“The market is powerful, but we need other things. That’s why we have regulations. We have to go against the flow and re channel the flow because the flow is leading us to catastrophe.”
Gov. Jerry Brown, April 20, 2017 (referring to the fight against climate change, not the fight for affordable housing.)
State Senator Scott Wiener, in a recent blog posting, attacked nameless critics of his efforts to produce more market-rate housing by removing local governments from the approval process if those local areas failed to meet regionally determined “housing needs.” Since all localities in the state currently fail to meet these needs, his legislation would, in effect, deregulate housing development all over California, since most housing regulations exist at the local level.
I do not recognize the argument Wiener poses. It’s a straw man, set up so he can knock it down.
He says that “some people” argue that the state’s “housing crisis” can only be met by building “housing built with some sort of public subsidy, which is then price-controlled based on the resident’s income. Also known as ‘below market rate’ units or BMRs…”
Besides confusing “affordable housing” with “below market rate” housing (in San Francisco’s hyper-hot housing market, one can have a “below market rate” priced unit that is still not “affordable” to people of low and moderate income, which is the vast majority of current San Franciscans) he make a key mistake. BMRs in SF cannot, by law, be publically subsidized.
Wiener’s formulation of his opposition’s argument is one that I have never made, never read in 48 Hills, and I don’t know of anyone making that argument. He invented it.
On the other hand, Wiener’s argument that subsidized housing only works for the poor, leaving the middle class unassisted, that we must remove all local approvals over market-rate housing development to get the needed supply, and that by building market rate housing we will, eventually, produce “affordable housing” is the same old argument supply-side neoliberals have been making for the last 40 years.
Wiener has changed some politically discredited words–” trickle down” has now become “filtering” for example–but it is still Reagan-era supply-side fiction.
Let’s take a look at the three parts of Wiener’s argument.
Part One: Subsidized housing only works for the poor, not the middle class.
Wiener has a history going back to 2013 of class-baiting the housing issue trying to play middle class residents off against lower income residents, as both classes are victimized by the current real estate market.
But to claim, as Wiener does to advance this division, that “the middle class … seldom benefits from housing subsidies” is an outrageous misstatement of fact. Indeed, massive federal, state, and local subsidies are targeted to middle class home owners that underpin and bolster the private housing market.
The largest housing subsidy of the federal government, the mortgage interest deduction and the local property tax exemption, is only available to middle and higher income Americans who own homes. In 2015 these two deductions amounted to some $200 billion in lost revenue to the federal government.
The 2015 HUD budget, the federal source of all subsidies for low income housing, was some $46 billion in 2015 — less than 25% of the existing subsidy to market-rate housing!
In 2011, Gov. Jerry Brown eliminated a local property tax program available through redevelopment agencies for the production for low and moderate affordable housing. The loss totaled some $1.1 billion a year statewide (or about $30 million a year in San Francisco). However, the state continued its state version of the mortgage interest tax deduction at a cost of $5 billion in state tax money during the last fiscal year. An additional $360 million was lost to the state in deductions allowed for second homes. Assemblymember David Chiu is proposing a repeal of the deduction for second homes (AB71) and directing the savings to financing low-income housing development.
Here in San Francisco, affordable housing advocates have campaigned for and won two bond measures which included some $100 million in down-payment assistance loans for first-time home buyers earning between 120% and 200% of AMI — that is, the very heart of the “middle class” in San Francisco.
Last year, affordable housing advocates campaigned for and won Proposition C which established, for the first time, a “middle-income affordable housing requirement” for market rate development.
Middle income tenants directly benefit from the price restrictions imposed by San Francisco’s rent control ordinance. A study by the Rent Board in 2002 showed that as many as 40% of tenants in rent controlled apartments earned 120% of AMI or above, that is, were solidly middle class.
Wiener’s argument that the middle class does not benefit from direct subsidies and indirect price restrictions on market rate housing is as false as the old Bill O’Reilly annual charge that there is a “war on Christmas.” Both seek to pit folks against each other based upon a lie.
Part Two: Local governments will not approve enough market rate housing to meet needs because of Nimby pressure.
At the heart of Wiener’s argument for his approach is that local governments cannot be trusted to approve housing to meet our needs. Dominated by Nimbys, local governments must be relieved of their power to approve housing and state law must mandate approvals at the local level. In advancing his argument Wiener cites a Sacramento LAO Report from 2015. The report does argue that local governments are not approving projects since the Great Recession of 2008 at the rate they did before the economic crisis. But there are reasons for this reluctance, which merely requiring approvals by state law will not address. In coastal California, which the report cites as the area that has slowed its approval rate most, there are two contributing reasons cited in the report (pages 18 -20).
