It's accepted as gospel by economists, politicians on all ends of the political spectrum, and by everyday people who want nothing more than to stay warm and dry, that California is the poster child for the breakdown in housing policy. When it comes to government at its worst, California is the canary in the coal mine—what happens here is soon to happen elsewhere.
Today's guest, Christian Britschgi (@christianbrits), is an associate editor at Reason magazine covering property rights, housing policy, transportation policy, and regulation. I've been reading Reason Magazine for 25 years. I don't care where you are in the political spectrum. Reason is just plain fun. It is the gold standard for print and digital media.
Since Christian has written extensively on housing policy, I have invited him to join us today to examine the root causes of the alleged affordable housing shortage.
I may have left the libertarian reservation by concluding that there is no housing shortage and never can be a housing shortage anymore. We will see if I'm right.
Links
California's housing crisis hasn't spared the state's college students, 9.30.2022, Christian Britschgi
Environmental lawsuits tried to block 50,000 homes from being built in California in one year, 8.26.2022, by Christian Britschgi
TRANSCRIPT
Bob Zadek: So, big picture, what is it about California—a big state, a lot of people, a lot of land, a lot of unused land—that has led to breakdown in housing policy?
Christian Britschgi: I first go by looking at price. California average home prices are the second most expensive state in the country, followed by Hawaii. Most of the top 10 most expensive cities for rent or home prices are in California as well. Obviously, San Francisco and Los Angeles. But then areas in the Bay Area particularly too.
You also have a high ratio of people to individual housing units. California, after Utah, has the highest number of people per housing units, which suggests you have a lot of housing overcrowding as well.
The percentage of people's income that goes to housing is a lot higher in California than it is in a lot of the rest of the country, particularly in California's large cities.
If you look at other measurements of housing costs or affordability, the price of a home in California, there's a huge gap between the price and then the cost of construction. Normally, in a healthy market you'd expect that the cost of the house would be a little bit more than the cost of construction, so the builder can make a profit. But in California, the cost of the house is a lot larger than the cost of construction.
So, there's something wrong going on here. It's a reason that the state is bleeding a lot of people why you see a lot of people moving to Texas and Florida, where housing is more abundant, more affordable.
Is housing “too expensive”?
Bob Zadek: I'll confess to have tricked you and manipulated you into saying what I hoped you would have said so that I can pounce on it. You said housing is “too expensive” here.
Are Super Bowl tickets too expensive? Well, they're expensive, but anybody who wants to go to the Super Bowl can go. They just have to pay what the ticket is worth.
What do you mean by saying housing is too expensive? Are diamonds too expensive? They are what they are. Why do they cost that? Because that's a relationship between the amount of diamonds available and the number of people who want them. So, diamonds are not too expensive. Supply and demand teaches us they are exactly the right price.
Christian Britschgi: Fair point. The traditional Econ 101 definition of a shortage is that there's some sort of price cap set below market prices, and therefore, the market provides less than what people are actually demanding or would buy in equilibrium.
In California, a lot of cities have rent control, so the market rate rent for units in California is lower what it would be. But much of housing stock in California isn't rent controlled. And you're right—the price rises to whatever the market level is. I would say it's too expensive, because a large portion of that price is the product of government policy.
Diamonds or Super Bowl tickets are very expensive, because the market can only produce so much and demand is very high. The prices of oranges are very low, because there's a lot of supply. And even though there's a lot of demand, per unit costs versus demand leads that to be the per unit price for oranges. It's a relatively free market. The problem with California is that while the market is setting the price for the homes generally, not including rent-controlled housing stock, the market is not allowed to add supply to meet demand. And so, the market price ends up reflecting the taxes, regulation and also taxes put on just housing there. Regulation drives up the cost of housing higher than where it would be in a free market.
Again, the difference between the cost of the home and the cost of construction is that gap is much larger in California and that's a product of restricting supply. Again, average the number of people in a housing unit is much higher in California than almost anywhere else in the country. That's because people can't necessarily afford a home of their own. So, they end up living with roommates. You have multiple families living in the same unit.
