Government Solutions Not Right for Housing Crisis

David Kersten
David Kersten is president of the Kersten Institute for Governance and Public Policy (www.kersteninstitute.org). Kersten is also an adjunct professor of public finance and economics at the University of San Francisco.

California is in the midst of a severe and growing housing crisis, and the Legislative leadership in Sacramento appears to not have the faintest understanding about the causes and possible real solutions to the problem.  Housing costs are skyrocketing, and the housing market is failing to build additional housing at a rate that comes anywhere close to matching demand.

California Assembly leaders, including Speaker Anthony Rendon, just proposed a package of more than $1 billion in new spending through existing state programs that is meant to address the housing crisis.  The package demonstrates an ignorance of the causes of the housing crisis, and carries on a “business as usual” approach to “solving” problems in Sacramento which relies 100% on spending taxpayer money and zero percent on innovative reform ideas or changes to the existing status quo. (Resources:  Housing California summary,LA Times Report

Fortunately, at least some in the GOP minority appear to understand this issue better than the Assembly leadership.  “I think government intervention is what created the crisis in the first place,” said Marc Steinorth (R).  “I think government needs to get out of the way and allow the free market to create its own way out of this by really eliminating red tape,” Steinorth said.

In the case of housing, increasing spending on state subsidized housing programs will not even begin to solve the program.  California’s housing crisis, results from rising demand coupled with an inability of the housing market to produce enough new housing in the population centers where demand is surging, particularly the Bay Area and Los Angeles.

​Any path to a solution must get honest regarding what is causing the problem.  The California Legislative Analyst released a report last year which found that demand is surging in the coastal areas of California but the rate of construction is anemic in the high-demand areas.  As some of the figures below illustrate, the report found that the problem is much worse in California than elsewhere in the nation, begging the question regarding what policies California has that prevent the construction of an adequate supply of housing.  The City of Seattle, WA, for example, has built a lot more housing to satisfy demand than California despite being an urban area on the west coast.

The real culprit is land use policy, and disincentives for building new housing in California.  A major sticking point is that most land use decisions are made at the local level, and nobody wants new housing built in their backyard.  Digging a bit deeper, emerging pension cost issues and Prop. 13 are also also major contributing factors because local governments face rising budget constraints and severe limitations on raising own-source revenues, and zero holding costs for keeping prime land off the market.  So these governments have no choice but to enact huge amounts of building fees and exaction on developers who want to build new housing.  That assumes the developer can even get approval from the local governing body to build in the first place.

The California Environmental Quality Act (CEQA) is also a major burden and responsible for dramatically increasing the cost of building new developments.  It has been stated that more than 25% of the cost of building is complying with CEQA and other state regulations, which serve to dramatically increase the cost of housing and make it much more difficult to build in a timely fashion.

California needs to look at rolling back regulation and local housing policies that dramatically increase the cost of housing development and the timeline for construction. For example, Marin and Contra Costa counties are close to population centers in the Bay Area and have huge swaths of open land, but vast majorities in those counties does not want any additional housing built there, particularly multifamily housing.  Even the City of Oakland has a large number of undeveloped lots near transit hubs that could be turned into multifamily housing.  However, infill development is also hugely expensive, cost prohibitive and problematic to build due to local approval requirements, but more so due to “environmental” challenges by neighbors who don’t want new development.

The state could potentially provide incentives or provide certain guidelines to facilitate more housing development.  The bottom line is that Sacramento needs to lead on this issue, not just pull out its wallet to spend more on existing government programs which have already proven to have a marginal impact at best.

The state needs to find a way to get 100,000 plus units of house built each year to keep up with demand, and not just provide housing subsidies to the poor.  Housing subsidies for the poor will not cut it, because housing represents a problem for the lower and middle classes as well, not just welfare recipients.   This cannot be achieved without a construction boom in the private sector housing market in key areas of the state.  We need to find a way to kick start the private sector’s desire to build housing, that’s the only way we will get to the type of figures that need to be built.

Business groups and builders need to be brought to the table and asked what it would take to jump start the private housing market.  We cannot afford to just wait for this problem to solve itself, there are obviously some impediments about why the state’s housing market is failing.

Sacramento needs to think big because the problem is big, and not try to solve big problems with small, easy solutions. Spending money in the absence of any type of new policy change or direction is the easiest “solution” of all, but its not really a solution, just a distraction that sounds good in press conference but won’t get us anywhere.

Throwing money to the farmworkers, Medi-Cal and state agencies may serve to please organized labor, who walk precincts for Assembly members and serve as the power base of the Assembly leadership, but does not serve to help anyone else.  Furthermore, debating such spending proposals and misguided small pots of money here and there only serves to distract attention from the real housing problems at hand.

California as a whole needs to come together on this issue, because it is probably the single biggest impediment to most families achieving a reasonable standard of living.  Reports have came out recently that it is not uncommon for families to spend 50% of their income on housing.

The California Legislature needs to first get serious about investigating the true causes of the housing crisis.  And then not be afraid to tackle these true causes even if it means challenging powerful entrenched interests including environmental groups and labor unions who almost always oppose any type of deregulation.

The Assembly leadership coming out of the gate making housing a “budget issue,” is a step in the wrong direction and makes one wonder if they even understand the problem they are trying to solve.  It is not a budget issue, rather it is a regulatory and land use issue, that needs corresponding solutions, not just more dollars and subsidies that have already proven themselves to be failed solutions to a much bigger problem.

(For more background information about proposed government programs and related charts please go here.)

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