California Traffic Is a Symptom of Housing Unaffordability
Two weeksago I explored how California's housing unaffordability crisis is impacting the Golden State's business climate. Due to restrictive government zoning ordinances and regulations, California's rental and for sale housing stock isn't keeping up with demand. In response to the crisis, policy makers have turned to rent control, inclusionary zoning, and targeted subsidies - policies that just alleviate the symptoms, while exacerbating the problem (price floors and subsidies increase demand).
No one disputes that California is in the midst of an unaffordability crisis and scholars on all sides agree that increasing housing supply is the only long-term solution. But local and state leaders have yet to remedy the impediments to development. In fact, in some cases, such as San Francisco, local leaders are vocally advocating for further restrictions. Two reasons for this resistance rise to the top: traffic congestion and reductions in home equity values and property tax revenue.
Development brings people and particularly in California, people bring traffic. According to the Texas A&M Transportation Institute, 9 of the top 10 most congested highways in the U.S. are in California. Traffic concerns regularly become political fodder during election season. In addition, existing home and rental building owners fear new development will lead to decreases in existing values. Home value reductions would then threaten property tax collections - which are a significant source of local government revenue - providing another rationale for local leaders to resist new development. However, a closer look at these concerns reveals that they are rather underwhelming excuses to maintain the unaffordable status quo.
Traffic Congestion: Commuters traveling from their homes to their work cause congestion. By restricting local housing supply, workers must commute from where they can find and afford housing. Indeed, Los Angeles, San Diego, and San Francisco grow by between 162,000 and 170,000 during the workday (compared to their nighttime populations), while San Jose shrinks by just over 50,400. This suggests that San Jose is relatively affordable, thus people live there, but work elsewhere, while San Francisco, Los Angeles, and San Diego are not affordable, requiring more commuters to travel back and forth each day. This creates traffic, which leads to congestion. As such, it would seem that traffic congestion is likely to be a symptom of the unaffordability crisis. If housing were affordable near the jobs, then congestion would lessen, not increase.
Decreasing Housing Equity/Property Taxes: Yes, increasing housing stock will, eventually, lead to lower prices. But increasing housing supply takes a long time to actually impact prices (one of this solution's greatest political drawbacks). Unlike oil shocks (i.e. the United States flooding the market with their oil reserves), where supply changes happen rapidly disrupting the market, housing stock takes a long time to hit the market and wouldn't happen simultaneously. Even assuming local and state government regulations were to become non-existent, construction time plus sale time would ensure new supply would seep onto the market rather than be dumped. This would temper the short-term effect on housing market prices, while bringing the market gradually to equilibrium over the long-term.
However, while prices would eventually decrease, reduction in property taxes is likely to be a phantom concern. In fact, local governments would arguably see a net gain in property taxes as the result of new development. Because California's Proposition 13 bases property taxes on the assessed value of the property versus the market value, new housing development - initially assessed at market value - would bring in more property taxes than a comparable existing property.
In most cases, average assessed value in a given neighborhood is likely to be well-below average market value, thus adding in new development would raise the neighborhood's average assessed value closer to its market value. In addition, because Proposition 13 allows, in most cases, properties to be re-assessed to market value upon sale of the property, if you also assume that some of the new housing stock would be purchased by existing community members, then both the new and existing supply would, for property tax reasons, be assessed at market value. This means more money for local government coffers, without raising taxes or fees.
This isn't to say that new development wouldn't impose costs on communities (this is perhaps an area that Sacramento could possibly assist local governments to remedy) but to use traffic congestion and concerns about decreasing home equity and property tax revenue as reasons to resist development are straw-man arguments that prevent this serious policy problem from being fully addressed. It's time to give housing supply a try.
