‘Build, Baby, Build’ Won’t Solve California’s Housing Crisis

By Doug Porter / Words&Deeds / May 20, 2019

Senate Bill 50, legislation aimed at easing the housing affordability crisis in California, got put into the ‘maybe, someday’ bin last week. While the bill could be reconsidered in 2020, chances of that happening in an election year are slim to none.

The presumption behind state (and local) legislation claiming to address this crisis is that we can build our way out if only a way can be found to make it viable for developers to make a profit and banks to consider such projects loan worthy.

Call me crazy…. But what if the “debate” is upside down, and –once again– an example of more than one thing being true at the same time standing in the way of what should be long term solutions.

If the shortage of housing is to be defined as people not being able to afford living on the available properties, perhaps the solution is to make it possible for enough income growth to solve the problem.

This solution is a non-starter, short of taking on the mirage of the ‘booming economy.’

If the shortage of housing is being defined by commercial developers as a result of higher construction costs, perhaps looking beyond the oft cited “regulatory costs” provides some insight.

It turns out those evil fees are going to get paid one way or the other, if we’re to have such things as paved streets, sewage systems, and fire departments.

From ShelterForce:

• Developers often complain about regulatory fees. One developer-funded study in San Diego shows that they add 40 percent to the cost of housing. But a deeper analysis reveals that most of the so-called regulatory costs are related to capital improvements. According to a survey of local development fees by the state’s department of Housing and Community Development, capital facilities fees accounted for 80 percent of subdivision and infill fees, and 86 percent of apartment fees.
• Since Proposition 13 of 1978, property taxes in California have been historically insufficient to pay for local infrastructure to meet the needs of a growing population. Counties in Texas, by comparison, have some of the highest property rates in the nation (average 1.81 percent), and can afford to give out permits without much planning, knowing that the project owners will pay for the municipal capital costs over their lifetime. But in California, cities looking to even keep up with their infrastructure needs have “one-bite” at the apple:
• In other words, local governments could no longer rely on spreading the cost of new infrastructure across an entire tax base, they now had to focus the cost solely on new development which constitutes a much smaller number of units. It also means that a local government only gets one bite at the proverbial apple via impact fees rather than a recurring income stream that can be assessed upwards as need dictates.—Landmark Capital Advisors)

There is scant evidence to suggest increasing supply is a viable means of addressing housing affordability.  

According to an article at Grow The San Diego Way:

• Increasing the supply of market rate housing does not guarantee that prices will go down. In fact, there is very little research on this topic and it is all over the place. As one example, the city of Vancouver, Canada, has built housing at a rate that exceeded their population growth consistently from 2001 to 2016, by 19%. There is, in fact, a surplus of housing. And yet they’ve seen some of the highest price growth during that same period.
• The Federal Reserve also did a review of literature back in 2018 and were unable to find any research that showed that market rate housing would increase the affordability of housing overall. They had to create a (decidedly imperfect) model simulation to try to answer the question. They concluded that a 5% increase in supply in the most expensive neighborhoods would only reduce rents in those neighborhoods by less than 0.5%. So, we take this as a given that simply building more market rate housing will lower prices overall, based on flimsy evidence.

Not enough “workforce housing” (the new term for affordable units designed to mitigate fears about encroachment by brown people) is being built. And it won’t get built as long as inducements–chock full of loopholes–are the primary mechanism being used.

Higher end apartments in San Diego have vacancy rate of 34.6%. The two thousand new apartments expected to open in 2018 had an average monthly rent of $2489. On a night time drive through downtown, where unrented retail spaces on street level abound, you’ll see less than half the units in these new towers dark. They are, in fact, unoccupied.

Some of those empty units in condominium buildings are places for cash-rich individuals to park their money. Others are vacation rentals not occupied for the evening.

Data analytics firm Host Compliance says San Diego has 11,000 short-term vacation rentals, most of which are whole homes.

A spin through the near-downtown neighborhoods offers up visuals of mostly occupied older apartment buildings and single family homes. Newer buildings, like the Brookstone on Texas Street, with one bedrooms starting at $2645 monthly, are paying sign spinners to stand on El Cajon Boulevard hoping to lure tenants.

California has only 22 affordable and available rental homes for every 100 extremely low-income households, according to analysis by the National Low Income Housing Coalition.

Affordability, meaning total housing costs at or below 30% of area median income, was the yardstick in this case.

Building affordable housing out in the hinterlands assumes buyers/renters will also be able to afford the $706 average monthly cost of a car, along with the indirect costs of $487 monthly once the environmental and infrastructure costs are included. And then there’s the impending end of having a habitable planet to consider.

“We” need to build where there are already people and infrastructure. Increasing density is an important part of the solution. A quick visit to the NIMBY-friendly Next Door app, reveals the political difficulties–usually based on ignorance–in making in-town construction projects happen.

Panic stricken posts about imaginary safe injection sites next to schools, for instance, go up about as fast as moderators at the site can take them down. I’m told via my feed on the app that all the new construction in North Park is being built without parking requirements, even though those regulations aren’t (and may never be, if Cory Briggs has his way) in effect.

Property values, the first line of defense for so-called NIMBYists, don’t go down. Crime does not go up. In fact, once you dig down into the opposition to the densification of urban neighborhoods, the answer is always fear of the “other.”

Or, as I like to call it, racism.

So here’s the discussion we should be having.

Changes, like those proposed by San Diego City Council President Georgette Gómez to ensure housing developments include homes that low- and moderate-income residents can afford are merely one part of the solution.

SB 50 focused on density as much as it did on affordability. Switching that formula–say by mandating an affordable component statewide in larger developments–would eliminate the loopholes created by localities who allow such unfettered construction.

The reality of the downsides of Proposition 13 need to be acknowledged.

Governments can’t afford infrastructure on nickel and dime fees and taxes. Housing turnover, which would free up available inventory, doesn’t happen because the locked in tax rate gives people an incentive to stay put. And corporate entities have gamed the system with land transfer schemes.

(And, no, we don’t need to throw your Granny out on the street to make this happen.)

Vancouver and other localities have experimented with increasing property taxes on unoccupied properties, with mixed success. While these measures have provided an income stream for affordable housing development, they haven’t done much to get properties occupied. And–Surprise! Surprise!– some property owners have used a loophole designed to allow commercial use to create faux tenants.

Finally, back to Murtaza Baxamusa –one of the rare people who cuts through the bs about development–at Shelterforce:    

California needs to build enough housing to at least keep pace with its growing population. The underlying issue in the lagging supply is finance. The private sector is only building what makes Wall Street happy, however erratic that may be, and fails to address the burgeoning needs of the vast majority of middle-and low-income households.

And the public sector supply does not have adequate financial tools to balance out the supply and keep building, even when lenders are nervous. A permanent source to fund affordable housing adequately must be created, so that sufficient housing units are either acquired or built to serve those with the greatest need, and the construction of affordable housing is buffered in the long-run from the boom-and-bust of economic cycles..