If there were no restrictions on supply, I would say, "Yeah, the housing isn't too expensive in California. The market has produced a very expensive place to live for whatever reason." But there are so many restrictions on supply that the market isn’t setting the price. You're not getting a true free market price.
Bob Zadek: Really, the problem is not that housing is too expensive. The problem is that housing is more expensive than it would otherwise be because of government intervention.
If California was just a good place to live – a good climate near an ocean – it would still have very expensive housing. If it was just market acting accordingly, we wouldn't be talking about this today. Is that a fair summary?
Christian Britschgi: Yes – obviously, you mentioned a lot of very fine features about California that drive up demand for living there. In a free market, that wouldn't necessarily drive up the cost of housing per se as much as it would drive up the cost of land. But then markets would respond to that. So, for instance, it's very desirable to live on the beach in California. You would imagine land prices w go through the roof. Developers would look at these high land costs and respond by saying, "Hey, there's a lot of demand for living here. I'm going to build a big apartment building right on the beach."
In Miami, there are condos right on the beach because the market is responding to high land prices. But in California, because of restrictions on supply, markets don’t respond as they naturally would to high land prices.
Bob Zadek: See that, we're friends again. Okay.
Christian Britschgi: [laughs]
Foot-Voting & the Delicate Balance of Zoning
Bob Zadek: It's almost as if there is “reverse rent control,” where government action is causing prices to be too high as opposed to too low. What policies are artificially inflating the cost of the commodity called housing?
Christian Britschgi: There are two basic ways.
One is restrictions on where and how much housing can be built. There are zoning rules that say you are only allowed to build a single house on a plot of land, when the market demand would be for a small apartment building. So, that restricts supply, and price goes up.
Second is a very convoluted and lengthy process for approving housing that you are allowed to build. There are limits on how many new suburban subdivisions you can build. There are urban growth boundaries and preservation of open space.
Additionally, you might have to go through environmental review, where the city requires to study all the environmental impacts and then propose ways of mitigating them. On top of that, they let third parties say, “You haven't studied X, Y, or Z impact enough. If the city approves your building without you going back and doing more study, we're going to come in and sue you and hold up your project for years.”
Bob Zadek: Zoning is usually preceded by the word, restrictive, although zoning per se is restrictive or else they wouldn't call it zoning. You mentioned, for example, that California loves its green space and therefore, restricts destroying open space. They say, "No, we'd rather see elm trees than an apartment building."
Now, many people enjoy green space. It's a quality-of-life issue. I'm conflicted about about zoning. On the one hand, the pure classical liberal in me says people can do with their property as they wish. On the other hand, the illogical extension of that is that if you want to see grass, you've got to see it on television, because you're not going to see it outside your window.
Am I so far gone?
Christian Britschgi: No, everyone can be saved. You too, Bob. Of course, I'm this way too. I like open spaces—I like having access to nature.
First, California has gone overboard in preserving open spaces. You're protecting a lot of open space that isn't necessarily beautiful or used for recreation. People are restricting it because of the problems that might come from more people living next to them, or out of misguided sense of environmental concern. There's a lot of marginal land that isn't open for development right now in California where you don't have to chop down the redwoods.
Second, it’s not like the people who would have lived in these places don't exist anymore. Instead of them being able to live in the Bay Area, they moved to the Inland Empire, or to Nevada or Arizona, where they are experiencing less green space as a result, because that's the only place they can afford housing. So, if you're trying to just maximize the number of people who can appreciate nature, urban growth boundaries aren’t what you want to do. .
There's a balance between preserving open space and then the provision of housing and the social good that comes from that. Who should make that decision? I would appeal to the libertarians in your audience that we should let markets decide that. Private property owners have all sorts of voluntary means of protecting truly beautiful open space or protecting productive agricultural land, either by just owning and operating the land agriculturally, or turning it into some sort of conservation trust. You can preserve beautiful parts of the landscape without government drawing a line on a map and saying, "No housing here."
Bob Zadek: I think I'm being accurate that some green space is nice, but you say other land isn't that pretty.
Christian Britschgi: Yeah.
