Section 1: Literature Review
Introduction
Much of Maine is currently facing a housing crisis, which is a shortage of housing stock and a rapid increase in demand for housing causing a significant rise in the cost of rent and home purchases. The worst part of this crisis is that many cities don’t know how to fight it. Some cities have been trying to solve the issues of housing affordability and housing access for decades, and the policies they implement to address these problems have had, in most views, mixed results. With the rising demand for housing that Maine has experienced after the COVID-19 pandemic, we as a state are facing a rapidly growing problem. For many cities, finding the right solution to that problem has not been easy.
This is especially true with so many policy options on the table. Maine cities have begun experimenting with policies like inclusive zoning, rent control, and short-term rental restrictions, despite these tools being shown to cause more harm than good. In particular, Portland, Lewiston, and Bangor have experimented with many housing regulations that create obstacles for market reactivity, which is concerning when considering the fact that these are Maine’s three largest cities.
In 2022, in response to the growing demand for housing and the policy barriers blocking market response, the Maine legislature passed LD 2003. Some obstacles this law attempts to alleviate are single-family zoning and restrictions on accessory dwelling units. From the perspective of state lawmakers, municipal restrictions on multi-family properties were squeezing housing supply, partially due to NIMBYism and local government incentives to inflate property values.
However, LD 2003 has had mixed effects so far, and many cities have worked to circumvent its goals. Portland, for example, complies by technically allowing up to four units on previously single-family properties, but creates an intricate system of requirements to build that many units in a single-family zone. Thus, the city is technically compliant on paper but is able to undermine the intended impact of LD 2003. Lewiston and Bangor have implemented similarly complex rules for building multiple units on traditional single-family parcels.
Another requirement of LD 2003 is for municipalities to weaken density restrictions for affordable housing, which aims to encourage affordable housing development. This solution runs into many of the same problems as inclusionary zoning and generates some questions of its own.
The effects and workarounds of this policy show that state-level housing mandates are generally not the best policy tool to combat the housing crisis. In proceeding with housing policy as a state, Maine needs to understand how both the housing development market and local governments will respond to state policies going forward.
Like other markets, housing supply tries to grow in reaction to an increase in housing demand, and housing crises are typically caused by some regulatory barrier thwarting increases in supply. Housing regulations–even those intended to create affordable housing–can become supply barriers. In this report, we examine some of the policies municipalities are experimenting with across the state, how they become barriers to the housing market, and how cities should react to them when proposed.
Inclusionary Zoning/Workforce Housing
Inclusive zoning currently exists in Portland and is being considered in Lewiston and Bangor, but it can have counterintuitive effects considering the goals of this policy. Inclusive zoning is a policy that requires housing developers to set the price of some units below market level, with a certain percentage of the units created as either “affordable housing” or “workforce housing.” Alternatively, the developer can pay a fee-in-lieu, which waives the requirement to build affordable units but forces the developer to pay the city a fee instead.
Inclusionary zoning has been found by scholars to function as a tax on housing development, and for every below-market unit produced through inclusionary zoning policies, these policies can stop an additional 20 market-rate units from being produced. A 2024 report produced by the Terner Center at UC Berkeley in cooperation with UCLA entitled, “Modeling Inclusionary Zoning’s Impact on Housing Production in Los Angeles: Tradeoffs and Policy Implications” found that:
“Nevertheless, it is important to understand IZ’s costs and benefits, and existing research suggests that IZ can have unintended consequences. Because in effect it operates as a tax on development, IZ should reduce housing production and increase the overall price of housing in the market, all else being equal.”
The same report found that inclusionary zoning has a net negative public welfare effect on housing supply and that, at a minimum, four market-rate units are lost for each below-market “workforce housing” unit supplied. In certain cases, a single affordable housing unit provided through an inclusionary zoning policy removes more than 20 housing units from the market. The report also estimated that the cost landlords incur from renting out affordable housing through inclusionary zoning policies is likely passed on to their market-rate tenants, with the rent increase needed to offset the private subsidy.
Implementing these policies benefits a few people by providing them with below-market housing but harms a greater number of prospective tenants by driving down the housing supply and driving up market prices. Additionally, while fee-in-lieu systems may seem more flexible in allowing developers to choose whether they wish to implement affordable housing programs, these systems warp the market even further.
