Can the free market be trusted with the housing for the poor?
Cities are becoming increasingly bigger and unaffordable to live in and maintain both for their citizens and governments.
São Paulo, Brazil in 2002 introduced an innovative scheme to finance its infrastructure expansion and up-gradation. Certificates of Additional Construction Potential (CEPAC) were a new breed of value-capture tool. It essentially was the NYC’s Air Rights policy on steroids as they sell not only the air rights but the right to change the zoning of the property itself. These openly and transparently traded bonds reduced the developmental control over the urban land freeing builders to construct bigger structures than otherwise permitted under the city’s master plan.
Urban land is one of the most regulated entity in the contemporary society and São Paulo’s move to loosen its direct control over it, allowing the free market to govern landuse and zoning was a bold move. The scheme found popular support from the real estate industry and has raised over $2 billion for the city government. But did it make the city more affordable?
The scheme is not free of problems. The city government is committed to use all revenue from the scheme within the designated area for which the bonds were floated, funding investments in urban infrastructure. There have been issues with how the city spent the fortune it collected but this write-up will focus on how the market based zoning impacted the city’s growth.
Businesses don’t pay premium price to accommodate low income dreams. Real estate industry is no different and given the option chose profit over the inclusive development. Today, São Paulo is known for its income and housing inequality. There are various economic and political factors that perpetuated this crisis but no one will deny that CEPAC had a role as well.
“CEPACs do not automatically lead to improvements in surrounding slums or policies that address the inequality and gentrification issues that often accompany development,” say Tom Hilliard and Neil Kleiman in their recently released report Innovation and the City.
Almost 15 years later city is trying to strengthen the policy driven urban planning to solve this crisis. New scheme is similar to NYC’s new Mandatory Inclusionary Housing policy which sets aside up to 30 per cent of apartments in new residential buildings for low-income residents.
Equitable development of urban space is one of the primary task of any city government. It is a difficult task as city governments are usually financially limited. The experience from São Paulo is that there is mega potential in monetizing the right to change zoning regulations to increase the city purse to finance growth but it can have high sociopolitical cost if left completely to free market dynamics.
The challenge is that of finding a balance that works for all.
