Real Estate Prices Going Through the Roof in California

Real estate prices in California have gone through the roof in almost any neighborhood you drive through.  Not only are mortgages leaving people high and dry; rents, too, are leaving people with fewer and fewer options.  Demoralized, some folks live in their cars, with friends or family, while others move out of state and away from family.  A bit humiliating but if your choices are shrinking then you must act on them productively.

What is causing the high prices?  Some say greed.  Greed by whom?  Developers?  Real estate agents?  Maybe cash buyers or real estate speculators and investors?

The answer might surprise you.  It’s a little closer to home.  It’s your city council and County Board of Supervisors.  Why do we hear only of their public service but never of their public greed?

So it’s regulation on construction that drives up market prices on real estate prices, specifically, Inclusionary Zoning Laws.

municipal and county planning ordinances that require a given share of new construction to be affordable by people with low to moderate incomes. The term inclusionary zoning indicates that these ordinances seek to counter exclusionary zoning practices, which aim to exclude low-cost housing from a municipality through the zoning code. In practice, these policies involve placing deed restrictions on 10%-30% of new houses or apartments in order to make the cost of the housing affordable to lower-income households

Politicians pick and choose cooperative developers who, by all intents and purposes should suffer a loss on the project if they’re mandated to sell 25% of the units below market value. But these chosen developers receive subsidies for their cooperation in the agreement. Politicians use the results to boast to the tax-paying public how virtuous they’ve acted by providing affordable housing for the poor, never revealing, of course, how their regulations reduces supply and forces builders to transfer that indirect tax on the project, 25% of the development, onto the other 75% of buyers at the market rate.  So prices rises–through the roof.  Prices are in the stratosphere.  The poor are rendered homeless, and average income folks are pushed out.  Wikipedia gets it:

Real Estate industry detractors note that inclusionary zoning levies an indirect tax on developers, so as to discourage them from building in areas that face supply shortages. Furthermore, to ensure that the affordable units are not resold for profit, deed restrictions generally fix a long-term resale price ceiling, eliminating a potential benefit of home ownership.

And the program reduces supply of available units.  In the face of increasing population demands, prices on limited things can only go up.

Many economists consider the program as a price control on a percentage of units, which negatively impacts the supply of housing

The reduced supply drives up prices in cities where these regulations are implemented. Here is one article by The Independent author, Ben Powell, on Inclusionary Zoning.  In a nutshell, here is what is happening:

Placing price controls on a percentage of new homes has one clear effect: it lowers builders’ profits from new developments.  Thus, inclusionary zoning ordinances essentially are a tax on building new homes.  And like any punitive tax, it has a predictable result: it reduces the supply of the commodity in question–in this case, new homes–while raising the price of the non-inclusionary units and the existing stock of housing.

Powell adds that

In the Bay Area, for example, we found that cities with inclusionary zoning ordinances imposed an effective tax of $44,000 on each new home.  With the median cost of a new home at the time slightly over $500,000, this amounted [approximately] to an 8% increase.  In Los Angeles and Orange counties, we found the effective inclusionary tax was $66,000 per new home–about 12% of the average median new-home price at the time, approximately $550,000.

So not only did the ordinance raise prices, it also reduced supply.

Inclusionary zoning also decreased the supply of new housing . . . . After adopting inclusionary ordinances, we found that housing production on average decreased [by] more than 30% in the first year in Bay Area cities.  In Los Angeles and Orange counties, housing production decreased 61% over a 7-year period following adoption of the zoning mandates.

Politicians love this zoning ordinance because it allows them to take credit for the little production that was built.

Politicians like inclusionary zoning because it allows them to champion affordable housing without having to directly raise taxes. But the new houses aren’t free.  Someone must pay for them.  That burden is borne by the [the] builders, land-owners, and other home buyers.

But it’s not just Los Angeles or San Francisco or even California for that matter.  These ordinances or laws are used in New York as well:

In New York, NY, inclusionary zoning allows for up to a 400% increase in luxury housing for every unit of affordable housing and for an additional 400% luxury housing when combined with the liberal use of development rights. Critics have stated the affordable housing can be directed to those making up to $200,000 through the improper use of an Area Median Income, and used as political tools by organizations tied to various politicians. New York City communities such as Harlem, the Lower East Side, Williamsburg, Chelsea and Hell’s Kitchen have experienced significant secondary displacement through the use of Inclusionary Zoning.

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