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Zoning reform: How California got into the mess it’s in

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:

FrameWORK_Housing_ZoningCapacity

The great down-zoning of LA (Morrow, 2013)

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.

24 comments to Zoning reform: How California got into the mess it’s in

  • Simon

    “It’s really difficult to reform policies when even the people who would benefit from changes can’t agree that they will be beneficial.” – this is not just a local issue. Some reading I’ve done recently suggests that this has been an issue for Obamacare in the US. People who are personally benefiting directly from the programme are nonetheless against it because they believe other less deserving people are benefiting more. WTF!

    • Greg N

      Like, “I personally support tax cuts that reduce my tax burden, but not if those rich[er than me] bastards are also getting even bigger tax cuts as a result.”?

  • conan gorbey

    Of course we have our own Lucys here in large quantities. There was a report in the Herald in the weekend outlining opposition to Ryman’s latest retirement home including this gem ‘Grey Power opposes the project, saying it is simply too big’.

    Given the takeout box next to the article talked about Ryman’s financial success it’s clear they aren’t having issues populating these developments, so it seems bizarre that the group giving voice to the supposed thoughts of our older citizens are opposed to something its members are lapping up.

    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11750669

  • mfwic

    Planning arguments are always about property values. Land gets valued according to what it is zoned for. So developers have an incentive to buy a site and get something else approved. That way they bought at a discount and have added to their land value. In contrast residents worry about the impact of a development on their own property value. If they are shaded or overlooked their property isn’t going to be worth as much. So they find something they can object about. A frog or moth (snails even) that is endangered or traffic safety or heritage or anything at all that sounds plausible that they suddenly take an interest in. But at its heart planning is about property values. Maybe if we gave up on all the crap and were honest about how things will impact prices or wealth then we could come up with a better system.

    • Realist

      But Mfwic that assumes people are prepared to pay the true costs of their development.

      In my experience human behaviour is to shift those costs onto “others” wherever possible.

      • mfwic

        I agree. Which is why we need a system that can deal with actual external effects and honestly make people pay for them. Instead we have this stuff about sustainable management.

  • Ari

    California is a mess, but that’s what you get when you have one party dominate the state government for decades on end and create a insanely inefficient state bureaucracy.

    • Genuinely curious: which party? The Democrats and Republicans have swapped the governorship between them for decades: Edmund Brown, Reagan, Jerry Brown, Deukmeijan, Pete Wilson, Gray Davis, the Terminator, Jerry Brown again. Until recently there was a rule you needed a 2/3 majority to raise taxes, which the Democrats have only just surpassed.

    • Ari

      Ask Google if you are curious.

      • Peter Nunns

        Over the last 50 years, California has spent 31.5 years with Republican governors, and 19.5 with Democratic governors. Admittedly, they’ve had Democratic majorities in the legislature for most of this time, but since Prop 13 (1978) that hasn’t meant much as you need a 2/3 supermajority to pass a budget or raise taxes.

        Here’s a link since you don’t seem to be able to follow your own advice: https://en.wikipedia.org/wiki/Political_party_strength_in_California

        Since 2010, California has had a Democratic governor and Democratic supermajorities in the legislature. This has been the only period of time when the state has been proactively addressing long-term issues like structural budget deficits and climate change. Housing actually stands out as an issue where they conspicuously *haven’t* been sorting things out.

      • Arecane2000

        Socialists. It doesn’t matter what you’re called, it’s what you do that counts.

  • Peter H

    Hamilton his been down zoning with each District Plan (DP) review, in the 1960: 278 ha was zoned higher density. Current 2012 DP: 244 ha, proposed DP: 204 ha

    Below is meets out lining change to more Greenfield housing.
    Current growth plan for new housing is 50% urban (infill) 50% Greenfield
    “Assumed demand for housing is 40% infill … 60% Greenfield” (page 29).
    http://www.hamilton.govt.nz/AgendasAndMinutes/20160825%20-%20Council%20Agenda%20-%20Open%20-25%20August%202016.pdf

  • Harsha

    “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.”

    I always take the “supply” is less than “demand” argument with a grain of salt – because “demand” itself is a function of supply. After all, this is the same argument that traffic engineers have been using for decades to increase road capacity. It would be more interesting IMHO to look at metrics such as price per unit area (inflation adjusted) and unit area of housing consumer per person – to understand the effects of this insufficient supply. Has it meant more people in the same limited housing stock? Can we separate out the price per unit area increase due to increased demand, from other effects such as improved amenity?

    Also, hello Peter!

    • Peter Nunns

      Hi Harsha!

      Highly recommend you have a read of that report. They’ve done some clever things in it to address your questions. In particular, their estimate of the shortfall in construction is based on a model of the relationship between housing construction and changes in prices estimated on data from all US cities over a 30 year period (controlling for exogenous variations in amenities). So their estimate reflects the number of additional homes that would have had to be built in order for California to have followed the same price trend as the rest of the country.

      They’ve also run supplementary models to estimate the impacts of higher prices on residential crowding, commute distances, etc. Clever bunch of boffins at the LAO.

