Bonds Won’t Make Housing Affordable

Instead of Prop 1C, California would be better off air-dropping money to taxpayers

Proposition 1C is being billed as the affordable housing bond to California voters. But the reality is that it has very little to do with housing – and even less with affordability.

Nationwide home prices are falling, but California isn’t feeling much relief. Housing prices have lost touch with the pocket-book realities of nearly everyone but the Hollywood elite in California. Median home prices in the Golden State are $553,050 – well over twice the national average.

Setting aside the question of whether the government should be in the homebuilding business, if Prop. 1C were serious about providing affordable housing, the logical way of doing it would be to use the bond money to build as many houses as possible. Studies have repeatedly confirmed that California’s major cities have been suffering from an acute housing shortage of anywhere from 600,000 to 1 million units. California’s homeownership rate of 57 percent is 13 points below the national rate.

But randomly air-dropping $6.1 billion in cash – the amount this bond’s principal and interest payments will cost taxpayers — across the state would offer California homeowners more relief than this initiative will. That’s because Sacramento won’t use the bond money to build houses and is more interested in using it to perform social welfare and social engineering.

There is no way to determine exactly how much of the bond money will eventually go toward actual home building. But the most generous reading suggests that it will be no more than $550 million – or less than a fifth of the $2.8 billion. Of the remainder, about a billion would go toward such welfare items as: homeless shelters; youth housing; down-payment assistance for first-time home-buyers; and – most incongruously for an infrastructure bond – health and social-services for low-income renters. And the rest of the $1.2 billion would go toward such social engineering schemes as: grants for urban environmental clean-up to encourage “infill” development in polluted lots; grants to encourage dense development near public transportation; and funding for parks.

All of this is misguided in and of itself. California is expanding social welfare programs when most other states are shrinking them. Meanwhile, social engineering efforts to force mass transit and city-living down the throats of families have failed nearly everywhere they have been tried. But what’s worse is that, even if such programs made sense, they ought to be funded through general revenues – not general obligation bonds. Such bonds are best used for capital projects like roads and similar infrastructure that generate long-term revenues. But in this case Sacramento is inviting taxpayers to mortgage their future earnings for schemes that offer no returns and may or may not even be needed down the road.

However, the worst flaw of Prop. 1C is that it would do nothing to address the root cause of the housing shortfall: California’s restrictive land-use regulations that have put vast tracts of land off-limits to development by down-zoning the number of units that can be put on a property; severely limiting the number of building permits issued; and making the permitting process deliberately expensive and cumbersome.

Such regulations, according to the Oregon-based Thoreau Institute, account for $850,000 of the price of a $1.1 million house – the median-price of homes in San Francisco in 2005; and $316,000 of a $463,000 house – the median price of homes in Los Angeles. All in all, regulations increased housing costs by a staggering $2.7 trillion in California’s metropolitan areas – almost half of the nationwide total of $5.5 trillion.

To the extent that Prop. 1C will inflate housing demand by offering assistance for down-payments without dismantling the regulatory barriers choking supply, it will actually increase the price of housing. The net outcome will be more prospective homeowners fleeing the Golden State as they are priced out of its housing market.

Prop. 1C is bad social policy, bad fiscal policy and bad housing policy.

Shikha Dalmia is a senior policy analyst at Reason Foundation, a Los Angeles-based free-market think tank. An archive of her work is here and Reason’s California research and commentary is here.