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California’s Affordable Housing Problem: If You Don’t Like What You’re Reaping, Stop Sowing It


You may not have noticed, but California managed to dodge another regulatory bullet when Governor Brown recently decided to veto AB1229—a bill by Assemblymember Toni Atkins that would have made “inclusionary housing” part of the entire California housing landscape.

Inclusionary housing, if you aren’t familiar with the term, is when developers are mandated to include a certain number of ‘affordable’ units in any new housing development. Of course it isn’t that simple economically or financially since, by definition, such rules more or less mandate that a portion of the properties be sold or rented at a below-market level. This creates an arbitrage opportunity that would otherwise be quickly taken advantage of except for a second set of rules that control the price of the property for many years beyond initial construction. Consequently, the property quickly becomes an ongoing regulatory nightmare for both the locality and the owner.

And just as importantly, inclusionary housing doesn’t work as public policy. A 2004 study (Housing Supply and Affordability: Do Affordable Housing Mandates Work?) authored by Benjamin Powell of the Free Market Institute and Edward Stringham of San Jose State University, found that inclusionary housing policies at the local level have been ineffective responses to high housing prices. The mandates produce little in the way of actual affordable housing even as they impose costs on middle-income homebuyers who end up bearing the additional burden either through limitation of supply or because the costs of the affordable units are passed on to their units. And because of the restrictions on prices, they rob lower income households – who might be lucky enough to land in one of these units – of the ability to build equity.

I don’t think Representative Atkins or the many other California legislators who support inclusionary housing have their hearts in the wrong place or are deliberately trying to hurt the economy. The state does face an enormous housing affordability problem, as we at Beacon Economics have written and talked about for years. High housing costs drive many mid-skilled workers out of the state in search of cheaper back yards, leaving us with a paradoxical situation of high unemployment among the low skilled and businesses that are unable to fill key production positions because a lack of skilled labor.

But I do blame these leaders for legislating with their hearts instead of their brains. Inclusionary housing is a classic case of ‘knee-jerk’ policymaking—where you grab something that seems like a good solution to a problem without examining the actual effects. The law of unexpected consequences is well established in the vast literature of ex-post policy results. Here, we have a policy with a known track record of failure—something that was seemingly ignored in the construction of AB1229.

And of course this goes to the core issue so many of us have with our policymakers. Rather than trying to identify the root causes of a problem and deal with them, lawmakers very often opt to simply pile rule on top of rule—ultimately making the situation worse.

If Representative Atkins and the legislators who supported her bill looked a little more carefully at our housing dilemma, they might understand that they themselves are part of the problem. The state’s lack of affordable housing has a simple cause—a lack of housing construction. California has the lowest housing vacancy rate in the nation. And while it is home to more than 12% of the nation’s population and has a faster pace of growth than the nation overall, its share of all new residential permits is less than 8%.

The lack of housing construction in the state comes from the high cost and slow permitting process created by the California Environmental Quality Act (CEQA)—something that many state legislators strongly favor as they have more or less ignored what has been an ongoing cry for relief from the state’s business community. Slapping an inclusionary housing rule on top of CEQA will ultimately make the problem worse, not better. If you want cheaper housing, the best way is to create more housing.

If Representative Atkins, and her fellow lawmakers truly want to help low-income families afford a home, they have to start at the base of the problem. The state needs housing. Developers would like to build that housing if our elected leaders would only let them without having to fight their way through years of zoning litigation, a scrum of NIMBY’s who want to live in the suburban past, and petulant local politicians who expect a political handout for doing their job.

Next time, instead of almost making the situation worse with a misguided inclusionary housing bill, Representative Atkins and other leaders should push for real CEQA reform in Sacramento. Then watch the state’s affordable housing situation go away quickly. That would be a true “inclusionary” housing act.

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