California’s Regulatory Hostility Prevents More New Homes

Edward Ring

Director, Water and Energy Policy

Edward Ring
July 2, 2019

California’s Regulatory Hostility Prevents More New Homes

The median home price in Los Angeles County is $618,000. In Santa Clara County it’s $1.2 million. In the entire state of California, including the somewhat more “affordable” inland counties, the median home price is $548,000.

The national median home price? $227,000.

There’s a reason for this. For decades, California’s state and local governments have made it harder and more expensive for any builder to construct new housing. In most other states, the governing agencies want more housing and they try to make it easier for builders. In California, the exact opposite is the case.

The consequences of this hostile shake-down of builders by California’s state and local governments are a housing shortage, unaffordable homes, an exacerbated homeless crisis, and increased calls for rent control (which will create even more disincentives for home builders).

The response of California’s policymakers to the housing shortage they created is not to address the punitive fees and permitting delays, but to try to cram high density housing projects down the throats of local communities, accusing them of nimbyism – the “not in my backyard” syndrome. The problem with this accusation is that no sane person wants an apartment building plopped next door to them in a neighborhood that used to be single family dwellings. If “nimbyism” means stop destroying well established and tranquil low density neighborhoods with mandated high density projects, then California needs more nimbyism, not less.

Along with punitive fees and permitting delays is a bias against any new housing construction on undeveloped open land, so-called “greenfield” development. The arguments against urban “sprawl” claim that wildlife habitat is threatened by new developments, ignoring the fact that California is only five percent urbanized, with plenty of room for nature preserves and new housing.

The argument that ends most discussions, however, is based on the theory that the expansion of low density suburbs will result in more “greenhouse gas” emissions. This theory, even if you believe that “greenhouse gas” is a threat, is based on biased studies that fail to take into account countless variables that might call it into question, for example: job migration to exurbs to follow the new residents, less congestion on freeways, ever cleaner automobiles, and the potential to telecommute.

According to Dan Dunmoyer, president of the California Building Industry Association, California has more regulations for getting a piece of land approved than anywhere else in the world. This should come as no surprise. In California, if it only takes 10 years for a large housing development to get approval, that’s considered fast. It isn’t uncommon for it to take 20 years or more. In Nevada or Arizona, these same large projects typically get approved within 18 months.

These permitting delays drive all but a handful of very large developers out of the housing construction business in California. And along with delays from the authorities come the lawsuits, many of them based on California’s unique California Environmental Quality Act (CEQA), which environmentalists have turned into a weapon to stop housing projects in their tracks for years. And it only takes one determined environmentalist group to stop development.

A particularly egregious example of this is the proposed Tejon Ranch housing project that has been embroiled in permitting delays and lawsuits for over 25 years. This massive project, a planned community of over 19,000 badly needed new homes, would straddle Interstate 5 in the northwest corner of Los Angeles County. The developers have committed to set aside ninety percent of the land as a nature preserve, after which the NRDC, the Sierra Club, and the Nature Conservancy all withdrew their objections. But it only takes one: The “Center for Biological Diversity” has filed yet another lawsuit.

There’s nothing wrong with setting aside significant tracts of land for wildlife habitat. But when 90 percent of a parcel is not enough set-aside, and existing California law permits endless lawsuits to stop new housing developments, the laws must change. As it is, there is always another well funded environmentalist organization that will oppose all land development, anywhere in California.

While costly permitting delays drive most home builders out of California altogether, the ones that remain pay fees that are literally unbelievable. The low end of fees charged by municipalities to homebuilders are $25,000 to $30,000, usually in the inland counties. On the high end, some cities in the San Francisco Bay area charge fees of over $150,000.

As if that isn’t bad enough, these so-called “pure fees” don’t take into account the other expenses, such as hiring a consultant to determine how big to make the park relative to the other towns, or biological studies, or the purchase of nature preserves. The fees are endless – development, park, fire, infrastructure, art (yes, art), recreation. CBIA president Dunmoyer described a project in Livermore where the total cost was over a half-million dollars per lot just to pay the development fees and expenses associated with land development.

In other states, the cities and counties build parks and other infrastructure themselves, less elaborately and for far less cost, because they want housing and the economic development that comes with new residents. In California, the developer will often pay the park fee and then they don’t even build the park.

Along with the lawsuits and astronomical fees, California’s housing prices are boosted by higher materials costs. In some cases this is because of environmentalist building code mandates. The new solar energy mandates that take effect in 2020, for example, will add up to another $12,000 in additional construction cost per home. But all construction materials cost at least ten percent more in California compared to other states. California’s regulators make it extremely difficult to operate timber and quarry operations in this resource rich state, so materials have to be brought in from elsewhere at additional expense.

Contrary to what one might think, these delays and increased costs that have created sky-high housing values have not enriched the builders. Especially because they must bear the costs associated with pursuing uncertain projects which even when approved are only after decades of effort. Home builders actually make a higher rate of profit on lower priced housing in other states than they do on higher priced housing in California.

When California’s policymakers propose rent control, housing subsidies, and mandate high density housing, they are doing literally everything wrong. Rent control and subsidies will discourage private investment in housing and further undermine a competitive market for new construction. High density mandates will destroy existing neighborhoods, embittering residents, while not creating nearly enough new housing to bring supply and demand into equilibrium. Moreover, the high rise residential projects in the urban core, encouraged by policymakers, cost far more per unit because of the far greater per unit quantities of steel and concrete required for structures over a few stories in height.

The solution to California’s housing crisis is to repeal SB 375 that restricts most new housing to within the existing urban footprint, to repeal CEQA which permits endless lawsuits, and to reform pensions and other out-of-control public employee perks so operating funds – instead of insanely high fees – can help pay for infrastructure upgrades.

Crucially, the mentality of the bureaucracy has to change. They need to treat builders with respect and speed up the permitting process. Improving the attitude and performance of the bureaucracy will be the hardest thing to change, but if Californians are to have the regulatory environment for housing that they need to be able to afford to live here, that’s what’s got to happen.

As it is, California’s state and local governments engage in a shameless shakedown of anyone who wants to build anything, anywhere. Everyone is a victim of this, except for unaccountable bureaucrats who collect the fees and property taxes, and investors who speculate on the real-estate bubble. It is a scandal and a tragedy.

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Edward Ring is a co-founder of the California Policy Center and served as its first president. This article originally appeared in the California Globe.

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