First, “little local government fiscal incentive to approve housing development.” This is the Prop.13 “gift that keeps on giving,” which fixes local property tax revenue but not local infrastructure and service costs. Local governments earn more revenue from commercial development through sales and excise taxes than from property taxes fixed by Prop. 13.
Second, “topography limits developable land” and “more extensive development has left limited vacant land.”
Gee, other than they can’t raise sufficient revenue to pay for the infrastructure and services generated by additional residential development and that there is little land left to develop and that which is available has certain “topography” issues (think sea level rise and Millennium Tower), a state law that compels local government to approve new projects should really improve things.
When you read in Wiener’s bill that the California constitutional protection against “unfunded mandates” that requires the state to pay “local agencies or school districts” for expenses incurred in meeting state imposed mandates will not apply to this required approval of new high density, market rate housing because these local agencies and school districts already have “the authority to levy service charges, fees, or assessments to pay for the…level of service mandated by this act,” you see how the bill is handed off to local folks, not the state.
San Francisco is in the midst of the biggest boom in market rate housing production in its modern history. Yet, according to the Controller we currently face a $348 million two-year budget deficit. If we can’t pay our bills now, how will we pay them when we are forced to subsidize more market-rate development that doesn’t pay for itself? It’s certainly comforting that Senator Wiener has our fiscal back in Sacramento.
Part Three: Market-rate housing of today, through “filtering” (the old “trickle down”) will become the affordable housing of tomorrow.
This is the most remarkable portion of Wiener’s argument, in that although he asserts it for the future, he fails to acknowledge that the re-sale of existing housing (“filtering”) already plays a significant role in both meeting the demand for housing and setting market rate housing prices. For a “pro-market” advocate his obvious ignorance of how the housing market works is sobering.
Like all HARPS (Housing Advocates for Rich People) Wiener wants you to believe that the only source of housing is new construction, that no existing home is ever sold to a new owner, that no apartment is ever converted to a condominium or TIC for a new resident. The absurdity of this argument is clearly seen in the San Francisco housing market, Wiener’s adopted home town.
Wiener argues that new construction in San Francisco has not kept pace with population growth, that we have increased our population by 200,000 since 1980 and have simply not produced enough new housing to meet that increase. “The numbers don’t add up,” he says, never adding up the numbers.
Let’s add up the number for him.
The Department of City Planning has determined that there are some 2.3 persons per household in San Francisco. So 200,000 additional residents would create a demand for about 87,000 housing units.
Between 1980 and 2016 some 85,000 new units were in fact approved in San Francisco. Indeed, the DCP reports that San Francisco was the only county in the region to increase its housing production each decade between 1970 and 2010. The facts hardly support the “Nimby death grip” fantasy narrative so dear to Wiener and other HARPS.
But that is, literally, only half the story.
Between 2000 and 2016 an average of 2,800 single family homes were sold every year in San Francisco. Assuming only 2,000 were sold in the years 1980 to 1999 dues to the mid-decade real estate crash, that would mean that some 83,000 existing homes were sold between 1980 and 2016, nearly equaling all approved new construction. But wait, there is more.
Between 1995 and 2015 some 10,000 apartments were converted to condos (see the Housing Inventory) for an average of 200 a year. Assuming the same going back to 1980, that’s another 4,000 conversions. These 14,000 condos were overwhelming bought by people not living in the apartments that were converted. And while it is impossible to tell if they were all sold to new residents to the city, they were overwhelmingly new residents to these new condos.
Finally, some 6,000 apartments were converted to TIC’s between 1995-2016.
The sales data indicates that between 1980 and 2015 some 103,000 single family homes, condo conversions and TICs were sold in San Francisco. New condo sales were not counted because of the difficulty in separating them from new construction. Some 46,622 “condos, town homes/flats” were sold in San Francisco between 2000 and 2016, and while it is reasonable to assume that some portion were existing, it is not clear from the data how many, so none were counted.
It is possible to make three important conclusions from this information.
First, San Francisco has no real difficulty approving residential development. High prices in the city are not a result of insufficient numbers of market rate units as Wiener and other HARPs claim. Market rate units built during this period exceeded the ABAG “housing needs” goals. Indeed, in the most recent report issued by the DCP we are building market rate units at 207% of the regionally defined needs for San Francisco while producing only 31% of our affordable housing needs. The overwhelming majority of the sales of existing homes, condos and TICs went to the middle income and above, showing clearly who the market serves without any assistance from state senators.
