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Business Observer Thursday, Jul. 15, 2004 17 years ago

Affordable housing land trust: Flawed scheme

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Affordable housing. That's the political motherhood-and-apple-pie issue these days. And yet, as demonstrated with SMR and 2050, the social engineers can't seem to grasp the consequences of limiting supply when demand is huge.

Affordable housing land trust: Flawed scheme

The tit-for-tat going on between Schroeder-Manatee Ranch and Sarasota County over the 2050 plan continues to demonstrate everything that's wrong with the government meddling in private property and government's misguided attempts to create affordable housing.

Affordable housing. That's the political motherhood-and-apple-pie issue these days. And yet, as demonstrated with SMR and 2050, the social engineers can't seem to grasp the consequences of limiting supply when demand is huge. In fact, instead of giving in to what should be obvious - more density, less-stringent height restrictions - the social engineers are crafting yet another affordable housing scheme: a land trust.

As proponents see it, some government agency in all likelihood would take tax dollars out of private hands and put them in a not-for-profit trust that would buy banks of land. The trust would then eliminate the cost of land for home builders so home builders can construct affordable homes.

But like all schemes that distort the market, this would be another government program that takes money from one group for the unearned benefit of another. Presumably, the land trust would be a not-for-profit organization that would not pay property taxes. Thus, the tax revenue that otherwise would have come from the land trust's land would be shifted to existing taxpaying property owners, increasing costs for everyone else.

That's just one adverse consequence. Carried further, if the land trust wanted to buy more land, it would compete with market-rate buyers for developable land. This would drive up the cost to fund the land trust, which would increase the burden on taxpayers even more.

The list of negatives doesn't stop there. But instead of documenting them, read the accompanying article on "inclusionary zoning." This is what Sarasota County wants to do with its 2050 plan - require developers to set aside a percentage of their developments for affordable housing. As the article points out, the practice is a failure.

Housing is unaffordable because we restrict where, how high and how many units builders can build. Housing will become more affordable when supply can outstrip demand. It's Econ 101.

By Benjamin Powell, Ph.D

And Edward Stringham, Ph.D

When confronted with the housing affordability crisis, many local governments have turned to "inclusionary zoning" ordinances, which mandate that developers sell a certain percentage of homes at below-market prices. But does "inclusionary zoning" work? To help answer that question we examined communities where the practice is particularly prevalent - the San Francisco Bay Area.

These are the effects of inclusionary zoning:

The 50 Bay Area cities with inclusionary zoning have produced fewer than 7,000 affordable units. Since 1973, the average is only 228 units per year. After passing an ordinance, the average city produces fewer than 15 affordable units per year. At current rates, inclusionary zoning will produce only 4% of the Association of Bay Area Governments' estimated affordable housing need. This means that inclusionary zoning will require 100 years to meet the current five-year housing need.

Inclusionary zoning imposes large burdens on the housing market. For example, if a home could be sold for $500,000 but must be sold for $200,000, the revenue from the sale is $300,000 less. In half the Bay Area jurisdictions this cost associated with selling each inclusionary unit exceeds $346,000. In one-fourth of the jurisdictions the cost is greater than $500,000 per unit, and the cost of inclusionary zoning in the average jurisdiction is $45 million, bringing the total cost for all inclusionary units in the Bay Area to date to $2.2 billion.

Who bears the cost of inclusionary zoning? The effective tax will be borne by some combination of market-rate home buyers, landowners and builders. But most of the burden is likely to fall to the market-price home buyer.

As contractors seek to recoup their losses for having to sell some homes for below-market prices, they will have to sell the remaining, unregulated units for higher prices to remain solvent. We estimate that inclusionary zoning causes the price of new homes in the median city to increase by $22,000 to $44,000. In high market-rate cities such as Cupertino, Los Altos, Palo Alto, Portola Valley and Tiburon, we estimate that inclusionary zoning adds more than $100,000 to the price of each new home.

Inclusionary zoning drives away builders, makes landowners supply less land for residential use and leads to less housing for home buyers - the very problem it was instituted to address. In the 45 cities where data is available we find that new housing production drastically decreases the year after cities adopt inclusionary zoning. The average city produced 214 units the year before inclusionary zoning, but only 147 units the year after. Thus, new construction decreases by 31% the year following the adoption of inclusionary zoning.

In the 33 cities with data for seven years prior and seven years following inclusionary zoning, 10,662 fewer homes were produced during the seven years after the adoption of incusionary zoning. By artificially lowering the value of homes in those 33 cities, $6.5 billion worth of housing was essentially destroyed.

Price controls on new development lower assessed values, thereby costing state and local governments lost tax revenue each year. Because inclusionary zoning restricts resale values for a number of years, the loss in annual tax revenue can become substantial. The total present value of lost government revenue due to Bay Area inclusionary zoning ordinances is more than $553 million.

Benjamin Powell and Edward Stringham are the authors of the Reason Foundation study Housing Supply and Affordability: Do Affordable Housing Mandates Work?, from which the preceding was excerpted. The entire study is available at: rppi.org/ps318.pdf

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