The San Jose city council wisely rolled back the citys 20 percent affordability requirement to a state-mandated 15 percent for new downtown high rises, but the council should go further. The requirement should be permanently rolled back and expanded to include all forms of housing.
When more homes and apartments are built the upward pressure on home prices decreases, making all homes more affordable. If building is limited, buyers bid against each other and drive up prices for everyone. Placing price controls on 20 percent of new units to make them affordable for low to moderate income buyers imposes losses on builders. Since builders have to accept these losses in order to get permission to build the rest of the development, these requirements end up acting like a tax on builders that discourages new home production.
Fellow economist Edward Stringham and I recently published a report, Housing Supply and Affordability: Do Affordable Housing Mandates Work? which studied the Bay Area to find out the size of the affordable housing tax and how much it restricts the supply of new homes. In the median Bay Area city the effective tax on each market rate home was over $44,000. New home construction fell an average of 31 percent in the year after an affordable housing requirement was adopted.
Relaxing San Joses affordability requirements on high-rise developments is predicted to generate three new buildings which will provide an additional 533 downtown units. A significant accomplishment for a downtown that currently does not have a single residential high rise. It will likely ease price pressures on other downtown condos and benefit nearby businesses. More can still be done though.
If the rollback was made permanent more high rises could be built. If the requirement is relaxed for other forms of housing in all areas of the city, far more than 533 new units would be built. With a greater supply of homes across the city all potential homebuyers could benefit from the greater choices and lower prices, not just those buyers with a preference for living downtown.
Watsonvilles recent citywide permanent rollbacks on affordable housing requirements demonstrate how a city can benefit. In 1990 Watsonville passed an affordability mandate requiring that 25 percent of new homes be price-controlled to make them affordable for low- to moderate-income buyers. That decision resulted in no for-profit development for almost ten years. In 2000, when the requirement was finally relaxed, the citys total housing stock increased by nearly 12 percent.
Relaxing San Joses affordability control on high rises in downtown is a step in the right direction. The council should make the rollback permanent extend it to include all types of housing throughout the city.
Benjamin Powell is a Senior Fellow at The Independent Institute, Director of the Free Market Institute at Texas Tech University, and former President of the Association of Private Enterprise Education. Dr. Powell received his Ph.D. in economics from George Mason University. He has been assistant professor of economics at San Jose State University, a fellow with the Mercatus Center's Global Prosperity Initiative, and a visiting research fellow with the American Institute for Economic Research. Benjamin is also the editor of Housing America: Building out of Crisis.
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