d r e s i d e n t m o b i l i t y (as r e f l e c t e d b y i n c r e a s e d t u r n o v e r r a t e s ) i s a n i n d i c a t o r o f n e g a t i v e n e i g h b o u r h o o d c h a n g e a n d u n f a v o u r a b l e (and r e v i s e d ) e x p e c t a t i o n s . 3 . I f t h e n e i g h b o u r h o o d c o n t a i n s a r e t a i l s e c t o r , i n c r e a s e s i n d o l l a r v o l u m e o f s a l e s a n d t h e number o f b u s i n e s s e s . s h o u l d r e f l e c t p o s i t i v e e x p e c t a t i o n s a b o u t t h e economy i n g e n e r a l a n d t h e n e i g h b o u r h o o d i n p a r t i c u l a r . 4 . R e a l h o u s i n g p r i c e l e v e l s s h o u l d be s t a b l e o r i n c r e a s i n g i n s t a b l e n e i g h b o u r h o o d s w i t h r e s p e c t e i t h e r t o a r e f e r e n c e n e i g h b o u r h o o d o r t o t h e n e i g h b o u r h o o d a t a n e a r l y p e r i o d i n t i m e . P r i c e s r e f l e c t b o t h h o u s i n g b u n d l e c h a r a c t e r -i s t i c s a n d e x p e c t a t i o n s w h i l e p r i c e c h a n g e s r e f l e c t a r e - r a n k i n g o f t h e h o u s i n g b u n d l e a n d r e v i s e d e x p e c t a t i o n s . The f o l l o w i n g c o n d i t i o n s c a n be u s e d t o c l a s s i f y t h e n e i g h b o u r h o o d . I f P "20, t h e n e i g h b o u r h o o d i s s t a b l e w h e r e a s i f A P < 0 , t h e n e i g h b o u r h o o d w i l l h a v e a t e n d e n c y t o d e c l i n e . P i s a r e a l a v e r a g e p r i c e c h a n g e r e l a t i v e t o a n e a r l i e r p e r i o d i n t i m e , . o v e r a p e r i o d l o n g e n o u g h t o e l i m i n a t e s h o r t - r u n f l u c t u a t i o n s - s a y t h r e e y e a r s . E a c h o f t h e s e f o u r s t a t e m e n t s w i l l be d e a l t w i t h i n t u r n b e l o w . T h e A n a l y t i c a l P l a n I t i s n ' t p o s s i b l e t o d i r e c t l y t e s t t h e m o d e l o u t l i n e d , e a r l i e r b e c a u s e o f t h e d i f f i c u l t y o f m e a s u r i n g s h i f t s i n demand f o r h o u s i n g a n d i t s v a r i o u s c o m p o n e n t s . H o w e v e r , i t i s p o s s i b l e t o p r o c e e d by i n d u c t i v e r e a s o n i n g t o t e s t i t s v a r i o u s i m p l i c a -t i o n s a n d t h e r e b y show t h a t t h e m o d e l h a s n o t b e e n r e f u t e d . A c t u a l m a r k e t d a t a a r e r e q u i r e d f r o m an a r e a t h a t u n d e r w e n t a f o r m o f c h a n g e ( i n t h i s c a s e , a r e z o n i n g ) i n o r d e r t o e x a m i n e t h e r e s u l t a n t i m p a c t i n l i g h t o f t h e p r e d i c t i o n s o f t h e m o d e l . T h i s a r e a a n d t h e d a t a w i l l be d e s c r i b e d f u l l y i n t h e n e x t c h a p t e r . 62 The rationale for the empirical work to be performed i s based on the hypothesis that the neighbourhood change process i s motivated by the e f f e c t of expectations on the demand for housing. A c r u c i a l assumption i s that a l l demand factors except for prices and expectations are viewed as fixed i n the short-run, implying that the d i r e c t i o n of neighbourhood change i s r e f l e c t e d by prices and expectations. The four hypotheses from the previous section can be restated as the following predictions for a stable neighbourhood that has undergone some form of change. The neighbourhood should remain stable i f : 1. reinvestment behavior i n housing remains constant or increases. This would r e f l e c t unchanged or p o s i t i v e expectations. Thus a source of data i s required that w i l l provide both the number of and d o l l a r value for expenditures on maintenance, alte r a t i o n s and additions over time. These home improvements should be tabulated i n a form that w i l l make i t possible to recognize changes in. r e i n -vestment behavior. Later a regression equation w i l l be sp e c i f i e d with price as the dependent, variable and a measure of expectations as one of the independent vari a b l e s . Since reinvestment behavior i s serving as a proxy for expectations, average yearly expenditure per improvement (suitably lagged to r e f l e c t the time i t takes for changed expectations to manifest i t s e l f i n changed investment outlays) should be a s i g n i f i c a n t variable in.the equation. 2. the r e t a i l sector remains constant or increases i n terms of real d o l l a r volume of sales and/or number of businesses. 63 This too would r e f l e c t unchanged or po s i t i v e expectations. A source of data i s required that i s able to provide sales revenue and the number of businesses i n operation over time. These should be tabulated so that i t w i l l be possible to recognize changes i n r e t a i l behavior. Changes i n sales and changes i n the number of businesses over a time period could also be used as a proxy for expectations i n a regression equation. 3. turnover rates remain stable. This would be an indicator of favourable and unrevised 8 expectations. Thus information i s required regarding the number of moves (sales) that take place over a s p e c i f i c time period over a s p e c i f i c area, making i t possible to calculate the turnover 9 rate. These figures should be tabulated i n a manner such that any changes that occur w i l l be recognizable. 4. most importantly, r e l a t i v e average r e a l housing prices remain constant or increase. Data should be gathered over time and by location so that mean prices per area and mean price changes per time period may be calculated, tabulated, and compared to the e a r l i e s t time period. These aggregated forms should i d e n t i f y whether any adverse neigh-bourhood change has occurred. Secondly, i n d i v i d u a l transactions prices w i l l be used as the dependent variable i n a multiple regression equation. If a l l four conditions are met, then i t may be said that expectations have not been unfavourably affected and the impelling factor of decline i s absent. Zero or po s i t i v e neighbourhood change w i l l imply s t a b i l i t y of the area i s maintained. Moreover, 64 the model w i l l not have been contradicted. Appropriate tests of means w i l l be conducted to determine i f the conditions are met. Comparisons of percentage changes before and aft e r the s t r u c t u r a l change (the rezoning) for experimental and control areas w i l l also be examined. One other set of data should be collected; median household income. Previous models of neighbourhood change, have stressed the importance of income change as an impelling f a c t o r . 1 1 I t w i l l be informative to see whether the r e s u l t predicted by income change i s consistent with the outcome predicted by the broader set of expectations variables described e a r l i e r . The above represents the basic means by which the model w i l l be tested. Further insight into the .model could be gained by 12 constructing a reduced form price equation. The price of an i n d i v i d u a l property, per se, does not give any insight into neigh-bourhood change. However, expressing price as a function of these c h a r a c t e r i s t i c s of the housing bundle that contribute to the t o t a l amount of housing services produced (and consequently to the value of the dwelling) such as physical c h a r a c t e r i s t i c s of structure and s i t e , expectations and e x t e r n a l i t i e s do allow several s p e c i f i c hypotheses relevant to the model to be tested: 1. The variables that have been described as proxies for expectation do s i g n i f i c a n t l y contribute to p r i c e . By including (a) average yearly d o l l a r value per expenditure on reinvestment lagged one period (b) changes i n value of r e t a i l sales over a period and (c) changes i n the number of businesses operating, the adjusted multiple c o e f f i c i e n t of determination \ 65 (R ) for the price equation should be improved. Each c o e f f i c i e n t should be s i g n i f i c a n t (and positive) at a given l e v e l as determined by. a t - tes t . 2. The externality cost said to be imposed on surrounding residents by the zoning change i s actually present. In other words, whether any re v i s i o n i n expectations about the v i a b i l i t y of the neighbourhood i s , i n fact, j u s t i f i e d . There are two variables of importance here; the occurrence of the rezoning and the distance from the supposed ex t e r n a l i t y : (a) If the rezoning has any ef f e c t on price of adjoining properties, a dummy variable representing the implementation of the zoning change should be s i g n i f i c a n t (and negative) i n the price equation. The equation's predictive power should be increased by including t h i s dummy variable. If th i s i s the case, then i t may be concluded that rezoning has an impact on surrounding r e a l estate prices independent of other forces operating i n the market. (b) In addition, the greater the distance from the rezoning (externality), the lesser should be i t s negative e f f e c t on pr i c e . Therefore a distance variable should be s i g n i f i c a n t (and p o s i t i v e i n sign) when included as an independent variable. If thi s i s the case, the implication i s that the externality doesn't have a measurable cost. 3. Property values i n a rezoned area increase aft e r the 13 rezoning. This t e s t of t h i s hypothesis i s self-evident. In t h i s case, the dummy variable for the occurrence of the rezoning should be 66 s i g n i f i c a n t (and positive) i n an equation run for the sample of a l l rezoned properties. An alte r n a t i v e means may be to specify an equation for the whole sample using assessed land value per square foot as the dependent variable and including a variable that indicates the l o t was rezoned. This variable should be s i g n i f i c a n t (and p o s i t i v e ) . Chapter 4 has described the model i n the context of a zoning change to a higher r e s i d e n t i a l density. From the d i f f e r i n g out-come predicted by the model i n d i f f e r i n g settings for households, investors, developers and businessmen, several general implica-tions for the neighbourhood about prices, moving behavior, and investment and reinvestment behavior resulted. These were l a t e r stated as e x p l i c i t hypotheses for a stable neighbourhood, a f t e r which i n d i r e c t means of testing the hypotheses were explored. Lastly, the construction of a reduced form price equation allowed the testing of several other hypotheses relevant to the model. In the next chapter, the neighbourhood chosen for intensive study and the data that has been collected w i l l be described. Chapter 6 w i l l present the results of the analysis suggested by the above. 1. This view i s advanced i n Leven et a l , 1976 and i n Peterson, 1974: "single-family homes which are located i n "general r e s i d e n t i a l " d i s t r i c t s , where multi-family structures and boarding houses are permitted, appear to command d i s t i n c t l y lower market values than comparable houses i n single-family r e s i d e n t i a l d i s t r i c t s . . . i t i s impossible to determine from the sample how much of t h i s negative influence on single-family home values i s due to ex t e r n a l i t i e s from parcels actually i n multi-family use and how much, i f any, i s due s o l e l y to the uncertainty introduced by zoning authorization, (emphasis mine) pp.13-14. From Leven et a l (p. 166). "Zoning 67 regulations that were designed to improve r e s i d e n t i a l s t a b i l i t y may i n fact hasten the t r a n s i t i o n from high to lower income families i n inner c i t y areas." 2. For example, i f the business sector expects that the change w i l l cause an occupancy s h i f t to lower income r e s i d e n t s ^ i n the e x i s t i n g single-family homes or that the residents of the multi-family units represent a d i f f e r e n t demographic group. 