The High Costs of Affordable Housing

Marc Joffe
Senior Policy Analyst, Reason Foundation

San Francisco has spent decades building, restoring and subsidizing affordable housing as a solution to homelessness, but this approach is surprisingly expensive. Before doubling down on affordable housing by voting for state propositions 1 and 2 as well as city measure C, San Franciscans should consider the hidden costs of this approach.

San Francisco already has built or conserved over 20,000 units of affordable housing of various types, which is about 5% of all units in the city. Also, about 40% of housing units citywide are rent controlled, making them more affordable than market rate units.

With its high land acquisition costs, expensive labor and complex regulation, San Francisco is an expensive place to build housing. For example, a new 83-unit project at 1036 Mission cost $56.5 million to build. That’s $673,000 per apartment.
Not only are affordable housing projects expensive to build, but they also crimp property tax collections. Affordable housing projects are often operated by not-for-profits that qualify for a “welfare” exemption from property taxes. In San Francisco, a total of $2.4 billion of real estate is shielded from property taxation due to this exemption resulting in a loss of $28 million in tax revenue to the city, school district and other local government entities. In San Francisco Unified had this revenue, it could afford to give all teachers a 7% raise.

There are also over 1100 below market rate (BMR) units in condominium projects across the city. Assuming these apartments are assessed at an average of $300,000 below market value, the BMR program is taking another $300 million off the property tax rolls.

Beyond welfare exemptions and BMRs, affordable housing policies have more subtle negative effects on property tax collections. To the extent that these policies lower market values, they reduce assessments and thus tax levies. They also contribute to a permanent street population. Just because addicts are housed doesn’t mean that they won’t continue to spend time on the streets panhandling or publicly injecting drugs. In one notable example, a woman from Nebraska panhandled on San Francisco streets with her infant even though they had a private room at the Hamilton Family Shelter.

A more cost-effective way for San Francisco to get people off the streets would be to acquire land in low cost areas and develop it with small manufactured homes. In rural Lake County, land is available for less than $10,000 per acre. Mobile homes or converted shipping containers – both available for $50,000 per unit or less – could be placed on newly purchased lots, providing the homeless with comfortable, private accommodation. The city could also hire social workers in Lake County at lower salaries than in San Francisco, and the local economy – weakened by forest fires – could use the new employment opportunities.
Not only is this approach less expensive, but it would offer more immediate occupancy than multistory projects in San Francisco, which take years to complete. The city could rapidly provide enough homes for everyone now on the streets, eliminating any excuse for people to remain outside.

Of course, homeless advocates and the homeless themselves may not appreciate an offer of housing 100 miles outside the city. But, while we may see housing as a right, it is impossible to guarantee a right to housing in San Francisco. Millions would welcome a free or very inexpensive home within city limits, and they all can’t fit with the city’s 47 square miles – much of which is devoted to green space and commercial uses. Rather than continuing to throw money at the homelessness problems, San Francisco voters should consider more cost effective options outside the current boundaries.

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