Last November, voters approved Proposition 1C, a $2.9-billion bond aimed at increasing affordable housing in California. Though well intentioned, the bond does not address the manageable factors contributing to the high price of housing in the Golden State. A true solution requires tackling the regulatory cost drivers.
According to data published two weeks ago in the Business Journal, the median price of a home sold in L.A. County in April was $575,000. In some ZIP codes in the county, the median was more than $2 million. Though consumer demand plays an obvious role in determining the price of a home, a number of man-made supply-side factors contribute to high home prices in California.
Construction costs have increased, due in part to prevailing-wage laws currently on the books. California's Code of Regulations requires that prevailing wages the wage paid in the largest city in the county to a majority of workers in that profession be paid to workers on publicly funded construction projects, including nearly all affordable housing projects.
A study by the California Institute for County Governments found that prevailing wages are typically 36 to 55 percent higher than market wages. These higher wages cause higher construction costs, which then result in fewer affordable homes. A 2004 study from the UC Berkeley Program on Housing and Urban Policy estimates the additional cost imposed from paying prevailing wages on a final home price to be between nine to 32 percent. The paper also estimates that more than 2,600 homes that otherwise would be low-income units are priced too high to be considered such, thanks to prevailing-wage requirements.
Repealing SB 975, the bill that requires the payment of prevailing wages on publicly funded projects, would significantly reduce high construction costs that discourage developers from building more affordable housing.
Also driving costs are environmental regulations such as the California Environmental Quality Act. Labor unions often use these complex regulations to leverage developers into signing Project Labor Agreements to use only higher-paid union labor in construction, increasing building costs. Developers often accept PLAs in order to avoid endless litigation and red tape challenging compliance with onerous environmental requirements.
California Unions for Reliable Energy recently tried to deploy this "greenmail" tactic to prevent the construction of two power plants. Had this been successful, the added costs would have been passed on to consumers in the form of higher electric bills. Used to require affordable housing be built with only union labor, greenmail increases the cost of construction and reduces the supply of affordable housing.
Housing prices, however, aren't determined solely on the basis of construction costs. A recent study by the National Bureau of Economic Research found that construction costs represent half, or less, of a home's price in high-cost cities. The remainder is due in large part to zoning regulations that seek to curb development and control growth but force up land values.
Even inclusionary zoning laws requiring a certain share of construction go to housing for moderate to low-income families contribute to the housing shortage. Inclusionary zoning laws, best thought of as another form of rent control, discourage developers from building in areas most in need of low-income housing. In the average city, new construction decreases by 31 percent in the year after the adoption of inclusionary zoning.
Eliminating harmful zoning and growth-control regulations would increase the supply of housing and make prices more affordable. Numerous studies measuring the impact of zoning and growth regulations on prices in California have confirmed this effect. One recent study examined the effect of moving from less stringent to more stringent regulations and found rents increased from nine to 26 percent.
The $2.9-billion bond of Proposition 1C won't lower housing costs as long as regulatory hurdles stand in the way. Californians should demand that lawmakers remove these costly man-made problems rather than open their pocketbooks every time there is need for a public bailout. The only practical long-term solution is to remove intrusive government regulations and let developers help people who need affordable housing.
Hovannes Abramyan is a public policy fellow in business and economic studies at the Pacific Research Institute in San Francisco.
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