3. This i s thought to be true because, as was mentioned e a r l i e r , i f expected losses due to a disequilibrium s i t u a t i o n exceed adjustment costs, a move might be expected. One of the major causes of disequilibrium i s changes i n the housing bundle, and these would be prevalent i n a declining neighbourhood. Of course, i t should be noted that turnover rate can be a misleading indicator. Abandoned houses would show a low (zero) turnover rate. High turnover might just indicate one generation moving to be replaced by functionally s i m i l a r households of younger generations. However, i t i s more l i k e l y that such "replacement" would occur gradually over time. 4. This.section draws upon a 1976 report produced by Western Realesearch. 5. Grigsby (1967) notes that deterrents to higher expenditures i n the marginal and declining sectors include: low incomes, a low preference for housing among part of the population, shelter i s too expensive ( i . e . price too high) and deficiences i n public services and community f a c i l i t i e s . 6. Astute competitors might buy. up such d e r e l i c t properties i f they have a d i f f e r e n t set of expectations. 7. It i s believed that such short-run fluctuations as changes i n the general business cycle, changes i n f i n a n c i a l ( p a r t i c u l a r l y mortgage) markets, and p o l i t i c a l uncertainty should average out over three years. 8. As indicated e a r l i e r , t h i s interpretation must be made with caution. 9. Note that what i s important here i s not whether the turnover rate i s large or small by some a r b i t r a r y standard but rather whether i t i s f l u c t u a t i n g over time. 10. It i s possible that under asset revaluation, for example, that general price r i s e s could more than I 68 outweigh decreasing r e a l prices i n an area undergoing downward change, giving the impression that prices are r i s i n g i n t h i s area. Where such an occurrence i s a p o s s i b i l i t y i n the sample period, the study neigh-bourhood^) should be compared to a reference neigh-hourhood as discussed e a r l i e r . Over the 1955-1966 period, such revaluation was not thought to take place and t h i s procedure was not necessary. 11. It i s always d i f f i c u l t to know i f income change i s the ef f e c t or the cause. 12. A general description of multiple regression techniques using price as the dependent variable and the various problems with t h i s approach w i l l be detailed when the results are presented. 13. This hypothesis i s consistent with the findings of T u n n i c l i f f e (1975) for Vancouver where one of his res u l t s was that rezonings from duplex (RT-2) to medium-density apartments (RM-3) led tc large increases i n property values. However, i t must be noted that other types of rezonings ( T u n n i c l i f f e found that rezoning medium-density apartments (RM-3) to medium-density commercial (C-2) led to a s i g n i f i c a n t decline in property values) may have the opposite e f f e c t . Thus, t h i s i s a s p e c i f i c hypothesis of the study rather than a generalization. 69 CHAPTER 5 THE RESEARCH DESIGN The Setting Now that the general model has been sp e c i f i e d , i t i s necessary to choose an area that has undergone some change i n i t s structure due to the d i r e c t intervention of government. It has e a r l i e r been argued that the history of intervention i n land markets, and i t s resultant e f f e c t on prices and values, influences the expectations of the residents and t h e i r reaction to st r u c t u r a l change. In Canada, given the favourable past, one should f i n d that such a change would have l i t t l e or no negative e f f e c t on expectations, and hence prices and the s t a b i l i t y of the area. Any type of large-scale government action on a neighbour-hood such as designating i t for urban renewal, or constructing a freeway through i t , or building public housing properties would have served to make the neighbourhood e l i g i b l e for further study. Given the paucity of such occurrences i n Vancouver; a convenient location for the study to be performed, an alternate stimulus was needed. Zoning i s a mechanism for r e s t r i c t i n g land uses. I t has been argued that any change i n zoning on an areal basis w i l l have an impact upon the surrounding, non-rezoned properties. Neigh-bours fear declining property values and neighbourhood decay. Thus, a neighbourhood that has experienced a rezoning to a higher use would be suitable as a testing ground. On July 4, 1961, a nine block area of K e r r i s d a l e 1 was rezoned from single-family r e s i d e n t i a l (RS-1) to medium density 70 multi-family (RM-3) use. The action was taken as a r e s u l t of strong demand for well located rental accommodation i n the C i t y . The Kerrisdale location was chosen as a r e s u l t of an August, 1958 report by the Vancouver Technical Planning Board to C i t y Council. In t h i s report, i t was recommended that serious consideration be given to decentralizing higher, density residences away from the West End apartment zone. Suggestions were made as to s p e c i f i c areas that might be suitable for rezoning. After additional study by the Planning Department of the C i t y of Vancouver and a lengthy process of public hearings (the l a s t one held on May 15, 1961 i n which surrounding residents had voiced much opposition to the encroachment of t h e i r neighbourhood), two areas were eventually rezoned. One of the newly-rezoned areas, located at Fraser Street and East 43rd Avenue which i s not a prime residentia 2 area, never gained market acceptance. However the Kerrisdale rezoning, which extended the e x i s t i n g multiple family zone north of 39th Avenue and south of 43rd Avenue, was an instant success. Figure 9 shows the extent cf the newly rezoned area. Developers were quick to buy up the propertie i n t h i s area and apartment construction was fa s t and furious from 1962 to 1965. Table 1 shows the h i s t o r i c a l development and com-position of the Kerrisdale apartment area to 1972. It can be seen that i n the four year period following the rezoning, 21 high-rise buildings containing a t o t a l of 1055 units were con-structed. Thus, the physical character of the neighbourhood was considerably changed with the extension of the apartment zone and the addition of these high-rises. 71 FIGURE-9 MAP OF THE REZONED EXTENSION, JULY 4, 196l 4 3 " ° A V E 4 4 ' " AVE A V E z i n n r E x i s t i n g Zoning - (RM 3) M u l t i p l e D w e l l i n g D i s t r i c t P r i o r to J u l y 4, 1961 , Proposed and Enacted E x t e n s i o n s to (RM 3) Zoning J u l y 4, 1961., CZJ 7 2 Table 1 KERRISDALE APARTMENT' AREA Year Sites Total Acreage Total Suites High Rise Bldgs Units 1900 1 .47 36 1922 1 . 35 11 1931 3 .56 29 1938 1 .22 6 1945 1 .29 16 1948 2 .56 33 1949 4 .76 58 1950 2 . 33 24 1951 4 .75 42 1952 4 1. 48 79 1953 8 1. 39 81 1954 8 2. 39 103 1955 13 2. 27 137 1956 12 2. 53 149 1957 4 . 87 63 1958 10 3. 51 251 1959 4 1. 04 77 1961 1 . 29 20 1962 10 5.38 386 7 319 1963 11. 6.59 494 4 221 1964 22 10.31 799 8 403 1965 4 2. 73 178 2 112 1967 1 .18 4 1968 1 .19 6 1969 2 .78 66 2 66 1970 1 .28 22 1972 1 . 22 12 136 46.89 3,182 23 1,121 Source: Selected Housing•Characteristics, City of Vancouver Planning Department, 1974 73 At the time of the rezoning, as i t i s today, Kerrisdale was an old, established neighbourhood located i n the southwestern portion of the City. (Figure 10 shows i t s l o c a t i o n ) . Its single family homes were well-maintained and among the most desirable residences i n Vancouver. Kerrisdale was well-served by trans-portation and had easy access to a l l parts of the Cit y . There was a major non-downtown commercial area along West 41st Avenue adding v i t a l i t y to the area. The neighbourhood contained extensive community f a c i l i t i e s and respected public and private schools. Census data revealed that i t s residents were i n the middle to upper middle socioeconomic cl a s s . Many were of B r i t i s h o r i g i n and the wage earner often held a professional job. If there i s any impact from the rezoning, i t should be noticeable i n t h i s setting. Structure of the Study Chapter 4 outlined the tests of change and expectations to be performed. In order to make these meaningful, i t i s necessary to delimit the study both over time (to determine the impact of the a n t i c i p a t i o n and actual occurrence of the rezoning on expecta-tions) and over space (to determine i f these e f f e c t s , and the supposed negative e x t e r n a l i t i e s imposed by multi-family residences, vary with distance). Accordingly, the study was broken into four time periods: Period 1 - from January 1, 1955 to November 30, 1958 which could be considered to be the pre-zoning period, Period 2 - from December 1, 1958 to June 30, 1961 which was the period a f t e r the Technical Planning Board report when the rezoning was under consideration by Council and anticipated by residents, 74 Period 3 - from July 1, 1961 to March 31, 1963 which was the immediate post-rezoning period, and Period 4 - from A p r i l 1, 1963 to December 31, 1966 which was the period by which any long-run changes should have been apparent and extended the study so that the periods pre- and post-rezoning were equal. The endpoints of the study period were also chosen te maximize the a v a i l a b i l i t y of consistent information. To get some idea as to the s p a t i a l impact of the rezoning, a series of concentric rings (each one-half block i n width) was plotted on a map to surround the e x i s t i n g RM-3 zone. Seven such rings were i d e n t i f i e d . The f i r s t two rings represented the rezoned area and the other f i v e the remaining RS-1 residences. It was also desirable to have a control group of properties similar to the above-described experimental group, but s u f f i c i -ently far away to preclude any e f f e c t of the rezoning. A judgemental selection by v i s u a l inspection was made of properties with similar housing age, s t y l e and l o t size to the experimental group. As a r e s u l t , four control groups were i d e n t i f i e d within a f i f t e e n block radius of the rezoning. Figure 11 delineates these areas and acts as a summary to the discussion. FIGURE 10 MAP OF THE CENSUS TRACTS OF KERRISDALE 765 FIGURE 11 BOUNDARIES OF THE EXPERIMENTAL AND CONTROL GROUPS BY RING 77 The Data The study now proceeds to the determination of suitable sources for the required data. As described e a r l i e r , information on market transaction prices, time of sale, physical chacteris-t i c s of the traded property, neighbourhood c h a r a c t e r i s t i c s and investment behavior was needed. Accordingly, several possible sources were examined i n l i g h t of these needs. The Land Registry O f f i c e maintains records of a l l registered transfers of properties i n i t s j u r i s d i c t i o n . However, the information l i s t e d therein only consists of the transaction p r i c e , charges against the t i t l e , the names of s e l l e r and purchaser, and the l e g a l description. It i s a d i f f i c u l t and lengthy process to search these records. Teela, a r e a l estate market service, provides a summary of the above on a semi-monthly basis and so i s subject to the same l i m i t a t i o n s . The B.C. Assessment Authority maintains records of every land r e g i s t r y o f f i c e transaction for every property on the assessment r o l l s . Over the study period, 3 t h i s function was ca r r i e d out by the Vancouver C i t y Assessor. These records were f i l e d by legal address and available for use i n the City Archives. Each contained information regarding transaction prices, date of transaction, assessment values of land and improvements, street address, owner's name (and address i f d i f f e r e n t from property address) and assessment r o l l number. The a c c e s s i b i l i t y of t h i s data and the fact that i t was i n a consistent form over the study period led to the choice of the Assessment