Bob Zadek: That's Christian speaking. No one has ever mistaken you for Frederick Law Olmsted. You might not have built Central Park or Prospect Park in Brooklyn or whatever.
In some people's opinion, the scale has been tipped too far – it's a question of degree towards open space, and not enough towards paying attention to housing cost.
The related about letting market forces decide. Let's just give you the benefit of the doubt: zoning went too far. Those who think California is too expensive can move. That is market forces of foot voting. People who are left say, "I pay a lot in taxes, but I get a benefit." The people who remain are those people who like it.
It’s market forces at work, as one state with a different zoning policy gets people to move in and other states lose people.
Christian Britschgi: I would not consider that market forces at all. In fact, I think you could justify almost any government restriction or regulation that way by saying like, "Hey, if you don't like it, you can leave."
People's ability to leave California is a safety valve. Certainly, it means California has not slid all the way into dictatorship that there's restrictions on them leaving, but it's still forcing them to do something that they wouldn't otherwise do, but for government regulation.
Who is it to decide how much open space that we have? I asked no one to take my aesthetic judgments at face value, or to let me say how much open space should exist. The problem with urban growth boundaries and agricultural zoning that prevents new housing is that you're telling someone else that, "Hey, we're putting rules on your property. You're not allowed to decide for yourself anymore."
What's going to be a more accurate representation of people's preferences—individual property owners deciding for themselves on the land that they own?
“Do I want to keep this as housing, do I want to operate as a farm, do I want to turn it into a subdivision?”
Or is it going to be a few environmentalists in Sacramento deciding that?
“No, actually, we're going to just draw these lines on a map and say, ‘You're not allowed to build housing here.’
So, yeah, I guess, that would be my response to those people.
Bob Zadek: We're in total agreement—you spoke correctly about the unfairness of buying your land and then discovering you have to keep it as a farm, and you can't make it into a subdivision. I would suggest that the zoning changed after you bought your house or bought your land. That's an obscenity. That's eminent domain by regulation, where they regulate the value out of the property.
But when you buy some land zoned in a certain way, that's the deal. You know that. The price you paid has been adjusted for that impairment on the use of the land. So, you buy the land knowing, if your fantasy is to convert the farm into low-income housing, you're not going to make it, because it's zoned against it. So, you haven't been misled. The distinction is between changing the rules on ownership after you buy in versus knowing the rules when you bought the land to begin with.
Christian Britschgi: However, at one point, everyone had zoning imposed on a property that they already owned. We used to not have zoning laws in this country. And then, states and cities passed zoning laws and they got more restrictive over time.
Bob Zadek: Except Houston.
Christian Britschgi: Except for Houston. That's a very good point. Houston does not have proper zoning laws. A couple of other cities around Houston don't have proper zoning laws, and some very rural communities don't have zoning laws. But by and large, every city, every suburb in the country has zoning. Every state allows localities to zone, and then California has a whole ream of state restrictions on top of this.
The question is whether that restriction is right or justified, or produces good or bad outcomes.
It's not the force of nature. It's not a contract that you necessarily agreed to. It's a government regulation which is subject to change. A good example of this is the complaints about Uber coming from taxi drivers. In a place like New York, you have to buy a taxi medallion to drive a taxi. There's only so many taxi medallions, the government issues, so the prices were astronomically high. It's like half a million dollars for one of these medallions. Then Uber comes in, gets around the regulations, and drives down the prices of these medallions. These guys reasonably complain that, "Hey, I bought into the system expecting it not to change. And then these guys undercut the price of this privilege I bought.”
I understand why they're upset, but at the same time, in order to maintain the price that high, you just have to stick with the government enforced cartel of taxi medallions. It's a similar case with zoning, where in order to not ruffle the feathers of someone who bought a property zoned one way, you have to enforce this government land cartel.
Bob Zadek: I lived in New York and have been around for a long time. The number of taxi medallions was fixed in 1938 at 13,388 medallions. It didn't change since then. Needless to say, the need for taxicabs has grown since 1938.
