We have a shortage of affordable housing in San Francisco.
Because housing is so artificially scarce, and therefore expensive in San Francisco, we force developers to include “below market rate” units in every housing development or pay fees.
So why aren’t developers building housing not-rich San Francisco residents can afford?
Density restrictions and our approval process make it impossible for developers to build down-market housing cost-effectively. Developers respond to being forced to build units that cost them money on net by building less, or not at all.
Building in San Francisco costs hella money
- Labor is expensive.
- Harsher height and zoning restrictions make land and building more expensive.
- Our approval process is insane.
San Francisco has “some of the most complex land use and environmental regulations in the country.”
- Permitting fees in SF alone are about $5000 per home. The national average is$500-$2000.
- Going through the California Environmental Quality Act (CEQA) process usually takes a year and a half to two years. Sometimes longer, depending on how many lawsuits you have to fight.
And that’s before you try to sell the neighborhood associations on the project.
San Francisco suffers from the IKEA problem
To understand what that means for not-rich people, imagine you suddenly made furniture one-third more expensive.
In a normal commodity market, entrepreneurs can profitably serve everyone. Look at furniture. On the low end, you have IKEA. On the high end, you have Williams-Sonoma. IKEA innovated a way to produce low-quality, mass market furniture cheaply. Margins are low, volumes are high, the furniture is flimsy, but nearly everyone can afford it.
Now imagine you told IKEA that before you can build a new store in SF, you must buy the land, then spend three years pushing through bureaucracy. During this time, not only must you pay all the lawyers and lobbyists, but you also have to pay the mortgage. Oh, and at the end, you might not get to build anyway and will have to try to sell the land and eat all the costs.
They’d stop trying to build IKEAs here. They’d build them in Houston, Texas instead. Buh-bye cheap couches with funny names.
That’s exactly what we’ve done to housing.
Height restrictions and our approval process jack up the price developers have to pay and the risk they take on. To turn a profit they have to pass those costs onto buyers and renters.
Affordable housing requirements backfire
To remedy this, we try to force developers to tack on units that cost them money on net, which reduces their overall profit on the development.
San Francisco to Williams-Sonoma: “So, unfortunately our building process makes it impossible for IKEA to build here cost-effectively. But poor people need somewhere to sit. So we’re going to force you to find poor people, determine conclusively that they are, indeed, poor, invite them into the store and sell them enough dining tables at a huge discount that you can prove to us that every sixth dining table was in fact sold to a poor person.”
What do you think Williams-Sonoma is gonna do? Say hello to Houston.
There’s so so so much evidence that this is how it works. The 50 San Francisco Bay Area cities with inclusionary zoning ordinances produced an average of 288 affordable units per year between 1973 and 2004. That’s 4% of the 24,217 we need according to Association of Bay Area Governments estimates. That’s a shortage folks.
Affordable housing requirements are supposed to work on the same theory as price controls. On a limited basis, in the short-term, price controls can reduce prices if some consumers are willing and able to subsidize other consumers. That is, if developers can pass along the cost of affordable housing units, on top of the other fixed costs, to other buyers.
But in the long-term, price controls often create shortages. Where shortages already exist, price controls usually make them worse.
You can keep people from making a profit, but you can’t make them work. That’s why Prop C, which tried to force developers to build low-cost housing, has been such a dismal failure.
The only way to make housing more affordable to buy or rent is to make it more affordable to build. We need eased density and zoning restrictions, a streamlined approval process, and todisempower neighborhoods from blocking projects that meet all the existing requirements.
Otherwise the rich will keep having to order their $1000 bar carts online and the poor won’t have any place to buy furniture at all. Which is fine, since it’s nearly impossible to find a bar cart that goes with tent fabric.
Cathy Reisenwitz writes about software for a living, sex on the side, and policy for fun. Her column “Unintended Consequences” appears regularly in the Bay City Beacon. She’s pro-sex, pro-feminism, and pro-market. Sign up for her newsletter and follow her on Twitter.
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Photograph by Hermes Rivera