(c) by Mark Dempsey
Hardly a day passes without some politician or concerned citizen writing an editorial or letter to the editor to say California can fix its affordable housing problem by deregulating. One contractor recently wrote (SN&R) to say "Every level of government is working to make housing as expensive as possible..."
And California regulations do sometimes require additional expenses, like steel straps on wood frames for earthquake resistance, but would we really rather build homes that collapse in earthquakes, even if the occupants are poor? What if government regulation is not really the biggest obstacle to affordability? After all, steel straps aren't that expensive. Fiddling with regulations may actually be like rearranging the deck chairs on the Titanic.
The larger truth: market conditions for real estate are so heavily influenced by government policies that no housing market would exist without them. The 30-year mortgage is a government invention. Building codes often have their roots in New Deal property standards.
That's true not just in the U.S.; and most of the world's governments subsidize housing to make it affordable. Putting an end to those subsidies in the U.S. has been a generations-long project. Nixon put a moratorium on building federally-funded affordable housing. As he was cutting taxes on the wealthy, Reagan also cut HUD's affordable housing budget by 75%. This has been a bipartisan effort, too. The Clinton administration cut federal public housing expenditures by $400 million annually, nearly the same amount by which the federal prison budget increased.
Perhaps the policy change most damaging to affordability occured when Reagan's '86 tax law removed a subsidy for multifamily housing, retroactively removing limited partnerships' deduction for depreciation. As a consequence, scores of limited partnerships with apartments failed because their economic viability depended on that depreciation write-off.
California's Proposition 13 also influences affordability. Lower taxes on real estate means that speculators can keep vacant land off the market without a big tax bill, as they wait for market peaks. This is one reason the Sacramento region has 20 years of unbuilt infill, and land speculation is rampant.
How much does land speculation cost homeowners? Rethinking the Economics of Land and Housing (by Ryan-Collins, Lloyd and Macfarlane), concludes that 80% of the recent decades' increase in home prices comes from increases in land prices. So higher land taxes would actually discourage price gouging!
Finally, the consensus among the deregulators is that rent control would be a disincentive for affordable housing builders, but not even that is true. After he privatized trains and government insurance programs, Mussolini eliminated rent control...leading to an increase in Italian homelessness. J.W. Mason notes that "In economists’ terms, the supply of housing ... is inelastic – it doesn’t respond very much to changes in price....there is a great deal of space to regulate the rents on existing housing without affecting the decision to build or not build.
"The bottom line is that rents in the everyday sense are often also economic rents … They come from a kind of monopoly, not from contributing real resources to production of housing. And one thing that almost all economists agree on is that removing economic rents does not have costs in terms of reduced output or efficiency."
So let's all take these dire warnings about government meddling adversely impacting affordability with at least a grain, if not a block, of salt.
Hardly a day passes without some politician or concerned citizen writing an editorial or letter to the editor to say California can fix its affordable housing problem by deregulating. One contractor recently wrote (SN&R) to say "Every level of government is working to make housing as expensive as possible..."
And California regulations do sometimes require additional expenses, like steel straps on wood frames for earthquake resistance, but would we really rather build homes that collapse in earthquakes, even if the occupants are poor? What if government regulation is not really the biggest obstacle to affordability? After all, steel straps aren't that expensive. Fiddling with regulations may actually be like rearranging the deck chairs on the Titanic.
The larger truth: market conditions for real estate are so heavily influenced by government policies that no housing market would exist without them. The 30-year mortgage is a government invention. Building codes often have their roots in New Deal property standards.
That's true not just in the U.S.; and most of the world's governments subsidize housing to make it affordable. Putting an end to those subsidies in the U.S. has been a generations-long project. Nixon put a moratorium on building federally-funded affordable housing. As he was cutting taxes on the wealthy, Reagan also cut HUD's affordable housing budget by 75%. This has been a bipartisan effort, too. The Clinton administration cut federal public housing expenditures by $400 million annually, nearly the same amount by which the federal prison budget increased.
Perhaps the policy change most damaging to affordability occured when Reagan's '86 tax law removed a subsidy for multifamily housing, retroactively removing limited partnerships' deduction for depreciation. As a consequence, scores of limited partnerships with apartments failed because their economic viability depended on that depreciation write-off.
California's Proposition 13 also influences affordability. Lower taxes on real estate means that speculators can keep vacant land off the market without a big tax bill, as they wait for market peaks. This is one reason the Sacramento region has 20 years of unbuilt infill, and land speculation is rampant.
How much does land speculation cost homeowners? Rethinking the Economics of Land and Housing (by Ryan-Collins, Lloyd and Macfarlane), concludes that 80% of the recent decades' increase in home prices comes from increases in land prices. So higher land taxes would actually discourage price gouging!
Finally, the consensus among the deregulators is that rent control would be a disincentive for affordable housing builders, but not even that is true. After he privatized trains and government insurance programs, Mussolini eliminated rent control...leading to an increase in Italian homelessness. J.W. Mason notes that "In economists’ terms, the supply of housing ... is inelastic – it doesn’t respond very much to changes in price....there is a great deal of space to regulate the rents on existing housing without affecting the decision to build or not build.
"The bottom line is that rents in the everyday sense are often also economic rents … They come from a kind of monopoly, not from contributing real resources to production of housing. And one thing that almost all economists agree on is that removing economic rents does not have costs in terms of reduced output or efficiency."
So let's all take these dire warnings about government meddling adversely impacting affordability with at least a grain, if not a block, of salt.
Steel straps is a ridiculous example of the costs of regulation of housing production in California, and illustrate the author's (1) lack of knowledge or (2) bias. Just in the context of earthquake resilience, shear wall assemblies and moment frames are much more costly. High efficiency HVAC systems, automatic garage door openers with battery backups, solar power systems and fire sprinklers are all required and significantly increase construction costs. BTW fire sprinklers are much less effective than smoke detectors in saving lives and reducing property damage.
ReplyDeleteBut the greater costs are in the regulatory hurdles that require years to entitle land for residential development and in the absurd conditions that are imposed by local agencies. After spending 2-20 years and millions of dollars in obtaining development entitlements, builders commonly have to build larger units, add masonry trim, ridiculously steep roof pitches and many other expensive and totally unnecessary architectural details to meet local agency design standards.
The author is correct in noting the market impacts of Prop 13 and related legislation. However, to ascribe 80% of the last decade's home price appreciation to land values is way off-base. Since 2010, construction costs have more than doubled and impact fees have climbed significantly as well.
What is the source for the statement "the consensus among deregulators is that rent control would be a disincentive for affordable housing builders"? As J. W. Mason stated, rent controls encourage conversion of rental units to for-sale units. Basic macroeconomics and common sense assure that in the long run, a cap on rents will limit investment in rental properties and will reduce both quantity and quality of the rental housing stock. However, housing projects take years to entitle, develop and build out, so in the short term it is very difficult to isolate the impacts of newly imposed rent caps.
Clearly there will always be a portion of society that needs assistance in obtaining decent housing. However, as long as local regulation (and NIMBYs) limit the supply of housing, there will be a shortage and those with the least resources will suffer the consequences.