card f i l e s as one source of data. The Assessment Authority also maintains a record of the 78 physical c h a r a c t e r i s t i c s of each property on i t s r o l l s i n a separate f i l e . Such information as: the permits issued (building and gas f i t t i n g ) to each property, areas of the improvements, number of f l o o r s , year of construction, number of rooms, plumbing and type of heating systems was contained on these f i e l d sheets. This represents a uniquely detailed source of information about the i n d i v i d u a l dwellings over the study period and so was chosen for use i n the research. The f i e l d sheets covering the period 1951 to 1969 are stored i n the City Archives. The f i e l d sheets for the period following 1969 are available i n the regional assessment authority o f f i c e . Since information on the f i e l d sheets i s updated as changes i n the property occur, i t was decided to use the records that most close l y coincide with the study period; those i n the City Archives. Other sources were sought for the data remaining to be collected; the area of the s i t e , neighbourhood c h a r a c t e r i s t i c s (primarily income), and other expectation proxies such as r e t a i l sales revenues and businesses i n operation over time. The dimensions of each l e g a l l o t are given on detailed maps available for use i n the Archives and these could be used to calculate the l o t s i z e . The Government of Canada conduct a f u l l census every ten years. From Census data, i t was possible to obtain median household income for. 1961 and 1971 so t h i s was chosen as another source. It was desirable to have the data disaggregated as far as possible so the smallest available grouping of the data was used. This was by enumeration area (containing approximately 79 200 f a m i l i e s ) . Lastly, i t was not possible to f i n d a suitable source of buinsess data. S t a t i s t i c s for sales volume in small r e t a i l areas had never been collected. It was o r i g i n a l l y hoped that business licenses issued i n each year would provide a source of data for the number of businesses operating. However, these records are only kept for six years; after which time they are destroyed, making them unavailable for use i n t h i s study. Having i d e n t i f i e d the sources of data that were available and useable for the study, the next step was the actual data 4 c o l l e c t i o n . A l l arms-length property transactions for single-family dwellings over the period 1955-1966 were recorded from assessment cards for the seven rings and the four control areas that made up the study area, giving a 100% sample of sales. In addition to sales price, the l e g a l address, street address, date of sale, land and improvement assessments,^ location of the property by ri n g , a dummy variable for the property undergoing a zoning change, and the area of the l o t were co l l e c t e d for each in d i v i d u a l property at the same time. The l a t t e r three were obtained from a detailed map which was used to ensure that double counting of properties did not occur. There were 767 sales trans-actions i d e n t i f i e d over the 1955-66 period i n a study area consisting of 979 properties. The breakdown by ring i s shown i n Table 2. The information for each of these transactions was recorded on a computer card, v e r i f i e d against the o r i g i n a l record for accuracy and f i n a l l y stored i n a computer f i l e . Futher information regarding the physical c h a r a c t e r i s t i c s of the structure was then gathered from assessment f i e l d sheets 80 TRANSACTIONS OVER THE PERIOD 1955-66, BY LOCATION Table II Total number Total number Ring of properties of transactions Experimental: 1 88 45 2 99 89 3 108 61 4 100 72 5 120 107 6 139 105 7 136 124 Control: 11 50 39 12 24 17 13 46 42 14 69 66 Total 979 767 81 for each property that had sOld, (the information c o l l e c t e d i s shown i n Table XII). The c h a r a c t e r i s t i c s l i s t e d include: main fl o o r area, year of construction, number of f l o o r s , t o t a l number of rooms, number of rooms on main f l o o r , number of plumbing connections, number of f i r e p l a c e s , type of heating system and the amount and type of covered parking. The street address of the property enabled the i d e n t i f i c a t i o n of the properties situated on a corner l o t and also made i t possible to i d e n t i f y the census enumeration area i n which the property was located; from which median household income could be found. This set of information was also recorded on computer cards, v e r i f i e d against the o r i g i n a l coding sheets for accuracy, and stored on a separate computer f i l e . The two computer f i l e s that have been described were then merged into one. The information i n t h i s f i l e i s l i s t e d i n Table XII i n Chapter 6. One other piece of information was available from the assessment f i e l d sheets, that of improvements to (or reinvestment in) the property. This was i n the form of building permits and heating permits issued and of other improvements rioted by the assessor (such as a new spare room or garage) that had not been authorized. The building permits l i s t e d the date, the type of improvement, and the estimated value. The heating permits described the date and type of i n s t a l l a t i o n . Unfortunately, 7 most of the improvements were of the unauthorized variety,-with a r e s u l t that there wasn't an estimate of value nor was the date l i k e l y to be very accurate (as i t was the date of discovery by the assessor). The above was recorded for the entire study 82 area over time and summarized by location. This summary w i l l be presented in Chapter 6. To check that the information regarding permits on the f i e l d sheets was correct and exhaustive, a random sample of ten properties was chosen from the set of properties i n the study area. The Permits and Licenses department of the City of Vancouver was asked to provide the permits issued to these properties over the.study period and the r e s u l t corresponded with the information co l l e c t e d from the f i l e d sheets, in d i c a t i n g the source was accurate and complete. The description of the compilation of data has been finished. I t i s now necessary to b r i e f l y summarize the pot e n t i a l l i m i t a t i o n s of t h i s data before turning to the various analyses to be performed. Limitations and Sources of Error As mentioned e a r l i e r , sources for r e t a i l sales and businesses operating were not available on a small area, h i s t o r i c a l basis, making i t impossible to t e s t the hypothesis r e l a t i n g to t h e i r 8 factors. Also, the sample of. building permits issued was smaller than anticipated which meant that a variable representing average yearly expenditure on improvements would be meaningless. The r e s u l t of these two l i m i t a t i o n s of the data i s that i t i s not possible to empirically t e s t the significance of these proxies for expectations, and thus expectations i n general, in a regres-sion equation on pr i c e . Another serious l i m i t a t i o n i n the data stems from the fact that there were st r u c t u r a l differences between the experimental and control groups that weren't evident when the o r i g i n a l 83 sampling was undertaken (such as a wider range of l o t sizes and 9 more larger houses for the control group)• Thus, d i r e c t para-metric tests (such as tests on differences of means) could not be performed on the data. Sources of error f a l l into two general categories: experi-mental (or sampling) error and systematic (or non-sampling) error. Sources of systematic error are thought to be few i n the study with the major p o s s i b i l i t i e s being errors i n coding and tabulation and errors i n the calculations performed. There are considerably more potential sources of experimental error. These include: 1. Some assessment cards were destroyed rather than discarded, giving less than a 100% sample. 2. Assessment cards and f i e l d sheets may not have been complete and accurate since they were maintained by hand and r e l i e d i n part upon the receipt of relevant data from the Land Registry Office and the Permits and Licensed department. 3. The physical c h a r a c t e r i s t i c s , as well as assessment values, of the houses may not be t o t a l l y accurate since assessors often cannot gain entrance to a house to v e r i f y i t s i n t e r n a l s t r u c t u r a l condition and changes. 4. Some non-arms length transactions may have been included i n the sample (such as between two adults i n a common-law re l a t i o n s h i p ) . These would be impossible to detect. 5. It i s possible that registered values may not have r e f l e c t e d non-cash considerations, and thus be inaccurate or that values were sometimes purposely misstated to reduce legal and r e g i s t r a t i o n costs. 84 6. Small discrepancies occurred i n the comparison of 1961 to 1971 census data since some enumeration area boundaries shifted s l i g h t l y over time. The t o t a l error introduced by the above i s thought to be s l i g h t . Every step of the c o l l e c t i o n and preparation of the data was performed c a r e f u l l y and double checked. Wherever possible, sources were v e r i f i e d for accuracy against alternate s o u r c e s ^ and found to be r e l i a b l e . Although every e f f o r t has been made to make the data set as complete as possible and to minimize the error present, some error i s inev i t a b l e . With t h i s caveat, the study proceeds to an analysis of the data. 1. Kerrisdale w i l l be described l a t e r i n t h i s section. 2. Fraser and 43rd i s i n a lower middle class neighbourhood located i n the east side of Vancouver. It i s situated behind one of the less-respected secondary schools i n the d i s t r i c t . This neighbourhood has never been viewed as a prime r e s i d e n t i a l area and demand for a higher density r e s i d e n t i a l use i s small. As a consequence of the rezoning, today the rezoned area i s a mixture of duplexes and low-rise apartment buildings of less than average quality interspersed with under-maintained singe-family housing. 3. In 1969, the assessment function was made a p r o v i n c i a l , rather than a l o c a l authority. 4. Trades that were disallowed included trades between r e l a t i v e s , transfers of p a r t i a l i n t e r e s t s , and b e n e f i c i a l transfers due to the death of the registered owner. 5. Assessed values were recorded for the period two years afte r the sale because of the finding by T u n n i c l i f f e (1975) that assessed values lag the market by two years. 6. One feature that must be noted i s that a l l the properties i n the rezoned areas (rings 1 and 2) should have been sold at least once (for the redevelopment). This does not appear to be the ease by looking at the table - the reason for the discrepancy being that once a property 85 undergoes a change i n use, a new card i s begun and the old card i s placed i n a discard f i l e . Unfortunately some were missing from the discard f i l e and must be presumed to have been destroyed. 7. Since i t i s d i f f i c u l t to detect i n t e r i o r improvements, and the penalty for doing unauthorized work i s s l i g h t , most homeowners do not seem to bother to obtain the appropriate permits. 8. 196 building permits and 252 permits to change the heating system were i d e n t i f i e d i n the study area. 9. Early i n the research i t was decided to choose control groups within a 15 block radius of the rezoning, close enough to remain i n the same neighbourhood, yet far enough away from the rezoning so that s p a t i a l impacts, i f any, would be minimized. Property c h a r a c t e r i s t i c s vary greatly i n the area i n which the control groups were to be located. The control groups are believed to represent the most homogeneous of the possible groups yet they varied considerably from the experimental groups. It i s not believed that re-choosing the control groups would have resulted i n closer comparability to the experimental groups. 