Posted by: Gaetan Lion
I am referring to the California Department of Housing and Community Development (HCD) housing building mandates. They are called Residential Housing Needs Allocation (RHNA). The latter mandates the State builds 2.5 million (mainly) rental units by 2031.
We know the demographics are not supportive of this scheme. California’s population is projected to remain flat or decline out to 2060. See my earlier demographic analyses on the subject:
Sacramento consistently overestimates California’s population growth
Sacramento’s projections for the Bay Area are still way too high
Given that the demographics with flat to declining population growth do not support Sacramento’s housing build-up, the resulting economics of housing development projects fall apart.
Let’s look at two economic factors associated with the prospective collapse of the RHNA building targets. These are:
- Vacancy rates
- Interest rates
Thanks for collecting data and proposing various scenarios. I have a few questions.
Is it reasonable to assume that developers will initiate development when large vacancy rates exist? This question seems to be unasked and unanswered by the most important group of leaders……city councilpersons.
How are you addressing recent information about escalating evictions? Impacts could be greater vacancies, bankruptcies and all sorts of new political pressures.
How do we address the question I get from many friends and neighbors whose adult children have entered the work force? These parents and adult children express great concern about their ability to find “affordable” housing. This could be a fact of life. Or not. And it could be a strong emotional opinion with obvious political impact to our legislators.
Neilson, these are very good comments and questions that I can’t always fully answer. But, I’ll give it a shot at a couple of them.
“Is it reasonable to assume that developers will initiate development when large vacancy rates exist?”
Well, clearly it is not reasonable. We have seen that every time the rental vacancy rate reaches upward of 7% in California, multi-family housing starts drop to close to Zero.
How about “affordability”?
We have to differentiate between “affordability” and “a housing crisis driven by a shortage of housing causing unaffordability.” The housing crisis bit as represented is a Sacramento political construct. Building more rental apartments will have only a marginal impact on rent levels. Marc Verville uncovered a study that indicated there is only a – 0.1 coefficient between rental units supply and rents. So, if the State would increase rental supply by 10%, rents would only decrease by – 1%. That’s a pretty minimal effect. How about the cost of owner-occupied housing. It most probably would not budge at all.
If you compare home prices in LA and SF compared to Charlotte, Atlanta, Minneapolis, etc. they don’t make any sense at all. California home prices are far more expensive vs. other cities that often have grown demographically and economically faster than their California counterparts. If you compare California cities vs. other world-class cities like Hong Kong, Sydney, Melbourne, Toronto, Vancouver, Auckland (NZ), etc. and scale home prices by their local personal income. And, if you look at that multiple (home prices/personal income), all of a sudden the California cities’ home prices fall in line and are in the ballpark of these other cities.
“Affordable housing” is a sticky problem that frankly few if any have resolved. That is especially true for California where development costs have gotten incredibly expensive. The cost of developing a single affordable housing unit in California is $750,000. In the SF Bay Area, it is closer to $900,000.
The issue of affordability within California is also not so much an issue of supply. We have enough housing as is. California’s population has plateaued and will decline going forward (I have done firsthand analysis on the subject that I have disclosed at The Marin Post). The issue is truly “affordability.” This calls for the expansion of existing programs providing rental subsidies to existing renters so they can afford their rent and avoid evictions.