During the 2008 alleged financial meltdown, the crisis, when the word bailout was in the news every day. Taxi medallion owners were requesting a bailout from the city and there was litigation, because they were victimized by governmental action and by making these things so expensive.
Christian Britschgi: It's almost the exact same thing with housing production. In the 60s or 70s, when most cities passed big zoning, they capped how much housing was allowed to be built in Los Angeles or San Francisco or wherever. Obviously, the demand for housing has grown in these cities, and they're bumping up against those caps more and more every day, and so, the same thing happens. The price of the taxi ride goes up in New York, the cost of the house goes up in California. Very similar dynamic.
Bob Zadek: I have to share an anecdote having nothing to do with housing. I can't control myself. I ask your forgiveness.
There was a one-term mayor in New York City in the 50s, Vincent Impellitteri. You have never heard of him. No one's heard of him. One-term mayor. People were complaining about the traffic problems in midtown Manhattan. He had a cure. At that time, New York City had almost exclusively Checker Cabs—big, comfortable, fold-down seats, fabulous. You could get in and out while standing up. They were the greatest thing in the world.
Impellitteri concluded the reason there were traffic problems is the taxicabs were too big and they were taking up too much space per taxi. So, he forbids any new medallions to be attached to a Checker. Checker went out of business. It was their biggest customer, and we ended up having Pintos and all those stupid tiny cars as taxicabs so each cab would take up less space. A little aside, having nothing to do with anything, I have to share the anecdote.
Greenmailing: How Unions Weaponized the CEQA
Bob Zadek: Okay. Back to the expensive, government created housing crisis in California. You wrote quite a bit about the contribution that unions have made through clear regulatory capture of government. So, tell us some of the tools in the union toolbox that have the direct effect of increasing the cost of housing to the detriment of all those who simply want to buy a house or other kind of residence.
Christian Britschgi: The first way is that government-funded housing, or housing that has received some sort of government benefit will come with this requirement that the developer pay prevailing wages to the labor. Prevailing wages, you can imagine, is just whatever the carpenters in that area are getting; if all the carpenters in that area are unionized then the prevailing wage is the union wage.
These rules are imposed at the insistence of unions. Studies on this estimate that it drives up the cost of housing from 10% to 30%.
The other more pernicious way is through this practice called “greenmailing,” which requires an explanation of how you get a project approved in California. If you're building a big apartment that requires discretionary approval from the city government, you have to go through this CEQA review. That stands for the California Environmental Quality Act, which basically requires you, the developer, to produce a study showing the environmental effects of your development. Then the city government will have to approve it as part of approving your development.
The CEQA process allows third parties— anyone—to come in and raise objections while your project is going before the planning board, and say, "Hey, you didn't study traffic enough," or "You didn't study the impact on birds enough. The wildlife is going to fly in your buildings."
In one story I reported on, the union came in and said, "The developer needs to study the impact of residents' owning cats on the local bird population, and you didn't do that here. And so, you failed the state requirements to study the environmental impacts of this building."
The other very common one is that you never have done enough shadow studies. I reported on a guy trying to turn a laundromat he owns in San Francisco into an apartment building. This wasn't necessarily the union's giving him trouble in this particular issue, but he had to do three shadow studies showing that his building would slightly shade the adjacent school park for a few hours in the afternoon, during part of the year.
This brought all these complaints from activists saying, "The kids, they're going to be malnourished because of the lack of sun, they're going to get rickets. You need to look into the impact of this." And so, this delayed his project substantially. So, that shows you how third parties are able to hijack and delay this process with what are often cynical demands. In that case, the activists didn't actually think that the shade was going to actually impact the kids' development. They just didn't want the apartment building.
Similar thing with the case of the union and the residents and their cats. I don't think the union really cared. Unions say to the city, "Hey, the developer hasn’t studied environmental impacts. You need to go back and study this more."
Then the union will go to the developer and say:
"You told us that hiring union labor on your project is going to be really expensive. Well, it's going to be even more expensive if we file lawsuits for the next 10 years to keep your project in limbo. So, why don't you just go ahead and agree to hire all union labor?"
Sometimes, their agreements are more restrictive.