10. For example, a small sample of transaction values from assessment cards was checked against actual Land Registry Office records and found to be accurate. A similar correspondance was found between the building permits l i s t e d on the assessment f i e l d sheets and the records of the Permits and Licenses department. 86 CHAPTER 6 THE RESULT  Indirect Tests of Expectations A plan for te s t i n g the model was outlined i n Chapter 4. Several shortcomings i n the available data (as noted i n Chapter ,5) prevented a l l of these tests from being performed. However those that were possible are presented below. Recall that several hypotheses were made about conditions that imply unchanged expectations and thereby continued s t a b i l i t y for a neighbourhood, even afte r i t has undergone some form of government intervention. The f i r s t of these was that reinvestment behavior i n housing should remain constant or increase. The building permits and heating ( o i l and gas) permits issued and the unauthorized- changes discovered by the assessor were examined over the period 1954-1968 to provide a measure of the reinvestment that had occurred i n the study area before and a f t e r the rezoning. Four possible types of investment were i d e n t i f i e d : the addition of o i l or gas heating, the construction of a garage or carport, the construction of a new dwelling unit, and alterations and additions to an e x i s t i n g unit. The number of occurrences of each of these types of investment, and estimated value when known, i s presented i n Table III by location for the period 1954-1968. Over t h i s time, there were a t o t a l of 252 new heating units i n s t a l l e d , 65 new parking f a c i l i t i e s , 20 new dwelling units and 111 alterations to e x i s t i n g units. There i s n ' t any noticeable difference between the periods before and aft e r the rezoning except of course there was l i t t l e reinvestment i n the rezoned Table III HEATING PERMITS, BUILDING PERMITS & UNAUTHORIZED CHANGES BY RING, BY YEAR, 1954-1965 (EXCLUDING DEMOLITIONS) REZONED YR 1 2 NON-REZONED CONTROL  5 6 7 11 12 13 : 14 TTL 54 A - 1 2 - 1 2 B - 1 200 - - 1 100 1 _ - - - 12 _ 3 _ 0 500 - - - " 1 4 4 3 7 3 - 1 1 1 '26 400 - 1 200 - 2 300 - - - 1 5 D _ - 1 400 - 2 1000 - - - - " 1 5 0 4 55 A B C - - - 1 9500 2 14000 56 A - - l 2 4 - 5 3 3 4 1 23 oo B - 1 - 1 300 1 200 - 1 200 - 1 200 - - 5 C - 1 8000 1 9000 - - - 1 10000 - 3 D _ _ - 3 1 - 1 3500 - - - 1 3000 6 57 A ' 1 6 3 2 6 9 4 3 - 2 7 2 45 B _ - _ 3 200 - - 1 200 - - 1 1 500 6 C - - 1 10000 -D 1 800 3 - -1 1 - - 1 2 14 58 A 4 5 1 3 8 5 7 1 2 5 4 45 - - 4 _ 11 B - - 1 200 1 1 450 1 250 -C - - 1 9000 -D 1 - 2 100 1 100 5 1500 59 A l 3 1 4 6 1 2 B _ - - - 2 170 1 300 1 200 C - - 1 10000 -D 1 - - - 3 _ - - 19 - - 4 1 500 2 3000 4 600 - - - 1 500 11 Table III (page 2) HEATING PERMITS, BUILDING PERMITS & UNAUTHORIZED CHANGES (EXCLUDING DEMOLITIONS) BY RING, BY YEAR, 1954-1965 REZONED NON-REZONED CONTROL YR * 1 2 3 4 5 6 7 11 12 13 14 TTL 60 A 1 2 _ 4 1 4 1 2 4 1 19 B - - 1 - - - - - - 1 - 2 C - - 2 21900 1 10000 - - - - - - - 3 D - - - - - - 3 2250 - - - - 3 61± A — 1 4 5 4 1 2 - - - - 17 B - - 1 500 1 - 1 350 1 250 - - - - 5 C - - - - - - - - - - - 0 D - - 2 1000 - 3 3 500 •- - - - 1 2000 9 62± A 1 - 2 - 1 2 1 2 - 1 - 10 B 1 300 - - - - - - 1 - - - 2 C - - - - - 2 24500 - - - - 2 28400 4 b - 1 300 - - 2 3700 2 1650 - - - 2 4100 1 500 8 63 A _ _ 1 2 - - 1 2 - - 1 7 B - - - - - 1 - 1 300 1 2 450 2 300 6 C - - - - - 1 11500 - - - - - 1 D - - - - 1 100 - 3 700 - 1 2 75 - 7 64 A - - - 1 2 1 4 1 - 1 - 10 B -• - - 1 500 1 200 1 5 1700 - - - - 8 C - - - 1 12000 - - 1 15500 1 13000 - - - 3 D - - - - 1 2000 2 1650 3 4400 - - 1 1 1000 8 65 A - - 1 1 - 1 1 - - - 2 6 B - - - - 1 250 2 1 425 1 550 - - 1 6 C - - - - - - - - - - - 0 D - - - 1 2 1550 2 1200 1 200 - - - 1 200 7 Table III (page 3 HEATING PERMITS, BUILDING PERMITS & UNAUTHORIZED CHANGES (EXCLUDING DEMOLITIONS) BY RING, BY YEAR, 1954-1965 YR * REZONED NON-•REZONED CONTROL 1 2 3 4 5 6 7 11 12 13 14 66 A _ — 2 _ 2 2 1 - - - 1 B - - - 1 1 350 1 - — — — c _ _ - . - - - - — — D - - 1 - 2 2100 1 1 2 800 - — 1 7000 67 A _ - 2 - - - - - -B - - - - 1 650 - 2 1850 - — — C _ — - - - - - - — — D - - - - 1 4000 2 2500 - - — 1 800 68 A - 1 — 1 1 - - - -B . — - - - 1 350 - - 1 450 1 400 - — c _ _ - - - - - — — D - - 1 900 2 1200 2 1180 1 450 1 3200 - — 1 1250 TOTALS 23 13 A 8 18 21 26 42 29 46 16 10 B 1 2 4 8 11 9 14 4 2 4 6 C 0 1 6 3 2 3 2 1 0 0 2 D 3 4 7 7 26 20 21 2 1 8 12 * TYPE OF INVESTMENT A = Addition of o i l < or gas heating B = New construction of garage or carport TTL 8 3 0 8 2 3 0 4 3 3 0 8 252 65 20 111 C = New construction of dwelling u n i t D = A l t e r a t i o n s & additions ± THE PERIOD AFTER REZONING Source: Permit f i l e derived from B.:C. Assessment Authority records 88 area aft e r the rezoning as these properties were purchased and demolished. Table IV aggregates the data into rezoned, non-rezoned and control groups to make i t easier to recognize any changes. One would anticipate a severe drop i n the number of investments occurring i n the non-rezoned area (ring 3 to 7) after the rezoning compared to the behavior of the control group (rings 11 to 14) i f expectations had changed. The data suggests that t h i s was not the case; reinvestment behavior did not appear to change for the worse. This implies unchanged or po s i t i v e expectations i n the neighbourhood. A second hypothesis was that turnover rates should remain stable. Turnover rate i s defined as the number of sales trans-actions that occur i n a period i n a given location expressed as a percentage of the t o t a l number of units i n that location. One drawback to t h i s measure i s that the turnover rate i s not uniquely determined ( i . e . a turnover rate of 10% of a hundred properties has a range of meanings from 10 properties traded once i n the period to 1 property traded 10 times). A frequency d i s t r i b u t i o n of trades per property would be useful but the form of the data did not allow such an analysis to be made. Since the majority of s e l l i n g properties sold only once and since those with multiple sales were di s t r i b u t e d evenly over the sample, turnover rate as defined i s s t i l l a meaningful measure. 1 If there i s any impact on expectations from the rezoning, an increase i n turnover rates from the period before the rezoning to the period afterwards that i s not matched by the control group should be recorded. Table V presents the turnover rates that 89 Table IV TOTAL NUMBER OF INVESTMENTS:, BY GROUP, 1955-66 (a) TOTAL NUMBER OF HEATING PERMITS (=A) % of t o t a l Rezoned in cagegory Non-rezoned o ~o Control Q. O 1955 2 1.1 18 3.0 6 3.2 1956 0 0 12 2.0 11 5.8 1957 7 3.7 24 4.0 14 7.4 1958 9 4.8 24 4.0 12 6.3 1959 4 2.1 14 2.3 1 0.5 1060 1 0.5 11 1.8 7 3.7 * 1961 1 0.5 16 2.6 0 0 1962 1 0.5 6 1.0 3 1.6 1963 0 0 4 0.7 1 0.5 1964 0 0 8 1.3 2 1.1 1965 0 0 4 0.2 2 1.1 1966 0 0 7 1.2 1 0.5 TOTAL NUMBER OF INVESTMENTS IN IMPROVEMENTS ( =B+C+D) 1955 0 0 10 1.7 12 6.3 1956 2 1.1 10 1.7 2 1.1 1957 4 2.1 12 2.0 5 2.6 1958 1 0.5 15 2.5 0 0 1959 1 0.5 14 2.3 1 0.5 1960 0 0 7 1.2 1 0.5 * 1961 0 0 12 2.0 2 1.1 1962 2 1.1 6 1.0 6 3.2 1963 0 0 6 1.0 8 4.2 1964 0 0 17 2.8 2 1.1 1965 0 0 10 1.2 3 1.6 1966 0 0 8 1.3 3 1.6 * Rezoning takes place 1. 187 Rezoned properties 605 Non-rezoned 18 9 Control 90 Table V TURNOVER RATES BY RING BY PERIOD Period 1 Period 2 Period 3 Period 4 N Q. •o Turnover N Q. ° Turnover N Q. t> Turnover N g. "5 Turnover Rezoned 50 26. 74 17 9. 09 25 13. 37 41 21. 93 Non-rezoned 178 29. 42 70 11. 57 55 9. 09 167 27. 60 Ring: 1 17 19. 32 6 6. 82 10 11. 36 12 13. 64 2 33 33. 33 11 11. 11 15 15. 15 29 29. 29 3 26 24. 07 13 12. 04 4 3. 70 18 16. 67 4 29 29. 00 8 8. 00 10 10. 00 25 25. 00 5 39 32. 50 18 15. 00 22 18. 33 29 24. 12 .6 39 28. 06 21 15. 11 17 12. 23 38 27. 34 7 45 33. 09 20 14. 71 12 8. 82 42 34. 56 A l l control 60 31. 75 25 13. 23 24 12. 20 55 29. 10 Ring 11 17 34. 00 7 14. 00 3 6. 00 12 24. 00 12 3 12. 50 2 8. 33 3 12. 50 9 37. 50 13 14 30. 43 7 15. 22 6 13. 04 15 32. 61 14 26 37. 68 9 13. 24 12 17. 39 29 42. 30 Period. 1: January 1, 1955 to November 30, 1958 Period 2: December 1, 1958 to June 30, 1961: Pre-rezoning Period 3: July 1, 1961 to March 31, 1963: Post-rezoning Period 4: A p r i l 1, 1963 to December 31, 1966 91 have been calculated by location and.period. It shows that the turnover rates of the non-rezoned properties were c l o s e l y matched by the turnover rates for the control group and there wasn't any increase between period 2 and period 3. This r e s u l t implies expectations haven't changed. An important hypothesis relates to housing p r i c e s . Constant or increasing average r e a l housing prices imply a stable neigh-bourhood. Accordingly, each sales transaction was analyzed by 2 period (as explained e a r l i e r ) , by r i n g and by area of l o t . The mean sales price was calculated for a l l experimental and control properties by period and area of l o t , and i s presented i n Tables VI to IX. I t can be seen'that housing prices generally increased from 1955 to 1966 with the exception of a period i n the early s i x t i e s during which time there was a general economic decline. To c l a r i f y the r e l a t i o n s h i p between housing prices and the rezoning, a summary table of price changes (Table X) occurring among the four periods of the study was constructed. Let us examine each period i n turn. From period 1 to 2, non-rezoned experimental l o t s increased at a faster rate on average than did control l o t s or future rezoned properties. This indicates that discussions about the proposed zoning change had l i t t l e impact on price before the rezoning. From period 2 to period 3 however (immediately before and a f t e r the rezoning), a drop i n housing prices i s noted for the non-rezoned properties i n rings 3 to 7. Over the same period though, a greater decrease i n the prices of l o t s less than 5000 square feet i s seen which indicates that the price e f f e c t i s due to the unfavourable economic conditions 92 Table VI AVERAGE PRICES BY LOT SIZE AND LOCATION JANUARY 1, 1955 TO NOVEMBER 30, 1958 Standard Mean Price N Deviation Lot Size LT 5000 sq.ft.  Experimental Group A l l rezoned l o t s $ 9,548.48 33 $2,102.75 A l l non-rezoned l o t s 10,016.29 66 3,244.98 Ring 1 9,435.00 10 1,787.60 2 9,597.82 23 2,261.80 3 11,275.00 12 2,623.36 4 10,407.14 14 4,034.17 5 9,407.50 20 2,801.60 6 9,045.83 12 3,386.89 7 10,421.88 8 3,395.09 Control Group A l l control l o t s 10,939.78 27 2,525.56 Ring 11 11,079.63 16 2,469.38 12 9,500.00 1 13 - -14 10,860.00 10 2,826.93 Lot Size GE 5000 Sq.ft.  Experimental Group A l l rezoned l o t s 14,064.70 17 3,932.10 A l l non-rezoned l o t s 13,804.02 112 3,315.44 Ring 1 13,642.86 7 5,029.52 2 14,360.00 10 3,222.98 3 13,842.86 14 2,759.51 4 13,420.00 15 3,665.70 5 13,534.21 19 3,469.78 6 12,705.55 27 2,307.99 7 14,885.13 37 3,720.70 Control Group A l l control l o t s 13,433.33 33 4,976.04 Ring 11 15,700.00 1 12 10,475.00 2 671.81 13 11,725.00 14 1,714.04 14 15,156.25 16 6,545.81 93 Table VII AVERAGE PRICES BY LOT SIZE AND LOCATION DECEMBER 1, 19 58 TO JUNE 30, 1961 Standard Mean Price N Deviation Lot Size LT 5000 sq.ft.  Experimental Group A l l rezoned l o t s $10,114.29 7 $2,888.13 A l l non-rezoned l o t s 12,474.24 33 3,053.74 Ring 1 11,250.00 2 1,767.76 2 9,660.00 5 3,290.59 3 14,330.00 5 3,413.13 4 12,875.00 4 3,604.03 5 13,286.36 11 2,951.94 6 11,012.50 8 1,465.23 7 10,850.00 5 3,717.52 Control Group A l l control l o t s 13,083.33 6 4,054.83 Ring 11 12,900.00 5 4,505.52 12 -13 -14 14,000.00 1 Lot Size GE 5000 Sq.ft.  