Developers who are most willing to price their housing below the market are the same ones who make housing of a quality that is below the market average. Most inclusionary zoning projects require no or little difference between the affordable housing and the developer’s normal housing. However, nothing stops the developer from reducing the quality of the regular housing below what it would have been without inclusionary zoning. Additionally, a fee-in-lieu system allows developers to avoid typical inclusionary zoning problems, but only the highest quality luxury housing developers will pay the high fees.
Thus, while many housing markets will encourage development to centralize around affordable, middle-class housing, inclusionary zoning significantly disincentivizes the middle. Inclusionary zoning can, therefore, encourage the creation of a massive gap in the quality of housing and, thus, the quality of life. While all housing is discouraged by inclusionary zoning, middle-quality housing is discouraged more than any other kind.
Rent Control/Rent Notice Requirements
Rent control and rent notice requirements are both policies that regulate when landlords can change the rent they charge and by how much. Rent notice regulations have negative impacts on the market by restricting landlords’ ability to adjust to rapid market shifts and inflationary pressures, thus discouraging development when inflation seems likely. The effects of rent notice requirements on development are not as directly obvious as rent control. Rent control directly affects the revenue developers of multi-unit housing can receive while keeping the amount needed for investment the same. Both policies hurt development, but rent control is more directly harmful.
Rent control is a selection of local policies that establish a maximum allowable rent increase, often a percentage of the rent currently being charged. Some municipalities use different systems for determining this increase, but Portland has decided to take a very controversial approach. They have created a rent control board and have tied the allowable increase percentage to 70% of the Consumer Price Index for the Greater Boston Metro Area. Rental notice requirements instead require a lengthy notice period for landlords to legally increase the rent they charge their tenants, making it harder for landlords to guarantee reliable revenue from housing units they own.
The Consumer Price Index is one of many ways to measure inflation, and it would be accurate to describe the growth that it experiences as the total inflation rate of the local market. This means that for landlords in Portland, the baseline rent increase, by definition, does not allow them to adjust the rent they charge to equate to inflation and that, adjusting for inflation, they are expected to make less and less money every year they rent out a unit.
The only way a landlord in Portland can keep pace with inflation is if they request–and are granted from the Portland Planning Board–an exception, though this is not guaranteed or even likely. If one considers the incentives this creates, it quickly becomes obvious that developers are outright guaranteed to not receive a return on their investment in the housing market.
Rent control advocates claim the policy creates affordable housing by keeping rents low, but the effects this policy has on the housing market tell a different story. Rent control discourages the creation of new housing, which means less housing is available to fewer people. Rent control also stops landlords from significantly improving the quality of their housing units, as they cannot adjust revenue to costs incurred.
Lastly, rent control policies can also, paradoxically, discourage keeping prices low. By removing the opportunity for landlords to drastically raise rent in massive market shifts, landlords rationally respond by keeping rents high and profit margins as large as they can. If this ability to shift prices up existed, landlords’ incentive to compete for tenants with lower rent prices would be unimpeded, thus causing an increased chance of downward rental price movement. However, since all landlords are forced into this rent control scenario, the rent-minimizing landlords are no longer incentivized with more rental applications.
Zoning Regulations
Zoning is a widespread form of housing regulation, and since the 1920s has grown to affect almost all of America’s cities. However, the effects of this type of regulation on housing quantity and price are often negative. While some report that zoning regulations allow for a more effective allocation of resources regionally, increased strictness of zoning is strongly correlated with increased housing prices.
Local government-imposed regulations are often clumsy and allow small groups to overemphasize the impact certain externalities have on the local area. A new bar may cause some people to object to the noise, but these externalities are not universal or objective. After all, someone with a hearing impairment may not care and even be happy about the reduced cost of living near a bar the same way a veterinarian may not care if their neighbors have pets.
While zoning appears to allow people to self-select regions with their own preferences in mind, this same selection would be done already without these sorts of restrictions, and on an individual priorities basis. Artificial limitations on land use can poorly mimic free-market self-selection by owners. However, it still creates major inefficiencies by imposing regional, cookie-cutter land use restrictions.
