This is the latest in an ongoing series on the politics and economics of zoning reform. Previous posts have argued that the benefits of enabling urban development generally outweigh the costs, but that local government political dynamics may serve as a barrier to achieving those benefits. As a result, any plausible reform programme must account for political and institutional dynamics, which can either speed or stall change.

The state of California represents one extreme when it comes to reforming zoning laws. Simply put, there have been some minor steps forward, but since the 1970s the overall direction has been towards tighter restrictions on development. For instance, the ‘Great Downzoning’ of Los Angeles in the 1970s and 1980s has never been substantially reversed:

As Joe Bousquin lays out in a sharp article for Builder magazine, California’s restrictions on housing development are the unintended consequence of several important policy changes in the 1970s. These have combined to create a situation in which it is systematically difficult to build, leading to continually rising home prices:

According to a widely referenced 2015 report from the California Legislative Analyst’s Office (LAO), the Legislature’s nonpartisan fiscal and policy analysis arm, since 1980, California has built half of the housing units it needed—about 100,000 per year—to keep up with demand. And that’s just in aggregate. In high-demand locales like the San Francisco Bay Area and Los Angeles, the housing deficit is even greater. “Most of California’s coastal counties needed to build three times as much (or more) housing as they did,” the report claims. Stated differently, during the past 36 years, California did not build the additional 3.6 million homes that it needed to keep its skyrocketing prices in check. To put that number in perspective, it would take the collective efforts of every home builder in the country, building nonstop at 2016’s projected pace of 1.26 million housing starts, three years to put a dent in the state’s problem. The report concludes that NIMBYism, local communities’ lack of financial incentives to approve more housing, and anti-growth proponents who go to daunting lengths to block development have contributed to the problem, as well as more inveterate challenges such as a scarcity of suitable land along the coast and an ever-increasing population.

Two particular bits of legislation have had broad detrimental effects. First:

In 1970, the then–California Governor signed the California Environmental Quality Act (CEQA), the state’s broad development review mandate, into law. It’s been at the heart of California’s housing shortage ever since. Modeled after the National Environmental Policy Act (NEPA) of 1969, CEQA originally was cast as a progressive mandate that would protect the rolling hills, towering forests, and jagged coastlines that make California so unique. It obliged local municipal bodies to consider environmental impacts before approving new housing projects, and if any were found, to require developers to come up with a plan to mitigate those impacts. But what CEQA has become, housing advocates say, is a bludgeoning club used by anti-growth and NIMBY interests, as well as labor groups, to either block development outright or hold developers hostage to their concessions.

There’s nothing wrong with regulating to protect environmental quality. I’m all for it. But the particular approach used by CEQA – ie case-by-case reviews for a large share of new developments – seems to be a particularly inefficient way of achieving this end. The ‘friction’ added by the review process kills off both good and bad projects. By comparison, a more certain process that guaranteed development proposals a quick yes or quick no is likely to work better for both development and the environment.

Second, a tax reduction referendum passed in 1978 significantly shifted the financial incentives facing local governments, who choose which developments to approve:

While CEQA and environmental reviews add millions in costs to housing projects, the localities that have the power to approve or block them don’t get any of that money. They also get a much smaller slice of the property taxes that often incentivize communities in other states to approve new development. “Cities will tell you that from a property tax perspective, housing is a loser,” says David Cogdill, president of the CBIA. “You’ve created a situation where property values are going up, but the localities don’t benefit financially.” The reason for that is Proposition 13. Voters passed the law in 1978 to cap the rate at which local property taxes can increase, and effectively put the state in charge of dolling out the money once it was collected… That process also explains, in a way that’s as convoluted as California’s revenue structure, why the impact fees Burns and other builders pay in the state are so high. Basically, cities can either block housing with CEQA and not incur the extra costs of services housing creates, or approve that housing, but raise impact fees, which are the last best option that remains for them to increase funding.

Proposition 13 created incentives to tax new housing development heavily – or refuse it outright. It did so in an environment in which CEQA expanded scope for local governments and neighbours to object to development. This proved to be a boon for people who already owned homes in California, but it’s been a catastrophe for younger generations.

Bousquin’s article focuses on several broad institutional and policy factors as a driver of California’s zoning shambles, but I think it’s also worth highlighting a third cultural / political factor: the role of bad analysis and wishful thinking in perpetuating bad policy.

If you pay close attention to San Francisco debates over housing affordability and zoning, you notice a steady stream of weird arguments about supply and demand. Some of these are actively self-serving, while others are just confused. For instance, Leigha Beckman at SF BAMO compiles an edifying list of the “Top 10 Bay Area NIMBY moments of 2016“. Here were a couple:

2) Mission Resident Lucy Admits We Need Affordable Housing But Protests 100% Affordable Housing Complex for Seniors

1296 Shotwell St. rendering

Last year, Supervisor David Campos asked San Francisco to pass Prop I, which would temporarily ban all new housing in the Mission District unless the units are 100% affordable. An extreme proposal, and it didn’t pass. But apparently even when housing is 100% affordable, and explicitly set aside for an economically vulnerable segment of the population, residents of the Mission and Bernal Heights still find reason to oppose it. A proposal at 1296 Shotwell for 94 units of permanently affordable senior housing failed to meet the standards of its future neighbor, Lucy, who insisted the project be reduced in size, despite the fact that this concession would eliminate affordable units. Lucy acknowledged that “every unit counts”, but with the usual NIMBY caveat that one more affordable housing project “would not solve the problems of the city.” In a rare moment of self-awareness, Lucy declined to provide her last name to Mission Local. 5) Peter Cohen, Director of an Affordable Housing Organization, Opposes Affordable Housing Initiative In one of the most head-scratching policy oppositions in San Francisco this year, a measure put forward to increase the amount of affordable housing through a density bonus program ended up getting challenged by members of the affordable housing community itself. Yes, we were also shocked. The proposal would allow developers to add three stories to a building irrespective of zoned height limits, but under the condition that all the extra units are affordable. More density, more affordability, and at no cost to taxpayers. Sounds like an awesome deal (it is), but Peter Cohen, Director of the affordable housing nonprofit Council of Community Housing Organizations (CCHO), came out as one of the loudest opponents of the bill. Cohen said it was too much of a giveaway to private developers, which seems to completely miss the fact that it is actually a giveaway to middle-income families. We admit this one doesn’t technically qualify as NIMBYism in the literal sense, but Mr. Cohen doesn’t technically qualify as an affordable housing advocate, either.

Affordable housing advocates opposing affordable housing? It’s really difficult to reform policies when even the people who would benefit from changes can’t agree that they will be beneficial.

In summary, there are a few lessons from the California experience:

While there are good reasons to regulate to manage negative spillovers or environmental impacts from development, we need to think carefully about the potential unintended consequences of case-by-case approval processes.

Local governments need to have some financial incentives to approve developments, or they will stop issuing approvals.

The public conversation on housing affordability and zoning has to be based in facts and evidence, rather than nonsense and self-interest. Otherwise it will be very difficult to gain consensus on what the issues are and how to address them.

Next week, I’ll look at what happened to the most recent attempt to modestly reform California’s zoning rules. Hint: It didn’t go well.

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