Experimental Group A l l rezoned l o t s 13,700.00 10 3,146.42 A l l non-rezoned l o t s 16,454.25 47 4,206.45 Ring 1 12,500.00 4 4,564.34 2 14,500.00 6 1,843.90 3 15,675.00 8 2,603.15 4 17,075.00 4 4,763.30 5 16,735.71 7 2,307.89 6 15,050.00 13 3,483.29 7 17,790.00 15 5,741.64 Control Group A l l control l o t s 13,846.84 19 3,042.23 Ring 11 17,250.00 2 3,323.38 12 11,600.00 2 424.23 13 13,750.00 7 2,523.03 14 13,642.50 8 3,454.04 94 Table VIII AVERAGE. PRICES BY LOT SIZE AND LOCATION JULY 1, 1961 TO MARCH 31/ 1963 Standard Mean Price N Deviation Lot Size LT 5000 sq.ft.  Experimental Group A l l rezoned l o t s $14,003.07 13 $1,960.23 A l l non-rezoned l o t s 11,928.13 24 4,137.50 Ring 1 12,786.66 3 1,194.33 2 14,368.00 10 2,040.88 3 14,087.50 4 1,442.41 4 9,840.00 5 3,166.70 5 11,072.50 10 3,977.51 6 13,300.00 2 11,313.70 7 14,466.66 3 1,750.23 Control Group > A l l control l o t s 11,042.86 7 2,052.30 Ring 11 1.0,083.33 3 1,876.39 12 10,575.00 2 2,439.51 13 -14 12,950.00 2 1,343.48 Lot Size GE 5000 Sq.ft.  Experimental Group A l l rezoned l o t s 21,067.91 12 5,878.58 A l l non-rezoned l o t s 14,270.96 31 3,158.03 Ring 1 17,455.71 7 3,523.02 2 26,125.00 5 4,649.19 3 - - -4 14,280.00 5 2,066.57 5 12,916.66 12 2,153.98 6 14,760.00 5 4,121.64 7 15,800.00 9 3,854.86 Control Group A l l control l o t s 14,800.00 17 4,642.14 Ring 11 12 12,500.00 1 13 12,841.66 6 2,722.55 14 16,205.00 10 5,371.65 95 Table IX AVERAGE PRICES BY LOT SIZE AND LOCATION APRIL 1, 1963 TO DECEMBER 31, 1966 Standard Mean Price N Deviation Lot Size LT 5000 sq.ft .  Experimental Group A l l rezoned l o t s $15,966.66 30 $5,598.75 A l l non-rezoned l o t s 13,727.64 65 7,410.08 Ring 1 18,164.29 7 11,657.85 2 15,297.82 23 1,500.12 3 13,784.09 11 2,190.19 4 13,883.33 12 3,474.00 5 12,631.46 15 2,259.50 6 16,443.33 15 14,541.70 7 11,495.83 12 3,202.30 Control Group A l l control l o t s 15,013.04 23 3,088.71 Ring 11 15,700.00 12 3,710.17 12 13,066.66 6 1,620.69 13 -14 15,700.00 5 1,909.20 Lot Size GE 5000 Sq.ft.  Experimental Group A l l rezoned l o t s 24,606.91 11 5,819.50 A l l non-rezoned l o t s 17,749.35 92 4,701.69 Ring 1 21,460.00 5 4,510.73 2 ( 27,229.33 6 5,770.61 3 15,878.57 7 1,884.96 4 18,014.61 13 4,469.89 5 17,725.00 14 2,937.33 6 15,865.21 23 3,669.79 7 19,272.86 35 5,825.41 Control Group A l l control l o t s 16,477.81 32 3,400.96 Ring 11 -12 17,383.33 3 4,244.49 13 15,233.33 15 2,374.07 14 17,617.14 14 3,919.97 96 Table X SUMMARY OF PRICE CHANGES (IN PERCENT) Period - 1 to 2 2 to 3 1 to 3 3 to 4 1 to 4 Lots LT 5000 sq.ft . Rezoned l o t s 5.9 38.4 46.7 14.0 67.2 Non-rezoned l o t s 24. 5 ( 4.4) 19.1 15.1 37.1 Ring 1 19.2 13. 7 35.5 42.1 92.5 2 0.6 48.7 49.7 6.5 59 .4 •3 27.1 ( 1.7) 24.9 ( 2.2) 22. 3 4 23. 7 (23.6) ( 5.4) 41.1 33.4 5 41. 2 (16.7) 17. 7 14.1 34.3 6 21.7 20.8 47.0 23; 6 81.8 7 4.1 33. 3 38.8 (20.5) 10.3 Control Group A l l l o t s 19 .6 (15.6) 0.9 36.0 39.2 Ring 11 16.4 (21.8) ( 9.0) 55.7 41.7 12 - - - - -13 - - - -14 28. 9 ( 7.5) 19.2 21. 2 44.6 Lots GE 5000 sq.ft . Rezoned l o t s ( 2.6) 53. 8 49.8 16.8 75.0 Non-rezoned l o t s 19.2 (13.3) 3.4 24.4 28.6 Ring 1 ( 8.4) 39.6 27. 9 22.9 57. 3 2 1.0 80.2 81.9 4.2 89.6 3 13. 2 - - - -4 27. 2 (16.4) 6.4 26.2 34.2 5 23.7 (22.8) (. 4.6) 37.2 31.0 6 18.5' ( 1.9) 16.2 7.5 24.9 7 19.5 (11.2) 6.1 22.0 29.5 Control Group A l l l o t s 3.1 6.9 10 . 2 11. 3 22. 7 Ring 11 9.9 - - - -12 10.7 7.8 19 .3 39.1 66.0 13 17. 3 ( 6.6) 9.5 18. 6 29.9 14 (10.0) 18.8 6.9 8.7 16.2 Period 1 - January 1, 1955 to November 30, 1958 In 1958, the zoning change was mentioned 2 - December 1, 1958 to June 30, 1961 The rezoning occurred mid-1961 3 - July 1, 1961 to March 31, 1963 4 - A p r i l 1, 1963 to December 31, 1966 By 1965, a l l private l o t s had been purchased and apartments constructed. 5 - January 1, 1955 to December 31, 1966 97 mentioned e a r l i e r rather than unfavourable expectations brought about by the rezoning. Further support for t h i s contention i s brought about by. the evidence over the post-rezoning periods (period 3 to period 4) over which time large non-rezoned l o t s once again appreciated faster than did the control groups. There aren't any of the overwhelming differences between the experi-mental, non-rezoned l o t s and the control l o t s that should be apparent i f expectations have been unfavourably affected by the rezoning. Over the entire study period (1955-1966), the prices of small, non-rezoned properties changed on average by a v i r t u a l l y i d e n t i c a l amount as the control group while larger non-rezoned properties on average changed by a greater amount than did the control group. As an aside, i t can be seen that the rezoning did a f f e c t the price of the rezoned properites. From period 2 to 3, the prices of rezoned l o t s increased greatly i n contrast to the control and experimental non-rezoned groups. Large l o t s had larger increases on average than small l o t s ; r e f l e c t i n g the fewer transactions that would be needed to assemble a useable parcel of land. A similar trend i s indicated by the price changes from period 1 to period 4. The evidence provided by transaction prices and price changes implies that the rezoning has not had an unfavourable e f f e c t on residents' expectations about the v i a b i l i t y of t h e i r neighour-hood. The rezoning did cause s i g n i f i c a n t price e f f e c t s but these effects were limited, to the rezoned area. The properties i n the non-rezoned rings seem to have undergone a s i m i l a r experience 98 regarding price as the control group. This i s similar to the results i n p l i e d by our examination of reinvestment behavior and turnover rates. There haven't been any discernable negative changes i n expectations. Thus i t may be said that the impelling factor of decline i s absent and there does not appear to have been any negative neighbourhood change. Income leve l s and changes i n income have often been used as a proxy for expectations i n other models. Consequently median household income was gathered by enumeration area for the period 1961-1971 (from just p r i o r to the rezoning to a considerable time afterwards) and changes i n income were calculated. These figures are presented i n Table XI by experimental and control groups. It would be expected that i f the rezoning had any impact on the experimental area, increases i n income would be considerably less than an average than i n the control groups. Although a great variety of percentage changes i n income and average income leve l s are noted, there i s l i t t l e to d i s t i n g u i s h the pattern i n the experimental and control groups; income change range from 64 to 308 percent i n the experimental group and 78 to 3 208 percent i n the control group. There does appear to be some tendency for apartment residents to have lower median household incomes (which might be expected, i n part because apartments would contain fewer two-or-more income households and p a r t l y because of the age structure of apartment dwellers). The evidenc on income changes does not contradict the evidence presented above but neither does i t o f f e r p a r t i c u l a r l y strong support. It i s f e l t that as a p r a c t i c a l matter, i t i s d i f f i c u l t to deal with 99 Table XI CHANGES IN FAMILY INCOME, BY ENUMERATION AREA:: 1961-1971 1971 . , Family CT-EA Income ($) Experimental Group  (Rings 1-7) 22 -153 11,540 22 -154* 8,355 22 -155 7,435 22 -156 14,890 22 -147* 9,710 22 -158 12,845 9 -304 9,505 9 -307 18,110 9 -314* 9,065 9 -313* 9,630 9 -312 8,595 9 -308* 9,705 9 -310* 7,990 9 -315* 9,455 9 -316 13,005 27 -115 16,410 27 -115 17,255 27 -118 15,145 Control Group 1961 1961-1971 Absolute Family Change. o CT--EA Income ($) (?) Chang( 36--137 5,931 5,609 95 36 -140 4,585 3,770 82 36--138 4, 521 2,914 64 36 -140 4,585 10,305 225 36 -140 4,585 5,125 112 36 -140 4,585 8,260 180 41 -131 2,329 7,176 308 41 -132 5,131 11,979 253 41 -134 5,449 3,616 66 41 -133 4,968 4,662 94 41 -133 4,968 3 ,627 73 41 -133 4,9 68 4,737 95 41 -133 4,968 3,022 61 41 -135 '5,467 3,988 73 41 -134 5,449 7,556 139 36 -58 6,977 9,433 135 36 -59 6,601 10,654 161 36 -58 6,977 8,168 117 (Rings 11-14) 8-320 17,825 40-145 5,790 12,035 208 8-319 - 15,480 40-147 5, 272 10,208 194 23-159 10,615 55-148 4,705 5,910 126 23-162 11,945 55-68 5,882 6, 063 103 23-163 14,310 55-69 5,492 8,818 161 23-164 13,195 55-71 7,426 5,769 78 1. CT-EA means census t r a c t and enumeration area. * Completely or p a r t i a l l y rezoned to multi-family in 1961. 100 income changes i n a consistent manner. Consequently, although change i n income may be a proxy for expectations, the broader expectations variables above are superior on both a p r a c t i c a l and conceptual basis. Regression Analysis The previous section dealt with some i n d i r e c t tests of expectations. I t i s possible though, that differences i n housing c h a r a c t e r i s t i c s and neighbourhood e f f e c t s could have accounted for some of the observed v a r i a t i o n i n prices and, to a lesser extent, reinvestment behavior. Consequently, detailed information was gathered on each housing unit (and i t s surroundings) that had sold over the study period. A l i s t i s shown i n Table XII. Three hypotheses may be tested using t h i s information: 1. The implementation of the zoning change had a negative e f f e c t on the price of the surrounding properties. 2. The e f f e c t of the supposed externality diminishes with distance. If these hypotheses are rejected, i t implies that the rezon-ing did not impose a measurable cost on the surrounding properties and any r e v i s i o n i n expectations about the future u t i l i t y of these properties i s u n j u s t i f i e d . 3. The rezoning had a p o s i t i v e influence on rezoned property values. This i s to t e s t whether the re s u l t s obtained by including physical and neighbourhood c h a r a c t e r i s t i c s are consistent with the r e s u l t obtained i n the previous, section when rezoned properties were found to increase sign i f i c a n t l y , i n value. To t e s t these 101 Table XII VARIABLES IN THE DATA SET Expected Unit of Relation Variable D e f i n i t i o n Measure to Value Date Year of sale - + Price Actual s e l l i n g price of property d o l l a r s Land Assessed land value d o l l a r s + Improv Assessed improvement value d o l l a r s + Sq.ft. Area of l o t square feet + Ring Location of unit i n r e l a t i o n to rezoning - ? Rez Property i n future rezoned area yes = 1 + Mflarea Main f l o o r area Square feet + Yrconst Year constructed - + Floors Number of flo o r s of dwelling - + Totroom Total number of rooms - + Mainroom Number of rooms on main f l o o r - + Plumbing Number of plumbing connections - + Fp Number of fir e p l a c e s Heat Modern heating system yes =1 + Parking Amount of covered parking + Income 19 60 census median household income d o l l a r s + Corner Lot situated on a corner yes =1 ? VARIABLES GENERATED Age Age of dwelling unit years Post rez The rezoning occurred proximate to these experimented non-rezoned properties yes =1 ? Unit Land Assessed land value per sq.ft . d o l l a r s / square foot + Rezon Site was rezoned i n 1961 yes = 1 + Dummy 1&2 Site located i n rin g 1 or 2 yes = 1 + Dummy 3 Site located i n ring 3 yes =1 + Dummy 4 Site located i n ring 4 yes =1 + Dummy 5 Site located i n rin g 5 yes = 1 + Dummy 6 Site located i n ring 6 yes =1 + 102 hypotheses, regression analysis was performed on subsamples of the 7 67 transactions for which detailed information was available. i 4 Multiple regression analysis i s designed to describe and measure the functional r e l a t i o n s h i p between a dependent variable and two or more independent variables. To calculate the r e l a t i o n -ship of the independent variable upon the dependent variable, the effects of the other independent variables are held "constant". The regression equation f i t s a curve to the d i s t r i b u t i o n of observed data. If the ordinary least squares technique i s used, and a l i n e a r r e l a t i o n s h i p between dependent or independent v a r i a -bles i s assumed, the procedure i s one of minimizing the sum of the squared deviations of the estimated values of the