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The Independent Institute

Affordability Disaster Wrapped in Blue Ribbon

Oakland’s Blue Ribbon Housing Commission recommendations—released in a 105-page report after months of deliberation—would, if implemented, be a disaster for housing affordability. They ignore the laws of economics, common sense and even the most important findings of the commission’s own consultant.

I was the only economist on the commission. I attended meetings until June, when I moved away from the area. I would have vigorously objected to the commission’s report, had I still been there, because I am convinced that the commission’s recommendations would make Oakland’s housing much less affordable.

The Real Estate Transfer Tax is probably the commission’s most obvious attack on affordability. The commission seeks a new 1.5 percent tax on the initial sale of each new home to raise money for affordable housing development. Given the Commission’s own assumptions about home prices, that amounts to a $7,500-per-home tax!

The commission also recommends an “inclusionary zoning” ordinance requiring builders to provide 5 to 20 percent of their units at below-market rates.

Because builders pay the cost of providing the subsidized units, they must spread those costs over the remaining market-rate units.

How big would Oakland’s inclusionary tax be? The blue ribbon report does not say, but Hausrath Economics Group, the consultant hired by the city, reported its estimate to the Commission, buried in Table D-8 of a “technical appendix.” The answer: between $6,900 and $17,000 per unit, depending on the type of construction during the first two years after the proposal became law. Thereafter, the tax jumps to between $12,400 and $51,700 per unit.

The burden of paying explicit transfer taxes and implicit inclusionary taxes is borne by a combination of market-rate home buyers, land owners and builders. Last May I asked the Hausrath consultants to estimate how much of this tax burden would translate into higher home prices, but they did not have the capabilities to calculate it and the city planning staff was clearly not interested in finding out.

Fortunately, we can predict the general consequences of the taxes without knowing the precise magnitude of its impact.

-To the extent that market rate home buyers bear the burden, housing will directly become less affordable.

-To the extent that home builders bear the tax burden, new construction will be discouraged.

-To the extent that the tax depresses land values, land owners will tend to supply land for non-residential uses, thus lowering the amount of new housing available and driving up prices.

Which types of development will disappear from Oakland if an inclusionary ordinance is enacted? The consultant found that the ordinance would disproportionately discourage low-rise town homes, condominiums and row houses in East and West Oakland—in other words, the most affordable housing.

The consultant’s study also showed that during the first two years under the ordinance, low-rise condos probably would not be built and building town homes and row houses would be barely feasible.

After two years, when the ordinance becomes more burdensome, not only would both of these types of development disappear from East and West Oakland, the construction of mid-rise condos downtown would also suffer, according to the consultant’s estimates.

The official blue ribbon report misrepresents all of this when it claims the revisions to the ordinance made by the commission “would make development feasible for all housing prototypes currently feasible in today’s market” (p. 8). That’s simply not what Table 16 in the consultant’s study says. The reality is that the blue ribbon commission’s recommendations would discourage new housing, particularly the affordable homes.

The official report was written by inclusionary zoning zealots on the city planning staff and was never shown to the full blue ribbon commission for approval. Fortunately, if one looks at all the documents, including the consultant’s study, the information is there. The proposed ordinance would be a disaster for home affordability in Oakland and should be rejected.

Benjamin Powell is a Senior Fellow at the Independent Institute, Director of the Free Market Institute at Texas Tech University. He Independent Institute books include The Economics of Immigration: Market-Based Approaches, Social Science, and Public Policy, Housing America: Building out of Crisis, and Making Poor Nations Rich.

From Benjamin W. Powell
HOUSING AMERICA: Building Out of a Crisis
Could government's pervasive involvement in housing be related to the very real problems of affordability, availability, mortgage defaults and loans, and much more? If so, the appropriate policy response would be to significantly reduce, not increase, government involvement. In reassessing government housing measures, Housing America: Building Out of a Crisis is the authoritative and most comprehensive book available on resolving the housing crisis.