Why Does Housing Cost So Much?
Wednesday, April 6, 2016
5:15 p.m. - 6:15 p.m. PDT
San Luis Obispo, CA, United States
CM | 1Add to My Log
1. The Problem:
- Economic Price Theory: Price reflects the interaction between supply and demand.
- When compared to almost every other market in the US, our relative housing cost is extremely high: http://blogs.wsj.com/economics/2015/03/04/where-should-you-move-for-a-decent-job-market-and-affordable-housing/?mod=WSJBlog\
- This is a reflection of our high demand and our severely restricted supply.
- High housing costs impact homelessness, poverty, the environment, and economic output.
2. Identify the Constraints:
- The supply constraints come from many different contexts including natural, political, and financial. Some constraints are inherent, others were developed as a response to incentive structures whether intentional or accidental.
- Supply constraints impacting housing costs:
- Geography - limited developable area
- Zoning - limited approvals for desired land use
- Environmental Policy
- Open Space Preservation
- Historical Preservation
- Public Hearing Processes
3. Identify Root Causes
- Two different incentive structures have been found to have significant impacts on the political/financial supply constraints on housing
- Municipal Incentives: Sales tax and transient occupancy tax structures increase City revenues without adding significant additional public services. Property taxes on the other hand, are distributed based on state controlled allocations that don’t necessarily benefit the City that is generating them, but adding households increases the demand for City provided public services. The net result, Cities compete for hotels and retail, but act fiscally responsible when pushing housing supply to neighboring City’s.
- “Homevoter” Incentives: Those voters already established in a community wish to protect their investment and lifestyle. In behavioral economics, loss aversion refers to people's tendency to strongly prefer avoiding losses to acquiring gains. As a result, voters are incentivized to find ways to block future supply that may disrupt property values, traffic, parking, views, open space, character, etc.
4. Understanding the Context/Choices:
- Community incentives: In order to overcome the dis-incentives to housing supply described above, new supply garners municipal and public support by offering parks, infrastructure, fees, etc. While this is generally linked to the “new demand" being generated, it is a biased process. Regardless, these costs are essentially a tax on new supply further limiting the quantity.
- Affordable housing policy: Also a tax on new supply, this further increases the costs for market rate, while creating a limited supply of highly constrained low income housing.
- Scarcity and balance: All resources are scarce. The more we constrain supply, the higher housing costs will become. We need to protect our natural resources, City character, and SLO lifestyle, but this must be balanced against the increases in housing costs impacting homelessness, poverty, environmental concerns, and economic output.
5. What can be done?
- At the State level, restructure property taxes to incentivize housing supply similar to hotels and retail. Cities should compete for housing supply instead of the opposite. Reform CEQA to discourage abuse.
- At the Municipal level, reduce restrictions on zoning & environmental regulation, and streamline approval processes (aka, fewer commissions). Limit taxes on new supply, and look for alternative means of funding public infrastructure improvements.
- Educate the public on why constraining local supply decreases economic activity, adds to green house gas emissions and traffic, and exacerbates the homelessness issue.