California is conflicted about building rental housing for our low-income residents. Not everyone can live in paradise. Life is not fair. Will we admit that we’re not willing to pay to subsidize our less fortunate neighbors? California would like for someone else, anyone else, to be generous to our lower income households. Here are elements of our conflict and history.
Conflict and History
We say we value decent housing and we want developers to pay their fair share. But we increased parking requirements, insisted on lower density, and collected fees for parks, schools, traffic, utilities, and other infrastructure. Guess what? Increased demand and insufficient supply meant housing cost went up.
Zoning codes decreed minimum standards which raised the cost of housing for low-income households. It was like saying that nothing less than new Lexus could be sold to car buyers. The housing that was built was beyond the reach of most renters. Most of the rentals built in the last decade were for the most affluent 25% of renters.
In the last generation, California has built less than half as many rentals as our population needs. For a generation, you could build wealth with a simple strategy – buy an older building in inferior condition, upgrade it, and then collect fair market rent. Entrepreneurs who created value earned a good reward.
Government policies blocked most low-income construction. Investors filled a need for better housing by upgrading older buildings. Lower income residents who could not afford the higher rent got squeezed. What should we do?
Many current San Diegans grew up in less expensive states and moved to San Diego for the opportunities. It seems we’re denying economic reality. Our lower income renters will have a harder time in the next generation than in this one. There are no easy answers, only trade-offs.
What’s Been Done?
Here are some of the things that have been done and suggested.
- State government overrode voters and imposed rent control. Rent control didn’t create any new housing; it reduced the incentive to upgrade existing housing. The current rent control law increases the cost and difficulty of renovating existing housing stock. My guess is that even before the virus, 2020 renovations would have been less than half of what they were in 2019.
- The governor and legislature passed density bonus laws. For more than a decade, local jurisdictions ignored state requests to build more low-income housing. In 2018 and 2019 the State passed laws which force cities to allow more low-income housing. More laws are in the works.
- For 50+ years the State gave each city a portion of sales tax originating in their city, which encouraged them to allow more retail. Retail space needs relatively few services like fire, police, school, water, and sewer. In contrast, rentals bring no sales tax revenue but need more services. Cities lose money by allowing multifamily, so they restricted multi-family construction.
- California changed the law and shrunk local jurisdictions’ ability to deny rental housing. Local jurisdictions are slowly adapting to the unwanted changes. The cities will have to raise taxes and/or or cut services. Few homeowners want higher taxes or fewer services so that more low-income people can live in their community.
- Some have suggested bond issues aimed at building housing for low-income households. Will most homeowners vote for higher taxes to support renters whom the owners don’t know?
California is Conflicted
We would like all our residents to have decent, affordable housing. Yet, for a generation, our policies have restricted the construction of low-income housing. Voters would like it if somebody else, anybody else, would pay for increasing low-income housing. That’s a nice hope, but it’s not likely to happen.
40 states build enough housing for their low-income residents. Can California adjust enough, and share the burden, so we can provide housing for our lower-income neighbors?
Terry Moore, CCIM is an investment real estate broker with a proven history of success in creating value, 1031 (tax deferred) exchanges, and building wealth though apartment investments. He has taught at UCSD, National University’s MBA program, the Appraisal Institute, SD County Tax Assessor, California Association of Realtors and is a National Certified Commercial Investment Member. For more information contact Terry at Tmoore1031@gmail.com, call 619-497-6424 (Direct), 619-889-1031 (Mobile) or visit www.SanDiegoApartmentBroker.com. (License #0091851).