Expanding Inclusionary Housing to Small Property Owners is "Dumb Growth" for everyone

The Pasadena Pundit ^ | July 9, 2005 | Wayne Lusvardi

[WayneLusvardi]

Expanding inclusionary housing to small landowners is "dumb growth" for everyone

"As night follows day, every clever government intervention will invite multiple private responses, which are certain to undo whatever good might come about." - Richard Epstein, Markets Under Siege, 2005.

Capitulating to affordable housing advocates, the City of Pasadena, California, is about to be one of the first cities to expand its inclusionary housing ordinance to small properties where only 5 to 9 units of new apartment housing can be built. Apparently, public officials and housing advocates do not realize that expanding the inclusionary housing law will produce no affordable housing, will not increase the tax base, and thus will subvert the city's identity as a center of the "new urbanism" and "smart growth" policies.

Inclusionary housing requires developers of new apartment housing to set aside typically from 10% to 15% of the units for low and moderate income tenants; or pay what is called an "in-lieu" fee to the city to develop such affordable housing. This is believed to be the political equivalent of creating the proverbial "free lunch" because taxpaying homeowners don't have to pay for it. But just as there is no such thing as a free lunch, there is no such thing as cost-free affordable housing in upscale "new urbanism" housing developments.

In reality what happens under inclusionary housing is that developers just shift such requirements onto landowners by discounting the price of the land on which such developments are built; and shift onto the new renters the reduced rents for the affordable units. So the highest and the lowest rungs of the economic ladder of rental housing are accommodated and the middle class is squeezed out in new apartment developments subject to inclusionary housing.

Inclusionary housing is one of the tools of what is oddly called "smart growth;" whereby "new urbanism" style higher density housing is concentrated in the core of cities and older suburbs instead of urban sprawl in "edge cities." But its proponents don't realize that it is a self-defeating tool when forced on small properties. Under inclusionary housing the highest economic use of small properties will revert back to their existing use and thus there is no economic incentive to build affordable units. In Pasadena, the only likely incentive would be to build up to four units of luxury housing, such as million dollar luxury townhomes.

For example, the economic consultants for the City of Pasadena estimate that the devaluation of land subject to inclusionary housing is at least 30% of the value for its new potential use for higher density housing. Coupled with the City's new parks fee of $20,000 per unit, this reflects at least a 50% loss to the potential higher value of the land. In other words, older land uses remain more economically viable than newer uses despite being "upzoned" on planning documents. What will result under expansive inclusionary housing will be an uneven growth pattern of new large upscale high-rise apartment projects next to older smaller commercial and residential properties which become "stranded assets."

This economic inversion phenomenon is not as prevalent on larger properties which may have older unoccupied economically obsolescent commercial improvements on them. The highest and best economic use of such larger obsolescent properties is typically to demolish the improvements and re-use the site for higher density mixed residential and commercial use.

It is often noted that the local politician with the most promises will typically win. However, the laws of economics tell us that this is not a win-win situation. There will be a lost opportunity cost associated with forced inclusionary housing ordinances. And that lost economic opportunity will pop up in the form of economic stagnation of older smaller improved properties and a declining economic tax base while larger properties prosper. Paraphrasing legal scholar Richard Epstein, "coercion leaves no stock of wealth afterwards. Markets do, however."

This spot economic stagnation may be desirable to anti-growth political groups who may see in inclusionary housing a de facto partial no-growth ordinance. Thus, typically what happens is radical affordable housing advocates are joined by more conservative "no-growthers" and "preservationists" who cloak their motivations under the moral superiority of championing affordable housing. This politically convenient alliance is often sanctioned by the social action committees of mainstream churches and synagogues. There is obviously something hypocritical in actions of the religious champions of inclusionary housing who ignore the Judeo-Christian commandments to not covet or steal their neighbor's property or excessively tax it.

Economic illiteracy is nearly a state religion in California politics. As newspaper journalist Steven Greenhut has written: "In other words, the more economically illiterate the population, the better off the economic interventionists will be. Throw in the normal passions of envy and hatred, and sound economic thinking goes out the window." (S. Greenhut, "Economic Illiteracy 101," Ideas on Liberty, June 2003). And apparently so does sound moral prioritization.

Speaking from the unique voice of experience as a former developer of low income housing for a public housing authority, a former teacher of affordable housing courses to city managers, as a former family and children's social worker, as a real estate appraiser, and as a small commercial property owner, forcing inclusionary housing on small landowners is a lose-lose proposition for all concerned and is morally troublesome. But elected officials, bureaucrats, housing advocates, and mainstream journalists are apparently deluded to the contrary by economic illiteracy, a broken moral compass, and political pandering to the many at the expense of the few. -- The Pasadena Pundit

[William Tell]

From the article: "Economic illiteracy is nearly a state religion in California politics. "

Got that right. I was entertained recently by some liberal acquaintances complaining because they were required to install wired smoke-detectors in their vacation home despite the fact that it is off the grid. How dare they question the wisdom of the enlightened majority.

[nothingnew]

I only read the first 3 or 5 paragraphs...I'll admit I know next to nothing about this particular happening, but it does smack of marxism...am I wrong?

FMCDH(BITS)

[WayneLusvardi]

Actually is more more fascistic than socialistic. Under socialism the costs of housing would be theoretically born by everyone. Under inclusionary housing only the landowning class are singled out to pay for it. I hope this answers your question. WL author

[Carry_Okie]

Yup, wealthy urbanites with servants' quarters subsidized by middle class taxes. The eventual result is a middle class collapsed into the poverty of indentured constituency.

Smart Growth is equivalent to feudal fascism.

Should you wish to know more about how Smart Growth works in an urban setting (Portland, OR), you might wish to read The Vanishing Automobile, and Other Urban Myths by Randal O'Toole. Here in Santa Cruz, we have the highest housing unaffodability quotient in the nation.