Prop. 1 Adds Billions in Debt but Won’t Make Housing More Affordable
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Prop. 1 Adds Billions in Debt but Won’t Make Housing More Affordable

Freeing up builders and entrepreneurs in the private market to produce affordable housing is the long-term solution.

This fall, California voters are being asked to add another $16 billion to the mountain of state debt. The four bond measures on the November ballot are cleverly marketed and key into compelling priorities such as children’s health, water, and affordable housing. But if voters dig into the measures, they find costly, inefficient programs that are more likely to benefit special interests than solve problems.

Take affordable housing, for example.  We all know California’s housing is costly. The theory behind Proposition 1 seems to be: Why not have the government borrow money and use it to fund a grab-bag of programs that are supposed to make housing more affordable for those who need it?

But even the state government recognizes that the new bond won’t come close to resolving the housing crisis. A state Senate analysis of Prop. 1 says that California has a deficit of 1.5 million housing units but Legislative Analyst’s Office finds Prop. 1 would help just 55,500 households.

The most cost-effective way to produce large numbers of affordable units would be to place manufactured homes in less expensive, outlying areas. But that isn’t the type of housing prioritized in Proposition 1. Instead, it aims to finance urban apartment buildings near mass transit stops, which means costly custom construction projects on expensive land — significantly reducing the number of units that can be provided.

The largest portion of Prop. 1 proceeds would go to the Multifamily Housing Program administered by the Department of Housing and Community Development, which provides grants and financing.

The Depot at Santiago, adjacent to the Santa Ana Regional Transportation Center, is typical of HCD-funded projects we might expect under Proposition 1. The 70-unit development cost approximately $34 million according to a 2016 Orange County Register article. That’s almost half-a-million dollars per ‘affordable housing’ unit – not including land costs.

The lucky few who occupying Depot units are receiving amenities far beyond those typically available for the modest rents they pay, ranging from $500-$1400. Further adding to construction costs at the Depot is HCD’s mandate that construction workers receive the state’s prevailing wage. California’s prevailing wages, set by the Department of Industrial Relations, are often well above market levels. A 2004 study for the California Institute for County Government concluded that prevailing wage requirements add 11 percent to the cost of affordable housing projects.

Besides being expensive, projects like the Depot deprive local governments of property tax revenues. Because the property is owned by a non-profit, it is eligible for a California Property Tax Welfare Exemption, effectively removing it from the tax rolls.

Desirable urban sites, located near transit stations, could have been improved with market-rate units that wouldn’t need subsidies and would contribute property taxes.  So, in a case like this, bond-funded state subsidies produce no net gains in the housing supply while putting pressure on city and special district budgets.

Smaller allotments of Prop. 1 bond money may fund truly low-cost housing in rural areas but grants under the CalHome and Joe Serna, Jr. Farmworker Housing Grant Program — together accounting for about 11 percent of the proposed bond – would not go directly to individual homebuyers. Instead, the money would be funneled through local agencies, non-profits, and corporations, which can all be expected to take their cut of the proceeds — further reducing the amount going towards actual housing.

Finally, 25 percent of Prop. 1 money would go to CalVet Home Loans, a subsidized mortgage program for veterans in the state. Federally-backed Veterans Affairs loans that don’t require down-payments or mortgage insurance are already available to California veterans, so rather than adding a billion dollars to the state’s debt, maybe California should just encourage veterans to check out the existing VA program.

In summary, Proposition 1 would primarily fund expensive and/or redundant housing programs that won’t significantly reduce the state’s housing shortage. Rather than take on the long-term debt obligations imposed by Prop. 1, voters would be better off demanding state and local government eliminate rules and regulations that are preventing adequate amounts of housing to be built. Freeing up builders and entrepreneurs in the private market to produce affordable housing is the long-term solution.

This column originally ran in The Orange County Register.