dependent v a r i a -ble from the observed values. One or more regression c o e f f i c i e n t s and a constant define the regression equation. (Since the con-stant hasn't any p a r t i c u l a r meaning for our purposes here, i t w i l l be omitted from the discussion). Regression c o e f f i c i e n t s measure the magnitude (unnormalized) of the explanatory power given to each independent variable adjusting for the e f f e c t s of the other variables. L i t t l e (1976) suggests that the c o e f f i c i e n t s of a price equation can be viewed as prices of the measured components. "In t h i s sense, they represent the terms of trade between the various c h a r a c t e r i s t i c s . " (p. 71.) The sign of the regression c o e f f i c i e n t gives an i n d i c a t i o n of the d i r e c t i o n of the r e l a t i o n s h i p . The s i g n i f i -cance of the regression c o e f f i c i e n t i s indicated by the standard error. "If the standard error i s much smaller in. magnitude ' than the regression c o e f f i c i e n t , then the sign of 'the regression 103 c o e f f i c i e n t may be interpreted with confidence. If the standard error i s nearly as large as the c o e f f i c i e n t , then i t should be used with care since there i s a s i g n i f i c a n t chance, at l e a s t 15 percent, that the true regression c o e f f i c i e n t i s of the opposite 5 sign as the calculated value due to random errors i n the data." The s t a t i s t i c a l significance of each explanatory variable may be found by a t - t e s t . Using a t table, at a chosen l e v e l of confidence, i f an observed t value exceeds the value i n the table, the pattern of v a r i a t i o n i s s i g n i f i c a n t l y d i f f e r e n t from random association. The goodness of f i t of the equation to the empirical data i s given by the multiple c o r r e l a t i o n c o e f f i c i e n t 2 (R ). I t measures the s p e c i f i c amount of explanation i n the dependent variable accounted for by a l l the independent variables together. Problems may be encountered i n multiple regression analysis when the assumptions of the regression model are violated. In general, these include m u l t i c o l l i n e a r i t y , autocorrelation and heteroscedasticity, and for a housing price equation, d i s e q u i l i -brium i n the housing market over time. A standard s t a t i s t i c a l 5 textbook such as Harnett and Murphy (1976) describes these i n f u l l . The most serious problem with t h i s type of data i s usually m u l t i c o l l i n e a r i t y . M u l t i c o l l i n e a r i t y i s a s i t u a t i o n that occurs when two or more of the independent variables are strongly related to one another. I t i s possible to calculate the least-squares estimate when m u l t i c o l l i n e a r i t y i s present, but i t i s d i f f i c u l t to i n t e r -pret the strength of the e f f e c t of each variable. To detect a 104 m u l t i c o l l i n e a r i t y problem, one usually f i r s t examines a simple c o r r e l a t i o n matrix. A high c o r r e l a t i o n between any pair of explanatory variables may indicate m u l t i c o l l i n e a r i t y . A l l independent variables, however, may have r e l a t i v e l y small mutual c o r r e l a t i o n and yet have some m u l t i c o l l i n e a r i t y among three or more of them. As a check for t h i s condition, regres-sions should be run using each independent variable i n turn as dependent variables against the remaining independent variables. If the multiple c o r r e l a t i o n c o e f f i c i e n t s r e s u l t i n g from these equations approach the size of the o r i g i n a l R, m u l t i c o l l i n e a r i t y i s a problem. There are other means of t e s t i n g for m u l t i c o l -l i n e a r i t y but these w i l l not be dealt with here. With t h i s general discussion i n mind, the f i r s t hypothesis may be tested. The sample used was af a l l non-rezoned experimental and control properties. Various s p e c i f i c a t i o n s of the price equation were t r i e d without any zoning variables and the "best" 2 one (best i n the sense that i t had the highest R and the least amount of m u l t i c o l l i n e a r i t y as shown by the table of p a r t i a l c o r r e l a t i o n c o e f f i c i e n t s ) i s presented as Run 1 i n Table XIII. The independent variables represented physical c h a r a c t e r i s t i c s of the dwelling and l o t , a neighbourhood variable (median household income) and a location variable (corner). The variables FP, HEAT, and CORNER had opposite signs to those predicted but had large standard errors of the c o e f f i c i e n t and were i n s i g n i f i c a n t at the chosen l e v e l of confidence. Income had the opposite sign to that predicted but was s i g n i f i c a n t . ^ The other variables had the predicted sign and were s i g n i f i c a n t . The greatest degree 105 Table XIII (continued on next page) REGRESSION RESULTS FOR VARIOUS SPECIFICATIONS OF PRICE EQUATION VARIABLE Run No. (Sample Size) 1 (712) DATE + 578.52 1 (34.11)' (16.96) 3* SOFT + _ 0.639 (0.057) (11.21)* RING MFLAREA ••••+• AGE FLOORS + TOTROOM PLUMBING + + 2.0794 -138.51 1825.0 363.47 342.86 (0.74) ( 11.33) (482.82) (112.28) (102.48 (2.81)* (-12.23) ( 3.76)*( 3.24)*( 3.34)* 2 598.1 0.6 (712) (46.4) (0.06) (12.9)* (11.2)* 2.1 -137.8 1815.2 (0.7) (11.4) (485.3) (2.8)* (-12.1)* ( 3.7)* 359.0 346.6 112.6 (102.7) ( 3.2)* ( 3.4)* 3 635.8 0.6 -62.6 2.1 -140.2 (712) (51.5) (0.06) (37.1) (0.7) ( 11.5) (12.4)* (11.3)* (-1.69)'* (2.8)* (-12.2) 1781.2 357.3 348.93 (485.1) 112.4 (102.58) ( 3.67)*( 3.2)* ( 3.4)* 4 607.1 1.5 (126) (284.3) (0.26) ( 2.1)* (5.6)* -2.6 -36.9 -3679.2 1011.3 359.8 (2.2) (49.9) (2015.4) (391.7) (311.4) (-1.2) (-0.7) (- 1.9)* ( 2.6)* ( 1.2) 1. Estimated c o e f f i c i e n t 2. Standard Error of the c o e f f i c i e n t 3. t - S t a t i s t i c s * S i g n i f i c a n t at the OC = 0.05 l e v e l of confidence Table XIV SAMPLE CORRELATION MATRIX FOR RUN 3 DATE 1. 00 SQFT 0.04 1.00 RING -0.43 -0.13 1. 00 MFLAREA 0.06 -0.29 0.04 1.00 FLOORS -0.00 -0. 07 0.04 0.10 1.00 TOTROOM -0.01 -0.10 0.01 -0.23 -0.34 1.00 PLUMBING 0.02 -0.03 -0.01 -0.11 -0.16 -0.44 1.00 FP -0.07 -0.05 0.02 -0.21 -0.13 0.01 -0.08 1. 00 HEAT -0.08 0.06 -0.09 -0.08 -0. 01 -0.11 -0.00 -0.00 1.00 PARKING 0.05 -0.05 -0.01 -0.09 -0.03 -0.03 -0.09 -0.07 -0.08 1.00 INCOME -0.05 -0.20 -0.05 -0.08 0.00 0.01 0.01 0.07 0.00 -0.06 1.00 CORNER -0.02 -0.10 0.07 0.01 -0.02 -0.04 0.06 0.05 -0.05 0.01 -0.13 1.00 AGE -0.12 -0.07 0.13 0.01 -0.18. -0.08 0.07 0.15 0.11 -0.03 0.11 0.02 1.00 POSTREZ -0.74* -0.03 0.44 -0.05 0.05 0.06 -0.06 0.06 -0.03 -0.05 0.04 0.01 -0.04 1.00 DATE SQFT RING MFL FLOORS TOT PLUM FP HEAT PARK INCOME COR AGE POST AREA ROOM BING ING NER REZ * I t i s not surprising that POSTREZ i s highly correlated with DATE since i t was generated from t h i s variable. 107 of -confidence may be placed on the year of sale i n the equation 7 2 as shown by the t - s t a t i s t i c . The R of 0.5489 indicates that 54.8 9% of the variance i n price i s explained by the independent variables; an acceptable figure for t h i s type of equation with so few variables. To see i f the implementation of the zoning change had a neg-ative e f f e c t on the price of the surrounding properties, a dummy variable representing the occurrence of the rezoning near those properties was added to the equation. The test was whether t h i s variable would contribute any explanatory power to the equation. In other words, whether the average differences i n price would be di f f e r e n t for the experimental properties than the control prop-e r t i e s . ..As Run 2 shows, the POSTREZ dummy for rings 3. to 7 was 2 quite i n s i g n i f i c a n t and the adjusted R value declined. Thus, we accept the n u l l hypothesis that the zoning change did not have a detrimental e f f e c t on the price of the non-rezoned experimental properties. A further t e s t was to include a variable that represented the location of the property with respect to the rezoning. Recall that rings were drawn outward from the rezoned area at half-block in t e r v a l s and lab e l l e d rings 3 to 7. The control groups were la b e l l e d rings 11 to 14. If there i s any negative e f f e c t from the rezoning, i t should diminish as RING increases ( i . e . the sign on RING should be p o s i t i v e ) . Looking at Run 3, i t can be seen that t h i s . i s not the case. The sign on the c o e f f i c i e n t i s negative but the variable i s barely s t a t i s t i c a l l y s i g n i f i c a n t at the 0.05 l e v e l of confidence. This implies that being located 108 proximate to the rezoning could have s i g n i f i c a n t l y influenced 8 price. The. conclusion to be drawn from Runs 1 to 3 i s that t h i s p a r t i c u l a r rezoning did not appear to impose a measurable cost on the surrounding properties. The l a s t hypothesis i s that the rezoning had a positi v e influence on rezoned property values. This i s tested i n two ways. In the f i r s t , a run was made using a sample consisting of a l l rezoned properties. The s p e c i f i c a t i o n was the same as for Run 1 plus a dummy variable was included for the property being rezoned i n 1961. If the rezoning had a pos i t i v e influence on price, t h i s variable should be s i g n i f i c a n t and the sign of i t s c o e f f i c i e n t should be p o s i t i v e . The res u l t s of Run 4 confirm the hypothesis. The REZON dummy variable was po s i t i v e and i t was the t h i r d most s i g n i f i c a n t variable i n t h i s equation. The most s i g -n i f i c a n t variable was the area, of, the l o t which i s consistent with the notion that developers are w i l l i n g to pay a premium for larger l o t s . The r e s u l t here indicates that the rezoning contributed to the prices of the rezoned properties. In the second,test, the intent was to eliminate the influence of the c h a r a c t e r i s t i c s of the dwelling unit on price and only work with the land component. In a rezoning to a higher density use, the hypothesis i s that the land becomes more valuable. Naturally land, value had to be standardized by the size of the l o t to account for the d i f f e r e n t sized l o t s . The variables thought to have an influence on land value for which information 9 was available were year of assessment, location and zoning variables. Thus these variables were regressed against land 109 value per square foot for the f u l l sample for which assessed values were available. The r e s u l t i s shown as Run 5 i n Table XV.. Five of the eight independent variables are s i g n i f i c a n t and a l l have signs consistent with the previous runs. The variable of greatest i n t e r e s t i s the dummy variable that indicates the s i t e was rezoned i n 1961 (REZON). If the rezoning had .a p o s i t i v e influence on land value, the variable would be expected to be s i g n i f i c a n t and pos i t i v e , which agrees with the empirical r e s u l t . A large percentage (76%) of the variance i n land value i s explained by t h i s equation."'"^ As a l a s t check that the rezoning. didn 11 negatively a f f e c t the surrounding properties, a f i n a l run was made including the POSTREZ dummy. Once again, as was the case i n Run 2, the variable was i n s i g n i f i c a n t . This indicates that the rezoning did not have a negative e f f e c t on the land values of the surrounding properties. The r e s u l t s of the six regressions are believed to be r e l i a b l e . In none of the runs was multicollinearity'''''" thought to present a serious problem. The resu l t s obtained from using land value per square foot as the dependent variable are consistent with and reinforce the results from the price equation. Of the three hypotheses stated at the outset, two are rejected and one i s accepted. This leads to two main conclusions: 1. the rezoning from single-family to multi-family use did appear to a f f e c t the prices of the surrounding single-family residences and 2. the rezoning did. have a pos i t i v e influence on rezoned property values. Table XV REGRESSION RESULTS USING ASSESSED LAND VALUE PER SQUARE FOOT AS DEPENDENT VARIABLE VARIABLE (Sample Size) 5 . (722) DATE POSTREA REZON CORNER 0.044 ( .001) 3 (41.7) 0.49 -0.004 (0.03) (0.02) (15.5) (-0.2) DUMMY 1&2 0.039 (0.014) (2.77) DUMMY 3 0.038 (0.014) (2.68) DUMMY 4 0.022 (0.013) (1.74) DUMMY 5 0.017 (0.01) (1.53) DUMMY • 6 0.004 (0.01) (0.38) R Standard (adjusted) E r r o r 0.7600 (0.7573) 0.1 6 0.042 0.018 0.49 -0.003 0.037 0.034 . 