Additionally, zoning encourages racial and income-based segregation, as it allows for housing in certain neighborhoods to be priced too high for lower-income workers. Evidence dating back to the 1990s shows that higher levels of local land-use regulation reduce the local minority population, and thus, these policies should also be opposed due to their disparate impact on lower-income and minority populations. While the economic effects of zoning is the primary focus of this report, the fact that this policy can be used to discriminate based on income or class should also make it inherently suspect.
By artificially inflating the cost of housing in specific neighborhoods, property use and density zoning allows for the underhanded banning of lower-income groups. Class-based segregation is often also co-opted by those desiring race-based segregation, meaning that the impact of these policies can be both classist and racist.
While the effects of increased zoning restrictions on economic efficiency, class, and race have generally been noted, specific forms of zoning regulation can differ in how they burden local populations. Thus, while zoning regulations generally have negative effects, the following sections will analyze the specific forms this policy takes in Maine and the impacts each form has.
Parking and Setback Requirements
Parking and setback requirements operate in similar ways to each other, as they require a certain part of a property to remain undeveloped. Parking requirements do so with the justification of allowing parking to be available to a city’s population, while setback requirements are often justified using aesthetics but have the same overall effect.
Setback requirements mandate that buildings be a certain distance from the property line and usually specify different distances for the side, front, or rear of the property. Those supporting setback requirements often justify them by forcing the building of larger sidewalks, front or back yards, or by allowing an increased open-air space in denser cities.
While Portland has recently worked to remove parking requirements for a large number of residential properties throughout the city, many of the city’s setback requirements are still in place. Both of the “Recode Portland” waves have made minor reductions to certain zones’ setbacks, and some zones that were merged together even saw increases in setbacks. One example of this is zone R-6a’s transition to RN-5, which increased a five-foot front setback and ten-foot rear setback to 25 feet each.
Lewiston is still behind Portland on parking requirements, as their rules largely require at least one parking space per dwelling unit, with some requiring twice that. Recent changes have required only two off-street parking spaces for every three units in some parts of the city, but this is still far from Portland’s partial parking requirement abolition.
While the setbacks here are not much greater than Portland’s on average, there are areas in Portland’s downtown regions with essentially no setback requirement to allow for maximal property use. These no-setback zones simply don’t exist in Lewiston outside of the Centreville district, which has no rear or side setbacks but still has a five-foot front setback.
Bangor also requires at least one parking space per dwelling unit citywide, though buildings with 2-4 dwelling units can count driveways for this. They also have setback requirements in every dimension for every zone except the Downtown Development zone, which covers only a small section of the inner city.
Both parking requirements and setback requirements require property owners to leave a portion of their property vacant. Similar to property taxes, which require owners to pay the government to continuously own land in a jurisdiction, these requirements require property owners to allow parts of their land to be continuously vacant for public use.
While ensuring parking availability and creating a beautiful and dynamic-looking city are laudable goals for local governments, these policies not only discourage efficient property usage by requiring some properties to be undeveloped, but they also force urban spread, which has a variety of negative impacts.
A recent study by the Terner Housing Center found that reducing parking minimums by 25% in Los Angeles would lead to a 6.9% increase in expected housing units per year, while reducing setbacks by 25% paired with a 25% floor area ratio and maximum height increase would lead to a 16% increase in expected units. Research from the same report showed that significant housing market change is more likely to occur when multiple “policy levers” like this are moved at once rather than only one or two small movements at a time. This is a major policy area where every one of Maine’s largest three cities needs serious reform.
Height Restrictions
Height restrictions are one of the most impactful anti-development local housing policies in existence, as they are an outright ban on properties being developed above a certain height. The impact this has on cities is massive, as it forces outward rather than upward development. Outward development means that cities are less walkable, that public transportation is less efficient, and that even private transportation has to go farther to get to the same places. Studies show that this increased travel cost to city centers has a significant net welfare loss for the city’s residents.
All of these factors add up to increasing the cost of living in the city and decreasing the availability of housing. Research shows that the unutilized airspace from height restrictions directly leads to a shortage in housing supply, which in turn indirectly leads to an increase in the cost of housing. While the desire to maintain the aesthetics of the buildings in local neighborhoods is a sympathetic one, such agreements should be through private contracts between property owners rather than government mandates. If someone wants to use their own property to maintain a certain look, even if it is a suboptimal use of their property, then it is their own prerogative, but in that case, government intervention is unnecessary. Similarly, if a group of neighbors wants to collectively enter into an agreement that their properties will have a shared aesthetic or use, that is similarly their prerogative.
