California Cities Have Widely Variable Response to Housing Crisis

The California Legislative Analyst’s Office issued a report last year that concluded that because of the shortage of housing in California, home prices and rents are higher in California than most of the rest of the country.

Lawson_Kristina_headshotA classic supply and demand problem, California’s housing crisis has been well documented and is seemingly well understood by housing policy experts. Quite simply, the state has not built enough housing units of all types to house the millions of people already here and those who would like to move here.

The California Legislative Analyst’s Office (known as the LAO), a nonpartisan fiscal and policy advisor to the California state legislature, issued a report last year that concluded that because of the shortage of housing in California, home prices and rents are higher in California than most of the rest of the country. This isn’t a new problem. In California, the average home prices and rents have been rising faster than the U.S. average since the 1940s. The cost of raw and/or developable land is also higher than most of the rest of the country.

According to economist Christopher Thornberg, California would need to expand its housing stock by between 6 and 7.5 percent in order to approach nationwide norms for housing stock, vacancy rates, and crowding. In total, the amount of housing that Thornberg indicates must be produced to bring the state from a crisis condition to a stabilizing condition is between 800,000 and a million additional residential units. These units need to be created throughout California.

In addition to simply producing new units, the 2015 LAO report noted that one of the strategies to address the housing crisis is to allow increased densification of development. In other words, because land costs are high in California, building more units on the same plot of land allows a developer to spread those land costs across more units, lessening the impact of the land costs on each individual unit.

So what are California cities doing in response to the housing crisis? In some cases, the response is contrary to the LAO and independent economists’ expert advice. Surprisingly, over the past year a number of California cities considered the adoption of new regulations prohibiting certain types of residential development.

In San Francisco, voters last November considered an initiative measure that would have severely restricted the production of market rate multi-family housing stock within the City. While the development moratorium was ultimately rejected at the ballot box, the proponents of the moratorium continue to argue against the development of new market rate housing, suggesting that somehow less market rate development will eventually lead to a solution to the housing crisis.

City Councils in the cities of Emeryville, Arcadia, Walnut Creek, Palo Alto and Cypress also considered the adoption of multi-family residential development moratoria over the past 12 months. As the LAO report confirms, many cities throughout California are resistant to new housing, at least in part due to concerns about the change new housing could bring to established communities. The resistance to new multifamily housing is particularly pronounced in California’s coastal communities.

The LAO report also indicates that local governments in California have little financial incentive to approve new housing development. While new development does generate additional tax revenue for cities, the costs of the increased demand for public services and infrastructure often outweighs any revenue generated.

So what can California’s cities do to help alleviate the housing crisis? One of the strategies identified by the LAO is to develop more, denser, multifamily housing. In contrast to those cities that are exploring development moratoria, some California communities are taking steps to develop more housing. The City of Oakland, for example, has signaled that it intends to encourage additional residential development through a variety of strategies.

Perhaps Oakland’s efforts signal a trend for 2016. Unfortunately, the LAO is not so optimistic about the potential for new, dense housing development. As the LAO report notes, the state will need to make a variety of policy changes at the state, regional, and local levels in order to close the gap on the housing shortage. In addition, the development of additional housing will continue to put pressure on services and infrastructure.

With the need for up to a million additional residential units and the identified obstacles to new development, the only thing that is certain is that the response from cities will continue to be widely variable.

Kristina Daniel Lawson is a partner in the San Francisco office of law firm Manatt, Phelps & Phillips. She is a sought-after expert in complex California entitlement, land use, and municipal law and policy matters. From the interpretation and application of local General Plans, specific plans, zoning ordinances, and the Subdivision Map Act, to local land use initiatives and referenda, to state and federal natural resources, air, and water law, her wide-ranging expertise adds significant value to land use projects throughout the state.