City Planning and Affordable Housing, in Reality

 (c) by Mark Dempsey     

The Davis Vanguard's editor, David Greenwald, recently wrote about The Left's Dissonance on Housing, pointing out correctly that liberals are among the first to raise those Not-In-My-Back-Yard (NIMBY) objections to developers building more housing--particularly affordable housing.

The problem of affordable housing is not new, nor is it unique to California. For example, using Australia as an example, the website RealEstate4Ransom.com reminds us that speculation in real estate makes prices rise until they reach the maximum lenders will lend. Since ~90% of  home purchases are typically financing, and since lenders make more money the bigger the loan, banks do everything they can to promote price rises. 

Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane echoes this point and adds that studies show 80% of the price rises in real estate come from increases in the price of land--and land prices rise with land speculation. Higher real estate taxes prevent land speculators from holding their land off the market to await the maximum price, so ironically, such taxes can make land cheaper.

If, for one example, real estate taxes were to rise, and what's paid in tax cannot service a loan, tax rises would make such lending and speculation less profitable. If we quell speculation, then prices might actually retreat. Yes, Proposition 13 made real estate more expensive, never mind the $12 billion in annual property tax revenue California loses because of Prop 13's commercial property loophole.

What loophole? If you buy a new house, its property tax comes from a revised assessment based on the sale price. If people buy less than 50% of commercial real estate, though, its taxes don't change, no matter what the sale price. Michael Dell (of Dell computer) bought a Santa Monica hotel, splitting title between himself, his wife and a corporation he controls. The property remained taxed at, in effect, its 1978 value. (Prop 13 passed in 1978). That's true throughout the state, and the loophole is unevenly applied--not every buyer takes advantage of it--so its impact on business is also uneven. In fact, the loophole actually discourages new businesses from building their own buildings--they would be assessed at current prices, and higher costs make them less competitive. In other words, it's nuts, and the California electorate is so anti-tax that it refused to pass a recent proposition (Prop 15) that would have closed that loophole.

Land speculation

If you doubt land speculation--an activity that increases prices--is big business in our region, take a look at North Natomas, just north of Downtown Sacramento. This is thousands of acres of 20-foot-underwater floodplain, surrounded by weak levees. It was so unsuited for development that a federal grant to increase the regional sewer plant's capacity included a $6 million penalty if that capacity served North Natomas. 

The speculators who controlled that land were undaunted. They went to then-vice-president G.H.W. Bush to get that penalty payable in installments, rather than the prohibitive up-front payment. As part of this negotiation, the speculators also got $43 million in federal levee improvement grants to bring the levees surrounding North Natomas up to pre-Katrina standards. North Natomas' levees need millions more to reach post-Katrina standards, but the speculators are long gone and won't be paying for that.

So...a pretty good deal! Pay $6,000,000 in installments and get $43,000,000! But wait, there's more! The speculators bought that land for ~$2,000 an acre. After they got the entitlements to develop, they sold it to builders for ~$200,000 an acre. If your calculator isn't handy, that's a 10,000% gross profit. North Natomas is nearly built out and...Surprise!...the speculators are proposing even more outlying development.

With that kind of incentive, roaches will scuttle out from under the baseboards to do land speculation. The "unearned increment"--that outrageous profit and a component of the 80% rise in real estate prices--goes into land speculators' pockets.

In Germany, the developers have to sell the land to the local government at the agricultural land price, then buy it back at the development land price if they want to build on outlying land. The public retains all of the profit--called the "unearned increment." And German infrastructure is first rate--not, as in the U.S, rated C minus by its engineers. German universities offer classes with free tuition, even for foreigners, and the arts budget of the City of Berlin exceeds the National Endowment for the Arts for the U.S. of A. Meanwhile we're begging for crumbs from the speculators' feast.

