SAN FRANCISCO—Wouldn't it be convenient if someone had clear, intelligent answers to most of your CRE-related questions? Problem solved. Nina J. Gruen, a.k.a. Ms. Real Estate, a.k.a. the principal sociologist overseeing market research and analysis at Gruen Gruen + Associates, is here to answer readers' questions.

Dear Ms. Real Estate:

In San Francisco, where housing costs keep rising—the local newspaper indicates they have “jumped 20 percent since March of 2013”—the City's Board of Supervisors was considering a measure to require 30 percent of future housing units be affordable to low and middle income residents. Would that have helped solve our housing affordability problem? As has been the case for many years, new housing products do not obtain building permits unless the developer agrees to either sell or rent between 15 and 20 percent of the units to low and moderate income households or build the below-market units elsewhere.

Given the very high cost of San Francisco multifamily rentals and condos, I've always been supportive of the provision requiring some affordable housing in any new residential construction. But I wonder whether upping the percentage requirement will do the job that has not been done by the present inclusionary zoning provision.

—Unsure About the Best Way to Create More Affordable Housing Units

Dear Unsure:

Ms. Real Estate does not think increasing the inclusionary requirement for new housing would have created the amount of needed affordable housing within San Francisco. Only increasing the total production of housing will increase the amount of housing that low and middle income households can afford. Many, many years of inclusionary zoning, all too frequently accompanied by NIMBYism, continue to leave a large gap in the amount of housing required to serve not only the low income but many of the city's school teachers, nurses, and other service workers. Currently, the median price of a home in San Francisco is a little over $1 million. Fortunately, the Mayor convinced the Supervisor who proposed increasing the below-market requirement to 30%, to instead put forward a proposition on the November, 2014 ballot asking for voter approval to set a goal of 30,000 new or rehabilitated units within the next six years. Ironically, for the reasons summarized below, increasing the percent of below market units required to accompany new construction would have only made such a goal harder to achieve.

Upping the inclusionary requirement to 30% would have retarded, and possibly even halted, the recent surge of new multifamily housing construction in San Francisco. That surge resulted from a combination of low interest rates, a slight easing of the Planning Department's rigid permitting rules, and the escalation of rents and prices to the point where profit margins from market-rate housing were high enough to offset the drag on profits from the current inclusionary zoning requirements of 15 to 20 percent affordable units. The stratospheric rent and housing price increases that make San Francisco housing among the most expensive in the country have resulted from long in-place planning restrictions that gladden the hearts of NIMBYs but have held the housing supply below demand for more than three decades.

The large gap between the supply and demand for housing in the City by the Bay provides an argument for continuing the existing 15-20%, because providing some affordable units to accompany market rate housing is likely to decrease the time it would take for enough new housing to be provided so that “housing filtration” would take place. Further, it makes new construction more politically acceptable. Filtration refers to the creation of enough new units to create “move up” units in the existing stock that can be afforded by those without the thick wallets needed to buy new housing. Adding any inclusionary requirement to the approval of permits for renovation would also be counter-productive, unless the new housing provision would also include some public subsidies and possibly allow the addition of more units as part of any permitted residential renovations.

Cities like Las Vegas, Phoenix and Houston don't have a housing affordability problem because they have always allowed developers to overbuild within their communities. Anyone who has taken Economics 101 will understand that it is only necessary to increase the total supply, so as to lessen the gap between supply and demand, to make more affordable housing available and stop the further escalation of market rate housing prices and rents. (Unfortunately, many of our politicians have not taken an introductory economics class.)

At the urging of her husband, who in the interest of full disclosure we should admit is an economist, Ms. Real Estate would add: To all those municipalities that have yet to adopt inclusionary zoning as an aid to the provision of affordable housing, first try the old fashioned approach of encouraging enough new housing to keep prices from escalating within the existing housing stock. Ms. Real Estate's bottom line is that while increasing the percentage of below market housing as a prerequisite for approving new construction or renovation may make all of us feel good, it is more likely to make things worse.

Instant Insights /

Affordable Housing, but What's the Cost?

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