“You have to hire our particular union, you have to pay into our union education fund, you have to pay our legal bills, so we can go do this to other developers.”
This practice is called greenmailing. If it sounds like extortion, I understand why you get that impression. Unions have used it to get work on projects, but also, drive up the cost of housing through the cost of delays and more expensive labor.
Bob Zadek: These are nothing other than a wealth transfer from ordinary residents of California to the union. It's like minimum wage on steroids. It means the contractor must overpay workers, but the contractor says, "Oh well, I'm just a middleman. I'm not going to really overpay. I'm going to tentatively overpay until I get back my cost in the sale of the housing." As a core principle of economics, the consumer always pays.
Christian Britschgi: The other more permissions effect is that sometimes this drives up the cost of production of housing to a point where it just doesn't get built. If you have fewer units than a free market would otherwise provide, the price goes up as well. You'd think unions would be on the side of expanding housing production, because that means more work for their members.
Can you imagine auto workers in Michigan being opposed to building more cars? I don't even think it's necessarily pro-worker. It's just pro existing union workers.
Local vs. State Control
Bob Zadek: Discuss this issue of local versus state control.
Of course, I favor local control versus state control. Obviously, as a principle of federalism writ small, just like I favor states versus feds. I favor counties versus state. Because the closer it is to me, the happier I am because I have more individual control. However, my bias of local control versus state control puts me on the wrong side of this issue, because state control seems to be more interested in more and lower cost housing. So, again, as a libertarian, I'm conflicted.
Christian Britschgi: You have to think about the interests of the state government versus the local government. You can imagine the local government is very sensitive to the concerns of people who already live in the community—the impact that new development might have on property values, or traffic, or shadows, or bird deaths, or something like that. But they're less sensitive to the ability of people who don't live in the community to move into the community. As a result, the localities tend to have more restrictive rules than if you were setting those rules at the state government level, where people are moving around more and have a more general interest in economic growth or something like that.
The movement in zoning reform generally has been to try to shift some decisions about how restrictive zoning can be from the local government to the state government. I'm a federalist too, but that's actually why I am in favor of some states trying out shifting zoning decisions to the state level as opposed to having at the local level, because federalism to me is just the arrangement in the constitution whereby states have wide control over their own policies. The federal government has very limited control and then local governments are basically not mentioned at all.
I think it's silly that we have this system across the entire country where every state gives local governments the most control over land use, and reserves a small role for the state. I'd like to see some more state-level experimentation—more laboratories of democracy, if you will—trying out these policy decisions at the state level. I think the states are generally going to have a greater interest in housing affordability and be less likely to be captured by some of these interests that have really strong preferences for restricting housing production.
Bob Zadek: By the way, you're not a federalist. At least in 1787, you would be anti-federalist.
Christian Britschgi: Not a Hamiltonian. Yeah. [laughs]
Bob Zadek: Your point has profound merit and great appeal from the housing standpoint. On the other hand, the danger is that a stronger “general government” could be quoted in support of their position.
I'm conflicted with my own libertarian views and my position on state versus county. Help me through this. I fear that I'm losing my creds.
Christian Britschgi: That's certainly not my aim either, for state control or local control. It would be for individual control. You have to ask, if I move these decisions to one particular layer of government, are they going to produce decisions that give individuals more control or less control? We have to look at the evidence. Local governments have been very restrictive, states are less so.
There are still plenty of reasons to worry about what states are going to do with their powers when it comes to land use. All the environmental review rules are set at the state level. When it just comes to the issue of like residentially zoned land, the state government is going to be a little bit better than your local government.
Reforms
Bob Zadek: The states have been offering economic incentives and indeed, Biden, in his obscene $1.7 trillion “Inflation Reduction Act” added funds to localities which induced legislation to provide for more housing.
On the other hand, the Wall Street Journal reported on the early stages of a national rent control statute.
Christian Britschgi: And I just wrote about the federal rent control proposals today that you mentioned, which you can find at Reason. That's where I write about these housing issues and I have colleagues writing about all sorts of other stuff.
Bob Zadek: You're on top of your game, Christian.
Free to Build