0.017 0.013 0.001 [722) (0.001) (0.012) (0.032)(0.018) (0.014) . (0.014) (0.013) (0.011) (0.01) (28.4) (1.49) (15.1) (-0.19) (2.6) (2.39) (1.3) (1.13) (0.07) 0.7607 (0.7577) 0.1 SUMMARY OF CHANGES Run 5: Sample of a l l properties f o r which assessed value was av a i l a b l e . Run 6: As above and includes POSTREZ dummy v a r i a b l e . 1. Estimated c o e f f i c i e n t s 2. Standard E r r o r of the c o e f f i c i e n t s 3. t - s t a t i s t i c * S i g n i f i c a n t at OC = 0.05 l e v e l I l l T a b l e V X I C O R R E L A T I O N MATRIX O F RUN 5 DATE 1 .00 REZON - 0 . 1 6 1 .00 CORNER 0. 01 0. 01 1. 00 DUMMY 1&2 0 . 27 - 0 . 38 0 . 03 1. 00 DUMMY 3 0 . 04 - 0 . 01 0 . 03 0 . 18 1. 00 DUMMY 4 0 . 03 - 0 . 00 0 . 02 0 . 19 0 . 19 1. 00 DUMMY 5 0. 03 - 0 . 00 - 0 . 04 0 . 22 0 . 22 0 . 24 DUMMY 6 0. 01 - 0 . 00 - 0 . 09 0 . 21 0. 21 0 . 23 112 These are consistent with the results obtained i n the the previous section. There i s n ' t any i n d i c a t i o n that resident expectations were unfavourably affected by the rezoning or that there should have been any r e v i s i o n i n expectations. Hence, area s t a b i l i t y was maintained. Some Concluding Comments The previous sections showed a s i g n i f i c a n t inpact on the prices of the rezoned properties following the rezoning and no measurable impact on the remaining surrounding single-family homes. Sim i l a r l y , reinvestment behavior and turnover rates i n the surrounding properties appeared unchanged i n the pre- and post-rezoning periods i n comparison with the control properties. These results are consistent with the implications of the expectations model presented e a r l i e r . For neighbourhood change to occur i n the face of some form of external intervention, a s i g n i f i c a n t number of residents must revise t h e i r expectations. This requires a s i m i l a r i t y of preferences about desirable and undesirable c h a r a c t e r i s t i c s of a neighbourhood. The more l i k e l y 12 case i s that prospective purchasers have d i f f e r i n g i n d i v i d u a l tastes and preferences which, means that buyers and s e l l e r s i n t e r a c t i n g i n the market serve to minimize any adverse external e f f e c t s . I t was further hypothesized that the s e n s i t i v i t y with which expectations were revised (with concomitant e f f e c t on the demand for housing) was due i-n part to the h i s t o r i c a l actions of government. In the Canadian setting, i t was believed that . • 13 no r e v i s i o n of general expectations should occur and the tests performed did not reveal any evidence that expectations 113 did change. Neither were there any external price e f f e c t s attributable to the rezoning. In t h i s s i t u a t i o n , a neighbour-hood should remain stable and t h i s has been observed to be the case for Kerrisdale. But what are the implications of these results and the expectations model i n general? At a micro-level, one could argue that rezoning part of a neighbourhood to a higher density was not harmful i n t h i s case and so some of the r i g i d zoning r e s t r i c t i o n s regulating neigh-bourhoods should be relaxed. In fact, the rezoning may have s t a b i l i z e d the neighbourhood by providing a tenure alternative for those aging residents who no longer wanted or needed a single-detached dwelling yet wished to remain i n the area. Another argument against s t r i c t regulation i s advanced by Leven et a l . They, observe that zoning regulations meant to keep neighbourhoods exclusive by excluding undesirable uses may i n fact lead to change. The very regulations that were designed to promote s t a b i l i t y may hasten the process of t r a n s i t i o n . Since some but not a l l neighbourhoods can be exclusive, i f everybody attempts to wall themselves o f f from change at the same time, some of t h e " i s o l a t i o n measures w i l l prOve i n e f f e c t i v e . It i s recognized that t h i s study has concerned i t s e l f empirically with only one area of one urban land market. Yet by analogy, i t s r e s u l t s should be generalizable to other markets i n other l o c a l i t i e s with similar conditions. The evidence i s increasingly strong, and the research here supports the view, that many of the negative e x t e r n a l i t i e s from mixed uses that zoning i s designed to prevent do not ex i s t i n s i g n i f i c a n t 114 quantities. Where negative influences on housing values have been found, the reason can often be atrributed to the uncert-ainty introduced by the zoning authorization i t s e l f . The way i s l e f t clear for less regulation,, more f l e x i b l e controls and a comprehensive zoning bylaw that judges each use on i t s own merit for that location rather than by s t r i c t conformity to a bylaw that, i n blanket fashion, tends to segregate uses. The r e s u l t would be a more diverse and creative planning environment which could only contribute to the v i a b i l i t y of the C i t y . On a more macro-level, the thrust of the thesis argument has been towards the role of government intervention i n neighbourhood change. I t has been theorized that the neighbourhood and change within i t i s a product of ad hoc p o l i t i c a l decisions and p o l i c i e s . While the segregation of r a c i a l minorities, a c u l t u r a l preference for what i s new, the conservative lending practices of f i n a n c i a l i n s t i t u t i o n s and r e s t r i c t i v e zoning regulations play a part i n some j u r i s d i c t i o n s , neighbourhood change can be the unplanned consequence of non-urban p o l i c i e s (transportation and housing p o l i c i e s are two examples which have been discussed at length). As Goldstein and Ross (1972) describe the process so elo-quently: "Neighbourhoods can and do die. Not infrequently they are murdered by government. While they do not leave for higher realms (the suburbs), they do f a l l apart. When they f a l l apart, they do not work either for the c i t y or i t s people." p.. 156. If the expectations model of neighbourhood change i s correct, then the implications are clear. For one, the perspectives of governments must be altered. Local governments must begin to accept the r e s p o n s i b i l i t y for the outcomes they produce. They must focus on re s u l t s rather than a c t i v i t i e s . In so doing, the po s i t i v e and negative impacts upon the neighbourhood and the City can be evaluated systematically. More importantly, federal governments must recognize that federal a c t i v i t i e s have the potential (and t h i s i s the r e a l i t y i f the U.S.) to change expect-ations, to weaken the neighbourhood economically and thereby make conditions worse, not better. To the extent that federal p o l i c i e s i n f r i n g e upon urban matters,.the government must begin to understand the re l a t i o n s h i p between what i t does and the re s u l t i n g urban structure. What i s required, and t h i s i s true of both countries, i s the development of a comprehensive set of urban p o l i c i e s that may be used as a framework by which the "unintended po l i c y " e f f e c t can be minimized. U n t i l p o l i t i c a l attitudes and government p o l i c i e s change, those neighbourhoods which are now declining w i l l not improve and other healthy neighbourhoods are i n danger. Another implication stems from the importance of reinvest-ment and maintenance a c t i v i t y i n the model. One of the factors of decline as described i n Chapter 4 i s the reduction i n maintenance expenditures i n a neighbourhood. This can i n i t i a l l y occur as an interim measure (before moving) by households that have unfavourable expectations. The d i s i n c l i n a t i o n to invest can spread to other owners and speed the process of decline. Or, some households and landlords are not able to devote a s u f f i c i e n t proportion of income to maintain, improve and repair the standing stock. In either event: 116 "Adequate accommodation can become substandard almost overnight i f maintenance leve l s are too low whereas,... increased outlays can quickly raise large sections of the deteriorated inventory to a passable condition." (Grigsby, 1967, page 129). A solution i s to make financing for renovation and maintenance r e l a t i v e l y more a t t r a c t i v e than that for new construction. This could remove some of the cost disadvantage of staying i n an old neighbourhood. I t furthermore might remove some of the incentive to allow e x i s t i n g improvements to deteriorate: (1) i n a n t i c i p a -tion of future changes i n use or v i a b i l i t y of a neighbourhood, or (2) i n response to the b e l i e f that i n the long run i t w i l l be less expensive to construct new improvements than to maintain the ex i s t i n g ones. In summary, the o r i g i n a l purpose of t h i s research was to develop a more general model of neighbourhood change. This has been accomplished u t i l i z i n g a broad set of peoples' expectations about neighbourhood change i n which the role of government i s a central feature. The tests performed did not refute the model, leaving the impression that the model at least provides a plausible explanation for change and represents a step i n the r i g h t d i r e c t i o n . The main implication of the model relates to 14 reducing the l e v e l of harmful government intervention i n urban a f f a i r s . . If t h i s were accomplished, the r e s u l t should be reduced uncertainty, more favourable expectations and stable neighbour-hoods. The next step i s to further explore t h i s hypothesis and the model by extending the research to other neighbourhoods i n a variety of situations i n Canada and the U.S. Given the importance of the neighbourhood i n the f i b r e of a nation, the project becomes a worthwhile endeavor for the future. 117 442 of the 767 transactions i d e n t i f i e d represented one transaction per property. Of the remaining 335 representing multiple transactions, 100 were located.in the rezoned rings 1 and 2,.180 i n rings 3 to 7 and 55 i n the control group which i s approvimately what would be predicted considering t h e i r r e l a t i v e s i z e s . Price changes could be distorted by grouping a l l s i t e s together because s i t e s with a greater area, c e t e r i s paribus, s e l l for higher p r i c e s . Goldberg (1979) notes t h i s e f f e c t : " i f one ignores l o t sizes and i f the proportion of larger l o t s decreases i n the sample over time, one might spuriously show prices to be declining when a l l that i s r e a l l y declining i s the proportion of large l o t s . " (P. 14) . If the experimental group i s further broken down into rezoned rings and rings 3 to 7, the ranges once again are not r a d i c a l l y d i f f e r e n t ; 61-225% for the former and 64-208% for the l a t t e r although the enumeration areas containing apartments generally show smaller increases over the period. These observations must be taken as tentative considering the overlap that occurs between enumeration areas of rezoned and non-rezoned rings. The general discussion derives from Sagalyn and Sternlieb (1972). The reader f a m i l i a r with the concepts of multiple regression may skip to page 104. Nie, Norman H., et a l , S t a t i s t i c a l Package for the Social  Services, (New York, N'.Y. : McGraw H i l l , 1970), p. 185. The qu a l i t y of t h i s variable i s suspect due to the fact that an average value for the enumeration area i s being ascribed to an i n d i v i d u a l dwelling unit. For t h i s reason, no attempt w i l l be made to explain the opposite sign and significance of t h i s variable. The year of sale variable was included to account for the general price increases which could be expected over time. With t h i s variable contributing so much explanatory power to the equation, i t was f e l t that possibly i t was masking important influences from the other independent variables. Consequently, t h i s equation, and the others that follow, were run with the DATE excluded. In each case, the R2 decreased as could be expected, but more importantly, the remaining variables kept t h e i r previous sign, the c o e f f i -cients were of the same order of magnitude, and the r e l a t i v e values of the t - s t a t i s t i c s remained the same. As a r e s u l t , there i s n ' t any reason why DATE may not be included and further evidence i s provided that m u l t i c o l -l l i n e a r i t y i s not a problem. 