Zoning Obstacles

Beside what amounts to covert subsidies offered for the land speculators, the obstacles presented by the planning bureaucracy prevent several good solutions for any housing shortage. For example, single-family zoning prevents mixing multi-unit apartments among the McMansions. What's often cited is that mixing poor folks among the rich will somehow devalue the neighborhood. 

But that's simply untrue. The most valuable real estate in the Sacramento region is the neighborhood around McKinley Park. There, you can find multi-unit apartments, granny flats, and small, separate multiple cottages among the mansions.

 

 

 

 

 

 

 

13 units among the mansions in McKinley Park

McKinley park's charm--besides the park itself, and some beautiful older homes--is that it offers amenities like offices, restaurants and transit within a comfortable and dignified walk of its residences. At an average of nine units to the acre, the neighborhood itself is slightly lower than the ideal density that Berkeley planner Robert Cervero observed in the East Bay: 11 units per acre. Higher densities support transit and commerce because they generate enough pedestrian traffic to patronize these things.

Density and the Public Realm

Increasing typical neighborhood density makes for viable neighborhood commerce and transit, yet suburbanites (who live in 5-7 units per acre) typically greet any proposal for denser development with howls of derision. Yet buyers pay premiums to live in McKinley Park, never mind far denser, more valuable New York City. Again: McKinley Park is the most valuable real estate in the Sacramento region.

Compact development itself is not enough to warrant the protests, but are there legitimate objections to density? Certainly dropping a bunch of strangers who are likely to be poorer into any neighborhood is hardly a recipe for enthusiastic acceptance, but one genuine problem is that under current law, residential property taxes don't pay their own way for needed public services. 

Since prop 13, funding for infrastructure, schools, fire protection, etc. requires more than the property tax revenue residences produce. If some multi-family housing lands in a neighborhood, odds are it will  make the amenities worse, increasing demands on them without providing funding to match.

Second, the U.S. has embarked on a multi-generational public policy project to de-fund the public realm. The public realm is everything from sidewalks to parks to public buildings from libraries to museums. Britain's National Museum is free. Locally, the Crocker has a fee for admission.

The public realm is everything accessible even to poor people. Like those German universities, the public realm is available to the entire population, without charge. A robust public realm is absolutely required for acceptable denser housing.

I was going to say "so neighbors would feel secure," but ultra-dense New York City has lower per-capita crime than sprawling Phoenix, AZ.

Anyway....government used to build, or fund, low-income housing. The Nixon administration put a moratorium on such federal building. The Reagan administration cut taxes on the wealthy roughly in half, even as Reagan and his successor raised payroll taxes eightfold. They also cut HUD's affordable housing budget 75%. As governor of California, Reagan also closed the asylums, evicting the mental patients to wander the streets. Gosh, I wonder why the mentally ill homeless and income inequality are such problems now?

Anyway, defunding the public realm means making society a dog-eat-dog battle for access to the best schools, to the streets leading to employment, and to housing itself. This makes housing into a scarce commodity, raising its prices to the delight of lenders, and ignoring the fact that people need housing as surely as they need food. Do we really want to motivate workers with the whip of starvation? How about homelessness? (Answer: sadly, yes.)

So yes, liberals have been conned into believing multi-family housing is always a burden. Yet California won't handle the current crisis in affordable housing without denser development. 

The Good News

Besides California's recent mandate that all new streets provide pedestrian access, one proposal that is actually getting traction now is redeveloping commercial corridors and malls to include housing. This could rescue the brick-and-mortar retail suffering from online competition and provide attractive, low-cost residences for the aging population whose fastest growing demographic is those over 85. 

The city of Citrus Heights has such a plan now for Sunrise Mall. Evidence is that such "lifestyle centers" can offer housing in addition to retail, and build for customers who can walk to the food court, etc. They are not just financially viable, such centers are apparently even more profitable than the single-use retail of sprawl. So yes, liberals have been conned into opposing affordable housing, but it needn't continue to be that way.

The author was in the real estate business for nearly two decades, and spent half that time sitting on a Sacramento County Planning Advisory Council, hearing development proposals.