However, many residents of single-family neighborhoods feel that they are entitled to control not just their own property, but everyone else’s in sight. It is important to remember that, for most intents and purposes, your property rights do not extend beyond the borders of your property. Lastly, as any lawyer with land use experience will explain, unless there is a specific law stating otherwise, property owners do not have “a right to a view.”
Weakening height restrictions, especially when combined with other restrictive land use policy reforms such as density restrictions and setback requirements, have been shown to significantly increase the available number of local housing units. Increasing the availability of housing not only reduces artificially inflated housing prices but also reduces the rates of homelessness by increasing available housing.
Lot Coverage Requirements, Density Requirements & Property Use Zoning
While lot coverage, density requirements, and use-based zoning all appear at first to be different, their effects all amount to properties not being used in the most profitable way. Lot coverage requirements, similar to parking and setback requirements, mandate that a certain amount of a property should remain unutilized, effectively functioning as a tax on property ownership.
Property use requirements instead restrict the ways in which a property can be used, meaning that people who want to open neighborhood convenience stores or build parking garages so neighbors don’t need parking spots aren’t allowed to if in a residential-only zone. Density zoning is somewhere in between the two. While it does not require only a portion of the property to be utilized, it does regulate how many residential units can be established on a lot. Sometimes minimum lot size requirements are considered a density requirement, but typically, this means a “maximum dwelling units per lot” requirement.
Recent research on the Dallas housing market shows that the cost of lot coverage regulations, when combined with other land regulations, can be equal to or even greater than the total cost of land. There are several reasons for this–not only because of the reduction in lot number, but also the restrictions on how lots can be used and even shaped. Lot coverage, especially when combined with density requirements, creates a major restriction on the freedom of property owners and the market’s ability to adapt.
Density requirements similarly hinder supply, especially that of multi-family units, and reform of these regulations, especially when combined with the relaxing of height restrictions, can increase housing units by up to 92%. Strict density restrictions don’t only force city sprawl, but can ironically force inefficient highly-dense regions. A Boston Federal Reserve study found that a massive leap in housing density occurred clustered against the edge of highly regulated parts of Boston. By forcing parts of a city’s population into the few regions that have weak density requirements, density regulations may potentially cause a myriad of health issues related to cramming many people into a small area.
While property use would not have as much of a negative effect as the others do in isolation, it still worsens the overall impact regulations have on the housing market. By allowing the market to develop mixed-use projects, where the natural demand is greatest, cities can create a catalyst for economic growth and address housing shortages simultaneously.
Minimum Lot Sizes
Minimum lot sizes are rules mandating that an individual property parcel must have a minimum square footage, which can lead to inefficient land use. They share traits with many other regulations. For example, they require extra land on a lot beyond what is optimum, similar to setbacks and coverage requirements. Additionally, they impact how properties can be optimally used, sharing some traits with usage requirements. Lastly, requiring properties to be larger than the necessary minimum lot size can directly affect local density, too.
Research by the Federal Reserve Bank of Boston shows that relaxing minimum lot size in combination with loosening density requirements and max height restrictions is one of the most impactful ways to increase housing supply and reduce both single-family prices and multi-family rents. The Congressional Research Service found that minimum lot sizes have significant regulatory costs, lowering the total housing supply.
Related but less studied are minimum frontage and minimum width requirements. Unlike minimum lot size rules which mandate a certain total property size in the region, minimum frontage requirements mandate a certain length of the property facing the street or some other specific side of the property. If one thinks of a property like a square, minimum lot size regulates the square’s area, while frontage requirements regulate the square’s length on a side.
Minimum frontage requirements, in particular, make cities harder to navigate, on foot or by car, by forcing properties to be uniformly spaced. If a popular deli can afford to be only 20 feet wide and wants to split in half its 40-foot wide property with another business, frontage requirements won’t allow them to despite this deal being in the best interest of the customers, businesses, and local economy. These types of situations happen all the time. By serving as an obstacle to easier navigable city streets, frontage requirements increase transportation costs and force development away from corridors of transit.