  • Matt P

    The 1970 initiative in California mirrors what we saw in Auckland after 1991 when that flawed bit of law the RMA was introduced.
    Auckland used to have quite flexible zoning provisions. For a long time it had a form of ‘flexi density’ where density was regulated by bedspaces not dwelling units. This meant you could have a few bigger house on one site, or lots of small flats.
    It resulted in the many sausage flats we see around Auckland. The taste police didn’t like those, so we saw the opportunity for density effectively banned in most Auckland suburbs. They aren’t all pretty but many of them aren’t particularly offensive either.
    I think there is a case for the reinvention of the sausage flat. I’ve done a few sketches, there is a much sexier 21 st century version of the sausage flat just waiting to be built….if only the unitary plan allowed it…

    • TimR

      If we’re going to have _any_ metric based density control, then that Flexi control based on bedspaces is pretty darn good as an idea.

      I’m even a fan of the sausage flat strategy as well…(shhhh, don’t tell). It just needs designing well to deal to the messy front/back relationships it creates, and to make any driveway civilised.

      I’m curious – what makes you think the UP bans sausage flats?

      • Matt P

        Hi Tim
        It effectively bans sausage flats due to outlook, private open space requirements.
        I wouldn’t fancy the chance of getting a consent for a sausage flat development that had juliet balconies on upper level units, and outlook of say 3-4m within the site
        Matt

      • Matt P

        Hi again Tim
        All good comments, perhaps I am just unlucky in running into urban designers’ on a regular basis who have a very different philosophy to you.
        Because in my regular encounters with UDs, they *are* often very aesthetic driven
        The impact of mandatory design requirements – taking your lead, if you like, of not being ‘urban design’ requirements – on spatial planning outcomes is large, and documented widely in credible international literature (eg. there’s some good OECD papers on this).
        Because requirements for large balconies, minimum floor areas, minimum ceiling heights etc all COLLECTIVELY impact on development feasibility, and make the goal of urban intensification that much harder to achieve.
        People can criticise some of the ugly CBD apartments all they like, with some validity, but in a spatial planning sense they are brilliant because they were feasible to build, and WERE built, and have brought a lot lot more life and activity to the CBD – which is a great spatial planning outcome
        I’ve said it elsewhere, and I’ll say it again with great confidence here – I predict a big failure in the Unitary Plan delivering on its spatial planning goals, at least partly because it’s requirements around outlook space, private open space etc are excessive. Try getting multi unit developments in the MHS and MHU zones to ‘stack up’ financially – good luck!

  • Matt P

    What do others think about the huge weight put on urban design here? Go to many cities in Asia, the Middle East, and even Europe and there will be plenty of ugly or at least not beautiful townhouses and apartments.
    I like good design but it seems to me we overemphasize or over regulate for it here in Auckland and in some form it is hindering affordability and spatial planning objectives.
    In many parts of Japan the built form is quite ugly, but it is ok because you get the upside of vibrancy and PT, walking, biking. Plus many of the streets are very well treed.
    But maybe it’s just me, perhaps I am a total philistine.

    • My main complaint about urban design in Auckland is not the ugly, but the dysfunctional.

      For example, the use of open space around Hobson Street. What’s in the space between those restaurants on the corner with Victoria Street? Parking. But look around and up: apartments and more apartments. They don’t need parking to go to these restaurants. Imagine how many more people would go to that corner if there would be a more pleasant space for people instead of that miserable little parking lot.

    • TimR

      i think there’s a few things to respond to here Matt. There’s plenty of digs at UD these days, but also lots of misunderstanding.

      – Lets be clear: urban design at its core is not about aesthetics. UD is probably more about the unseen, activities, economics, collaborative process and integrated design across disciplines. There’s an elegance and artfulness about bringing these things together effectively that’s not even visible (although doing this all and making it look good really is an art). Any Urban Designer who tries to sell you the idea UD is just about flashy pavements or blingy buildings probably needs their competence checking IMHO.
      – That’s not to say aesthetics is not important – it’s just not the be all and end all and certainly not the starting point of urban design. Efforts like the downtown and waterfront area certainly focus on high quality aesthetics, but that’s because throughout civilisation, diverse societies have deemed it appropriate that the central areas that are accessible to many should not be second rate cast-offs. Centres should be a source of civic pride and represent a city’s identity, not just lowest cost accidents that drive people away. Other contexts require a different mix of priorities, but that’s not to say that UD is not relevant in places such as outer suburbs. As I said, much is to do with the unseen – for example, designing subdivisions for future change so that we avoid big costs in future infrastructure upgrades, and avoid badly formed urban infill.
      – In the context of other regulatory controls on development, UD is hardly a “huge weight”. I’d love to hear evidence validating that as a relative cost or impediment. PS – minimum balcony sizes is not “urban design”, despite efforts to tag it as such.
      – The notion of UD impeding spatial planning is quite hilarious. The two are fully interchangeable in my view. Equally the notion of affecting housing affordability is nonsense. I repeat: Good UD is not about blingy design; some of its core concerns are around doing more with less, more efficiently, and avoiding blowing dosh on excessive infrastructure. If we’re serious about housing affordability we would be properly examining the full cost build up of homes, and questioning the role of major drivers such as finance availability, rather than putting trust in the half-cocked, manipulated analysis of ProdComm.

      If there’s a grain of truth hidden in your comment, it’s that we need better collective understanding about what UD is and is not. There’s plenty of negative spin and mudslinging around UD right now in absence of an established definition of UD and it’s practice. Don’t take the ProdComm or Bill English’s comments on UD as gospel – they’re just reacting to disgruntled developers whispering in their ear in search of a way to beat up Councils.

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