Housing policies from the state of California and local jurisdictions might make for great campaign rhetoric, but they are increasing housing prices while decreasing housing production. Policies ranging from CEQA to rent control to inclusionary housing might feel good to support, but they hurt the very people they purport to help while increasing the cost of living for just about everyone else.
The key market indicators are signaling to developers to build more housing – home prices and rents are at all-time highs and the economy is at full employment. But developers built fewer than half of the 161,000 units needed for our region during the last housing cycle. This mirrors what is happening statewide, as construction fell far short of projected need.
So why isn’t more housing being developed and driving down prices?
The answer, at least partly, is that “feel good” policies at the state and local levels are making housing development unnecessarily expensive; and it is only getting worse.
The California Environmental Quality Act requires an evaluation of potential environmental impacts of proposed projects, and mitigation of those impacts. This process can take years to complete, which increases the carrying costs for housing development. While well-intentioned, unscrupulous lawyers exploit the law with lawsuits that threaten to tie up projects for years unless project proponents make what amounts to extortion payments. Cottage industries that specialize in exploiting specific CEQA elements are flourishing at the expense of future homeowners and renters who must pay higher prices for what has become a cost of doing business.
It isn’t just state regulations that drive up development costs. The imposition of “impact fees” at the local level are also contributing to high prices. Local agencies are increasingly relying on one-time impact fees to fund sidewalks, parks and other public amenities. This may sound like a reasonable use of development fees, but it is more of a reflection of financial mismanagement. If a city is properly managed, exorbitant one-time fees for basic improvements are not necessary. A city can instead rely on a very modest impact fee and the recurring property tax revenue generated from new construction to pay for public features. As impact fees rise, so does the cost of development.
Two of the most perverse drivers of housing prices, however, are inclusionary housing and rent control policies.
As the name suggests, “inclusionary” policies are intended to make neighborhoods more accessible for lower-income families. Unfortunately, these policies end up excluding low-income families the most.
These policies mandate developers pay a fee for each market-rate unit they produce, which subsidizes below-market-rate housing for someone else. For example, in some parts of the San Diego region, a developer building a 1,500 square foot unit will be required to pay $37,500 in inclusionary housing fees or, spend even more money to build below-market-rate units on-site. a
Imposing inclusionary housing fees and requiring the construction of below-market-rate units might sound good, but these artificial increases in development costs shift the entire supply curve to the left and decrease overall housing supply. A study by San Jose State professor Tom Means found that cities imposing below-market housing mandates end up with 20 percent higher prices and 7 percent fewer homes overall.
Furthermore, since new housing and existing housing are market substitutes for each other, the inclusionary fee will increase prices regionally. Increasing prices regionally while decreasing supply makes it more difficult for everyone, including low and middle-income families, to afford housing. This helps explains why developers build more higher-end units, which is exacerbating the middle-class housing gap we are currently experiencing.
As bad as these policies are, there is probably none worse for general affordability in a city than rent control. Politicians who set an arbitrary cap on rental rates artificially create scarcity in the marketplace by reducing the incentive for developers to build more housing. Rent control reduces development of new projects, decreases the incentive to renovate existing projects and can contribute to gentrification.
According to a Stanford University paper, rent control policies in San Francisco reduced overall housing supply by 15 percent and only benefited a very narrow segment of the population while increasing rents for everyone else.
Another policy that threatens to increase housing prices even more is “ballot box” planning. Known as Measure A, this measure, if passed, would require all general plan amendments, for projects with as few as six units, to receive approval from voters countywide. This may sound like a reasonable check on our representatives, but it would add an enormous cost to the production of new housing units, further decreasing supply. Voters throughout San Diego County will have the opportunity to vote on this measure in March.
If our region is serious about producing more housing, we must eschew feel-good policies that hurt low-income families the most. Our leaders must call for CEQA reform, a reduction of impact fees and red tape, an end to “inclusionary” housing policies that only produce exclusionary results and streamlined approvals for new developments. The best approach to mitigate our housing crisis is a return to policies supported by basic economic theory and common sense.
Richard Bailey is the mayor of Coronado and a SANDAG board member.