In analyzing the Auburn, Maine housing market, Dr. Salim Furth of the Mercatus Center divided housing market demand into two categories: the privacy market and the walkability market. While minimum lot sizes and frontage requirements have little or even a slight positive impact on properties’ attractiveness to privacy market consumers, walkability market consumers prefer areas that are easy to navigate on foot and foster a tight-knit local atmosphere. Of the two markets to address, the walkability market is by far the more important, as the privacy market can simply purchase a larger or more private property than regulations mandate.
With the fast-growing urban population percentage throughout America, appealing to the urban-focused walkability market is incredibly important for cities. Furth specifically highlights both frontage and minimum lot size requirements as obstacles to this. Parking minimums and setback requirements are also emphasized in his report, but combining as many policy levers as possible to alleviate the housing crisis is the only effective way to address Maine’s ongoing problems with market quantity and price.
Short-term Rental Restrictions
Another poorly planned housing policy is the restriction or banning of short-term rentals, and both Bangor and Portland already have such regulations on the books. Most recently, Lewiston passed an ordinance banning short-term rentals in the city’s residential areas, and the justification for this was the same poorly thought-out reasoning as other cities.
The reasoning behind short-term rental bans is that short-term renters take up space that other tenants might occupy. Cities theorize that short-term and long-term rentals compete for the same space and that banning one will allow the proliferation of the other and, therefore, alleviate Maine’s housing crisis. Not only is this assumption incorrect, but it ignores the natural response that the rental market will experience to reduce the reliability of its profitability.
Firstly, the short-term and long-term rental markets do not compete with each other, as many short-term rental situations are people’s vacation homes or bed and breakfasts. While renting one’s cabin out while away is a good way to make some money on the side, doing so for a long term tenant denies the homeowner the ability to visit the property when they want. Additionally, having a bed and breakfast that caters to temporary travelers is a great way for people to make money, but many of those bed and breakfast owners are not willing to become long-term landlords or have permanent roommates.
Removing or restricting these markets not only discourages people from other states from investing in or moving to Maine, but also makes it harder and more expensive for vacationers to visit the state while denying valuable business to local Mainers. While the theory appears to be that these vacancies will be filled with long-term tenants, there is no actual proof that this is the case, and for the reasons listed above, the impacts this has on supply may not be as clear-cut as cities often think.
Additionally, short-term rental bans ignore the market incentives created by these policies. Property developers of apartment buildings and similar long-term tenancy buildings likely consider short-term rentals a way to fill vacant apartments and provide more stable profits. While the two markets don’t naturally compete for space, the short-term market is naturally situated to fill in space that the long-term market would be guaranteed not to want.
A landlord would rather have a long-term tenant and guaranteed income than have to engage in frequent searches for short-term tenants who would also provide less reliable income. However, a landlord might temporarily make do with a short-term lease rather than a vacancy, as some income is better than none. By banning this practice, developers are less likely to make apartments or other leasing structures available, as their guarantee of profits has been removed.
“Energy Efficiency Building” Mandates and Portland’s Green New Deal
Another policy that some cities have begun adopting is energy-efficient construction requirements. Portland, in particular, has been at the forefront of this so-called policy “innovation,” and while energy efficiency is claimed by some to be a cost-savings maneuver, the impacts of the mandates are not that clear-cut. The cost-saving effects of energy-efficient buildings are a long-term benefit of owning an energy-efficient building. Additionally, while reducing alleged climate change-caused weather risks externalities is another benefit, this has little to no direct effect on the housing market or consumer behavior. The relevant question, then, is whether the long-term savings of an efficient building requiring less energy consumption by either the owner or tenants cancel out the immediate increase in the building’s material costs.
It is important to note that the savings from energy efficiency are long-term, and it could take years for the energy savings to make a meaningful profit for the homeowner. Meanwhile, high investment costs, long payback time, and investment risks have all been found to be significant barriers to energy-efficient construction projects. Mandating this sort of construction won’t remove the barriers but simply remove the option for the industry to avoid them, thereby increasing the cost of construction.
Another issue of note is where the costs and benefits of the policy fall: on the builder or the consumer. Increased construction costs also mean an increased cost of the building. Homebuilders, assuming they are not building their own residences, will not see the profits from the reduced emissions but will see the increased costs from the installation. Therefore, recapture profit, the price charged for homes will grow faster. This is frequently found to happen when the cost of producing something goes up significantly, such as wage increases or regulatory production costs.
