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A Housing Incentive That Actually Works

Adam Christian on
Feb 21, 2016

The February 9 Legislative Analyst Office report on California "serious housing shortage" ends on a decidedly depressing note: "Bringing about more private home building - would be no easy task, requiring state and local policy makers to confront very challenging issues and taking many years to come to fruition." The report, which focuses on low-income housing, follows a a March 2015 companion that officially - if obviously - summarized the state's skyrocketing housing costs. 

Note the new report's use of "would," not "will." Experts agree that California suffers from a chronic underproduction of new housing that stretches back several decades: an estimated 180,000 to 210,000 additional units would be required in Los Angeles County alone, and 170,000 additional units in the Bay Area, to restore some semblance of a balanced housing market in the State's major urbanized areas. In a well functioning market, this kind of shortage would make new home production a foregone conclusion -- future tense -- not something to be hoped for in the conditional tense.

Among the key challenges is the lack of incentive for cities to achieve their Regional Housing Need Allocations, the amount of new housing that cities would need to build to accommodate anticipated growth. Currently, there are no penalties for non-compliance with RHNA targets. For many cities, new residential uses are seen as a fiscal drag: capped by Proposition 13, property taxes increases do not keep pace with the cost of providing services to new residents. As a result, many cities are loath to approve the housing they need.

In the absence of penalties, one logical solution would be to reward cities that achieve their RHNAs. It turns out that the state experimented with this elegantly simple approach through a pilot program launched in 2001.  

Administered by Department of Housing and Community Development (HCD), the Jobs Housing Balance Incentive Grant Program (JHB) provided modest financial incentives to jurisdictions that voluntarily increased their permitting activity. To qualify for funding, cities were required to achieve a 12 percent increase over a baseline average in permitting activity from the previous 36-month period. If, say, an average of 1,000 units had been permitted annually over the prior 36 months and a given city that issued permits for at least 1,120 units during the pilot period would qualify for incentives.

The pilot produced near-term, cost-effective results. A follow-up report on the JHB Program, issued in 2006 to the Legislature, estimates that participating cities permitted an additional 24,624 units of housing in 2001 compared to their rolling 3-year average. Eighty-six percent, or just over 21,000, of those permitted housing units had been built and occupied five years later. Critically, many coastal communities permitted more housing as a result of the JHB program.

The per-unit grant incentives were relatively low - ranging from $500 to $1,300 per unit ($670 to $1,740 in 2015 dollars), with high-density employment counties receiving higher per-unit incentives. The total award pool was $25 million; the largest award of $3.5 million went to the City of Los Angeles. The JHB program allowed award recipients to spend the funds on new housing-related infrastructure and amenities, creating a virtuous cycle of investment in growing neighborhoods.

We should put these numbers in the context of both the current depth of the state's housing need and the relative effectiveness of other housing subsidy programs:

  • Proposition 46 of 2002 and Proposition 1C of 2006 together provided $4.95 billion for the construction, rehabilitation, and preservation of 57,220 affordable apartments, at a cost of over $86,000 per unit.
  • Prior to their elimination in 2011, community redevelopment agencies produced only 10,000 affordable housing units over their multi-decade existence.
  •  The Affordable Housing and Sustainable Communities (AHSC) program spent $122 million last year to subsidize the construction of 1,924 units statewide, at an approximate cost of $63,400 per unit.
  • The federal Low Income Housing Tax Credit (LIHTC) program has produced around 7,000 new rental units annually, at an average cost of $165,000  per unit in coastal communities.  
  • Assemblymember David Chiu's (Dist. 17 - San Francisco) proposed AB 35, to expand the California Low Income Housing Tax Credit, would have spent up to $100 million per year to leverage an estimated $1 billion in additional funds. The bill passed but was vetoed by Gov. Jerry Brown.

Since subsidized affordable housing projects often receive funding from multiple programs, the total per-unit subsidy is likely higher than the amount shown for any single program. By comparison, the average cost per unit for the JHB program was around $1,180 ($1,580 in 2015 dollars) -- less than the state incentive on some electric cars. On the one hand, it's kind of amazing that cities would be willing to do an about-face on housing approvals for so little money. On the other hand, if that's all it takes, it could be a wise, efficient investment for the state. 

Let's address two obvious arguments with these comparisons:

The HCD follow-up report can't quantify how many of these units would have been permitted anyway due to the real estate upcycle then occurring in 2001, and how many of these permits were directly attributable to the incentives. True, but even if only a fraction of the total unit production were directly attributable to the incentives, the JHB program is still dramatically more cost-effective than its next closest peer. It is also more transparent and simple to administer.

This comparison is a case of "apples and oranges:" the cost of permitting a unit of market-rate housing and the cost of producing a unit of affordable housing are not directly comparable or equivalent in their social impact. The Feb. 9 LAO report provides compelling evidence to the contrary. Increased production of market-rate housing would have broad-based affordability benefits for households at all income levels. Strikingly, the LAO report found that cities with abundant market-rate housing production were far less likely to displace low-income residents than cities with slow growth policies. While targeted subsidies for very low- and low-income households will continue to be both morally and economically necessary, everyone wins with an increase in overall supply of housing.

This premise is at the heart of the JHB Program.  Whether rooted in NIMBYism, environmentalism, or the fiscalization of land use wrought by Proposition 13, many local governments are reluctant to approve new housing. The JHB Program shows that this reluctance, at least in the near term, may be most easily overcome with cold hard cash. There might even be greater receptivity to such an incentive program now than there was in 2001. In an era of dwindling state and federal assistance to cities, many communities-whether coastal or inland, affluent or low-resource-are highly motivated to pursue every discretionary dollar out there.

In resuscitating the JHB Program, or creating a new program like it, the state wouldn't have to reinvent the wheel - there is already a statutory mechanism in place; it would just need a dedicated, sustainable funding source. While many sources could be considered, there would be a strong policy justification for using a portion of cap and trade funds for this purpose. The construction of new housing in job-rich areas would directly support shorter commutes, a reduction in household VMT, and hence a decrease in greenhouse gas emissions. And, of course, new units means more property tax monies going back to the state, even if taxes are constrained by Prop 13.

Ideally, cities should not have to be bribed into approving new housing. But we are not living in an ideal world. Given the urgency of California's affordability crisis, a program with the potential to produce near-term, cost-effective results deserves to be resurrected from the state's policy graveyard.  

Adam Christian is a senior consultant in infrastructure funding and finance at HDR, Inc and the founder of Urban Insights. 

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