Second, “trickle down” or “filtering” clearly does not result in lower prices in high priced housing markets like San Francisco. The sale of existing homes and apartments, which exceed the number of new constriction by at least 120% during the period we are examining, seems to keep housing prices very high, not lower them. Wiener’s assertion that today’s market rate housing is tomorrow’s affordable housing is simply not borne out by the facts in this high-cost housing market.
Third, adopting market friendly housing polices like “ministerial” approvals (taking housing approvals away from local officials and residents) and adding density bonus’s in hot housing markets will simply pour gasoline on a raging fire.
What Does Work?
The voters of San Francisco and the Bay Area have an answer: market controls to keep existing housing within reach and public subsidies to build new housing they and their neighbors can afford. As argued earlier on these pages, the passage of more than $1 billion in bonds and sales taxes to build homes affordable to moderate income earners and people at risk of homelessness or homeless is sound public policy. Moreover, the passage of rent control measures is a rational response to a red hot real estate market. Continued effort to regulate Airbnb and other short term rentals is critical — the 10,000 STR’s in San Francisco just about equals the current vacancy rate for apartments. Imagine what would happen to rents if the vacancy rate were doubled because un-registered Airbnb listings were placed back on the rental market.
What is clear is that Wiener and his allies are in full reactionary mode against this popular vision. Wiener and his allies are busy seeking ways of preventing democratic control of development, of finding new ways to deregulate housing development.
That’s fine. It’s what makes public debate. Debate is good. Just don’t call it an “affordable housing” program and quit making stuff up about folks who oppose these policies.
California’s “housing crisis” is, in fact, a crisis of the shortage of a supply of housing able to be afforded by the vast majority of working Californians. State policies can and should be adopted to increase that supply, not at the expense of market rate housing but in addition to it.
The state legislature missed an opportunity when it passed SB-1, the $52 billion transportation infrastructure bill last month with no linkage to housing production. A primary cause of San Francisco’s high housing prices is the influx of Silicon Valley workers bidding up prices. In 2016 76% of home sales in San Francisco were at prices over the asking price. Housing workers close to their place of employment makes good transit, housing and environmental sense. The suburban counties that make up Silicon Valley simply do not build housing sufficient to meet the demands of new workers generated by the local preference for commercial development. But the one thing suburban counties do want from the state is funding for road and freeways.
Linking meeting housing needs generated by commercial development to receiving road and freeway funding is a “carrot” approach the state could have adopted. Last year affordable housing advocates urged that approach in testimony before the Senate Housing and Transportation Committee (yes, the Senate see the two issues linked!) No such linkage was adopted and a real opportunity was missed.
But there are other polices that should be adopted at the state level that are aimed not at reducing local control over development but instead providing funding for the infrastructure and affordability needed to increase the supply of affordable housing in particular and all housing in general.
Wiener scoffs at the notion — “not gonna happen in our lifetime” — of a what he calls a “federal Marshall Plan” for funding affordable housing, as if only the federal government is the only source of such money. California is the sixth largest economy in the world and there are two measures that can be taken at the state level to produce billions of dollars in new revenue for a California plan.
First, reform Prop. 13. The 2015 LAO report lists the cap on local revenue of residential development as a brake on local government support. By simply allowing local governments the ability to tax commercial property at fair market value instead of the Prop. 13 freeze while maintaining without change the current residential property tax rate, would bring in $9 billion a year in new revenue every year.
In San Francisco that would mean some $691 million (!) in new revenue, enouigh to susidize some 2,000 new affordable apartments and homes each year! (look here for details)., A statewide coalition, Make It Fair is planning to place the issue on the state ballot in 2018.
Second, state law prohibits local governments from establishing an income tax. Assemblymember Phil Ting is proposing legislation to repeal that prohibition. A half of a percent tax on incomes of more than $1 million would generate some $62 million a year in San Francisco, replacing and enlarging the annual amount lost to the city when Brown repealed the affordable hosing property tax program in 2011.
Wiener supports two modest ballot measures to increase funding for affordable housing: a one-time $3 billion housing bond and an even smaller measure that would establish a $75 fee on real estate transactions and is expected to yield between $200 million and $300 million a year. Taken together these measures would only equal the amount lost by Brown’s 2011 redevelopment repeal and then only for about three years.
We don’t know where Wiener is on either Prop. 13 reform or the local income tax measure. So the real test of Wiener is his willingness to put his money where his mouth is and support these state reforms. I bet that is “not gonna happen in our lifetime.”