While the upper class may be able to make what is essentially an investment in their home’s electricity consumption levels, forcing this upfront cost increase on lower-income households will reduce their ability to afford homeownership. This fact is obvious when one considers that there is a direct and obvious correlation between a person’s income level and the percentage of that income that they invest rather than spend. Thus, making homeownership even more of an investment than it already is will make it more of a good associated with the wealthy than one accessible to Mainers at a variety of income levels.
Portland’s Green New Deal is another example of restrictions on construction and methods that increase the costs of construction. In 2022, Portland passed via referendum new regulations that require green building standards for buildings receiving a minimum of $50,000 in public funds. It also requires construction contractors to hire a percentage of workforce employees as apprentices, which means they are inexperienced but are paid less. Some have argued that both of these standards save money, the first because they let building owners spend less on energy consumption and the second because they allow contractors to save money by paying workers less and training new workers.
However, as previously stated, the long-term savings are likely canceled out by upfront costs, which harm both construction companies and potential homeowners. The apprentice workers are inexperienced and not readily available. If increased apprentice numbers were economically optimal, they would already have been hired and a government mandate would not be necessary. By mandating that developers meet a 25% apprenticeship worker requirement, the Green New Deal makes it harder, not easier, for housing development to be completed.
Complex Regulations
Another obstructive policy many municipalities create for new development is less obvious than those discussed above. By making local regulations complex and difficult to navigate and understand, some cities discourage development, especially by nonlocal and nonprofessional developers. Portland’s zoning code is particularly dense, and the recent Recode Portland zoning code reform has sought to reduce the city’s more than 1,000-page zoning code to a comparatively small 371 pages.
Lewiston’s zoning code is easier to navigate, as it organizes all of its zoning and land use ordinances on the city website and subdivides by subject. Bangor’s code is a mixed bag. While the city makes most of its regulations reasonably easy to find, its zone-by-zone lot size requirements are kept in a separate Schedule A, which can be difficult to find, and guidance from city staff may be necessary to locate it at all.
All three cities’ zoning maps are a different story, as none are very easy to use. Lewiston’s map links users to a page with zoning standards and shows each zone’s initials, but constant cross-reference between the two pages is necessary to understand a parcel’s zoning regulations. Bangor similarly shows the user acronyms of the zones a parcel is in, but not the regulations or even zone names without a cross-reference to various zoning documents.
Portland’s land use code is slightly more user-friendly because it shows the names of the zones rather than simple acronyms. However, after Recode Portland was completed, the post-recode map only uses acronyms, which may be a worrying slip into a lower transparency system the other cities use. In the currently circulated map for the changes put in place on December 4, 2024, the map requires zooming in very closely to even have the zone acronyms appear, and to view the map with a wider view one needs to refer to the map, the map legend, and the land use code. Having to refer to three separate sources simply to understand a zone’s purpose is absurd and incredibly low-transparency. Hopefully, this is just a format they are using for the post-recode map currently, and Portland intends to upgrade the map quality when the effort is finalized.
These are the three largest cities in Maine and while they might argue that, looking at each other, none of their behavior here is abnormal, there are Maine cities that do far better in this area. Auburn has about 75% of the population of Bangor, the smallest of the big three cities, but it still manages to have a significantly more transparent zoning map than any of the big cities.
Accessing the online page will show a clear color-coded zoning map with acronyms. While official zone names are typically preferable labels to acronyms, clicking on each zone addresses this and will show not only the full zone name but also the zone’s base elevation, building height, and various setbacks. If a developer in Auburn wants to know how large a building they can build on any property, they can get a general idea of the rules applied to it simply by looking at the zoning map and nothing else. This may not seem as important of an issue as the earlier ones, but in many cases, the ease of regulatory navigation and understanding it is the most important policy of them all.
If one thinks from the perspective of a developer deciding where and when to build, the ease at which one can learn and access the local land use rules is the very first issue that they will have to face. This is a massively underestimated category of local housing regulations, as developers who are either new to the industry or new to the area are going to face major challenges when trying to make sense of more complex city codes. Auburn has seen an influx of in and out-of-state developers investing in the city, and with its transparent zoning system accompanied by other pro-development policies, it is not hard to see why.