118 8. Since i t i s u n c l e a r whether RING i s measuring p o s i t i v e i n f l u e n c e s or neg a t i v e i n f l u e n c e s , equation 3 was r e s p e c i f i e d so t h a t each of r i n g s 3-14 was rep r e s e n t e d by a dichotomous dummy v a r i a b l e . The equation was. r e - r u n with these dummy v a r i a b l e s , e x c l u d i n g one so t h a t a p e r f e c t . l i n e a r combination would not be pre s e n t , t o study the d i f f e r e n t impacts more c l o s e l y . The r e s u l t was the c o e f f i c i e n t s v a r i e d i n magnitude and s i g n , and a l l were i n s i g n i f i c a n t a t the .05 l e v e l . T h i s lends more weight to the statement t h a t t h i s p a r t i c u l a r r e z o n i n g d i d not appear t o impose a measurable c o s t . 9. The l o c a t i o n v a r i a b l e s , as d e s c r i b e d i n footnote 8, were dichotomous dummy v a r i a b l e s generated from RING. In the runs shown, dummy v a r i a b l e s f o r being l o c a t e d i n rezoned r i n g s 1 and 2 (DUMMY 1+2), r i n g 3 (DUMMY 3 ) , . . . , t o r i n g 6 (DUMMY 6) were i n c l u d e d . •10. A t e n t a t i v e i n t e r p r e t a t i o n of the p o s i t i v e s i g n s on the l o c a t i o n dummies and the d e c r e a s i n g s i g n i f i c a n c e moving outward from the rezoned area i s t h a t r e l a t i v e t o r i n g 7, there doesn't appear t o be any negative impacts from the rez o n i n g and the r e does appear t o be p o s i t i v e e x t e r n a l i t i e s generated. 11. As d e s c r i b e d e a r l i e r , the c o r r e l a t i o n m a t r i c e s do not show any evidence t h a t m u l t i c o l l i n e a r i t y i s p r e s e n t . As a f u r t h e r check, runs were made of v a r i o u s independent v a r i a b l e s a g a i n s t the remainder, of the independent v a r i a b l e s and i n none of these cases was the R2 c l o s e t o the o r i g i n a l . F i n a l l y , the omission of DATE from the equations d i d not a f f e c t the sign s or s i g n i f i c a n c e of the remaining v a r i a b l e s . 12. Each i n d i v i d u a l w i l l a t t a c h d i f f e r e n t weights t o components of his* u t i l i t y f u n c t i o n s and consequently w i l l view d i f -f e r e n t neighbourhood c h a r a c t e r i s t i c s as r e p r e s e n t i n g v a r y i n g degrees of d e s i r a b i l i t y . 13. In the absence of government a c t i o n i t i s d i f f i c u l t t o t e s t the hy p o t h e s i s . I t remains yet to be done and should be a hig h p r i o r i t y r e s e a r c h item i n the f u t u r e . 14. Harmful government i n t e r v e n t i o n i n c r e a s e s u n c e r t a i n t y i n the housing market p r o c e s s . P o l i c i e s i n the area of urban t r a n s p o r t a t i o n , renewal, development and p u b l i c housing have i n some cases had a d e t r i m e n t a l e f f e c t on the neighbourhood. 119 SELECTED REFERENCES Ahlbrandt, Roger S., "Public P o l i c i e s for the Preservation of Capital i n Older Areas, "AREUEA Journal, 5, 1 (Spring 1977). - • and P.C. Brophy, Neighbourhood R e v i t a l i z a t i o n , (Lexington, Massachussets: Lexington Books, 1975). Bailey, Martin, "A Note on the Economics of Residential Zoning and Urban Renewal," Land Economics, 35 (1959). Birch, David, "Neighbourhood Evolution and Decline," (Boston, Massachussetts: Harvard - M.I.T. Joint Centre for Urban Studies, 1974) . Boehm, Thomas P. and J.H. Mark, "A P r i n c i p a l Component Analysis of the Mobility Decision," unpublished paper, 1979. Bourne, Larry S., "Spatial Patterns and Determinants of Land Use Change i n Metropolitan Toronto," Research Paper #80 (Toronto, Ontario: Centre for Urban and Community Studies, 1976). , "Perspectives on the Inner C i t y : Its Changing Character, Reasons for Decline and Revival," Research Paper #94, (Toronto, Centre for Urban and Community Studies, 1978). Brueckner, Jan, "The Determinants of Residential Succession," Journal of Urban Economics, 4, 1 (January 1977). Burgess, E.W., R.E. Park and R.D. McKenzie, eds., The City, (Chicago: University of Chicago Press, 1925). Cameron, James G., M.A. Goldberg and J.H. Mark, "Some Discrep-ancies i n Theories of Neighbourhood Change: Toward a More General Model of Neighbourhood Change and S t a b i l i t y , " paper prepared for the Western Regional Science Association Meetings, 1979. Cannon, Donald S., M.L. Lachman and A.S. Berhard, "Identifying Neighbourhoods for Preservation and Renewal," Growth and Change, 7, 1 (January 1977). Crecine, J.P., O.A. Davis and J.E. Jackson, "Urban Property Markets: Some Empirical Results and t h e i r Implications for Municipal Zoning," Journal of Law and Economics, 10 (1967). deLeon, Peter and John Enns, "The Impact of Highways upon Metro-po l i t a n Dispersion: St. Louis," Rand Corporation Report P-5061, 1973. Downs, Anthony and M.L. Lachman, "The Role of Neighbourhoods i n the Mature Metropolis," paper prepared for the Symposium on Challenges and Opportunities i n the Mature Metropolis, St. Louis, 1977. 120 Fredland, Daniel R., Residential Mobility and Home Purchase, (Lexington, Massachussets: D.C. Heath and Co., 1974). : , "A Model of Residential Change," Journal of Regional Science, 15, 2 (1975). Goldberg, Michael A., "Housing and Land Prices i n Canada and the U.S.," i n Public Property?: The Habitat Debate Continued, (Vancouver: The Fraser I n s t i t u t e , 1977). , "The Evidence on Zoning: A Vancouver Example", Chapter 6 of a forthcoming book, (Vancouver: The Fraser In s t i t u t e , 1979). Grigsby, V I . G . , Housing Markets and Public Policy, (Philadelphis: University of Pennsylvania Press, 1967). Hamilton, Stanley W., and David Baxter, Landlords and Tenants i n  Danger - Rent Control i n Canada, (Winnipeg: The Research and Development Fund, Appraisal In s t i t u t e of Canada, 1975). Harris, Chancy D., and E.L. Ullman, "The Nature of C i t i e s , " The Annals of the American Academy, 242 (November 1945). Hoyt, Homer, The Structure and Growth of Residential Neighbourhoods  in American C i t i e s , Washington, D.C: U.S. Government Pr i n t i n g O f f i c e , 1939) . Kain, J.F. and J.M. Quigley, "Measuring the Value of Housing Quality," Journal of the American S t a t i s t i c a l Association, (June 1970). •- , Housing Markets and Recial Discrimination: A Microeconpmic Analysis, (New York: National Bureau of Economic Research, 1975). Koutsopoulos, K.C., "The Impact of Mass Transit on Residential Property Values," Annals of the Association of American  Geographers, 67, 4 (December 1977). Leven, C.L., J.T. L i t t l e , H.O. Nourse, R.B. Read, Neighbourhood  Change: Lessons i n the Dynamics of Urban Decay, (New York: Praeger Publishing Co., 1976). and J.H. Mark, "Revealed Preferences for Neighbourhood Cha r a c t e r i s t i c s , " Urban Studies, 14 (1977). L i t t l e , James T., "Revealed Preference i n assignment housing markets," Working Paper HMS 5, (St. Louis: I n s t i t u t e for Urban and Regional Studies, Washington University, 1975). "Residential Preferences, Neighbourhood F i l t e r i n g and Neighbourhood Change," Journal of Urban Economics-3, 1 (1976). 121 - - • __, "The Impact of Housing Codes and Occupancy Controls on the Neighbourhood Succession Process," Working Paper  INS 16, (St. Louis: In s t i t u t e for Urban and Regional Studies, Washington University, 1975) . Lowry, Ira S., A Model of Metropolis, (Santa Monica, C a l i f o r n i a : Rand Corporation, 19 64). Maher, C.A., "Spatial Patterns i n Urban Housing Markets: F i l t e r i n g i n Toronto, 1953-71," Canadian Geographer, 18, 2 (1974). Maser, S.M., W.H. Riker, and R.N. Rosett, "The Ef f e c t s of Zoning and E x t e r n a l i t i e s on the Price of Land: An Empirical Analysis of Monroe County, N.Y.,"- Journal.of Law and Economics, 20, 1 (April 1977). Mercer, John, "On Continentalism, Distinctiveness, and Comparative Urban Geography: Canadian and American C i t i e s , " Canadian  Geographer, 23, 2 (Summer, 1979). Moore, E r i c G. and Stephan Gale, "Comments on Models of Occupancy Patterns and Neighbourhood Change," i n Moore, E r i c G., Ed., Models of Residential Location and Relocation i n the City, Northwestern University, I l l i n o i s : Department of Geography, 1973). Moore, Peter W., "Zoning and Neighbourhood Change i n the Annex of Toronto, 1900-1970," (Toronto: Ph.D. Thesis, University of Toronto, 1978). Muth, Richard F., "A Vintage Model of the Housing Stock," Regional Science Association Papers, 30 (1973). , "A Vintage Model with Housing Production," i n Papageorgiu/, George J. , ed. , Mathematical Land Use Theory, (Lexington, Massachussets: Lexington Book, 1976). Nowlan, David M., "The Land Market: How i t Works," i n Public  Property?: The Habitat Debate Continued, (Vancouver: The Fraser In s t i t u t e , 1979). Peterson, George E., "The Influence of Zoning Regulations on Land and Housing Prices, "Working Paper 1207-24, (Washington, D.C.: The Urban Institute, 1974). R a t c l i f f , R.U., Urban Land Economics, (New York: McGraw-Hill, 1949). Reuter, F.H., " E x t e r n a l i t i e s i n Urban Property Markets: An Empirical Test of the Zoning Ordinance of Pittsburgh, Journal of Law and Economics, 16, 2 (July 1977). Sagalyn, Lynne B. and George Sternlieb, Zoning and Housing .Costs - The Impact of Land-Use Controls on Housing Price, (New Jersey: Centre for Urban Policy Research, Rutgers University, 1973) . 122 Schliewinsky, F. , "A Systems Approach to Neighbourhood Change" (Toronto: M.A. Thesis, University of Toronto,'1975). Siegen, B.H., Land Use Without Zoning, (Lexington, Massachussets: Lexington Books, 1972). Smith, Wallace F., " F i l t e r i n g and Neighbourhood Change," Research  Report 24, (Berkeley: Centre for Real Estate and Urban Economics, University of C a l i f o r n i a , 1964) . Solomon, Arthur P., "The E f f e c t of Land Use and Environmental Controls on Housing: A Review," Working Paper No. 34, (Boston: Joint Center for Urban Studies of the Massachusetts Inst i t u t e . of Technology and Harvard University, 1976). Sternlieb, George and James Hughes, "Analysis of Neighbourhood Decline i n Urban Areas," (New Brunswick: Centre for Urban Policy Research, Rutgers University, 1973). S t u l l , William J., "Community Environment, Zoning, and the Market Value of Single Family Homes," Journal of Law and Economics, 18, 1 (1975). T u n n i c l i f f e , K.W., "The E f f e c t of Rezoning on Property Values," (Vancouver, B.C.: M.Sc. Thesis, U.B.C., 1975). Western Realesearch, "Potential for and Impact of Low-density Multiple Housing i n RS-2 Areas," (Vancouver: C i t y Planning Department, 197 6) . VJheaton, William C , "A Bid Rent Approach to Housing Demand," Journal of Urban Economics, 4, 2 (April 1977). Wolpert, J., A. Mumphrey, and J . Seley, "Metropolitan Neigh-bourhoods: P a r t i c i p a t i o n and C o n f l i c t Over Change," Resource  Paper No. 16, (Washington, D.C.: Association of American Geographers, 1972). 

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