California's high housing costs drive inequality in the state

San Francisco

THE average home in the US costs around US$240,000. But in San Francisco, the world's most expensive place for construction, a two-bedroom apartment of what passes for affordable housing costs around US$750,000 just to build.

California's staggering housing costs have become the most significant driver of inequality in the state. Last Wednesday, the state's governor Gavin Newsom mentioned the issue 35 times during an impassioned speech, urging lawmakers to solve the state's homelessness crisis by building more and faster.

But the vertiginous prices of housing in California show how difficult that will be. Building affordable housing in California costs on average three times as much as in Texas or Illinois, the federal government has said.

The reasons for California's high costs, developers and housing experts say, begin with the price of land and labour in the state. In San Francisco, a construction worker earns around US$90 an hour on average, said Turner & Townsend, a real estate consulting company.

But non-construction costs also weigh heavily. Not taking into account the price of land, around a quarter of the cost of building affordable housing goes to government fees, permits and consulting companies, a 2014 study by the California Department of Housing and Community Development found.

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For a building to be defined as affordable housing, it typically obtains tax credits and subsidies.

A single affordable housing project requires financing from an average of six sources - federal, state and local agencies, said Carolina Reid, a researcher at the Terner Center at the University of California, Berkeley. She called the process "death by a thousand cuts".

State Senator Brian Jones remembers labouring over an affordable housing project when he was on the City Council of Santee, California, near San Diego.

"It took us on the City Council six months to get all of our attorneys, all the developer's attorneys and all the federal government's attorneys, to agree on the paperwork. And that was just the financing. I walked away from that process and told the developer I cannot believe this project is going to employ more attorneys than construction workers to get built."

Mr Jones, who is head of the Republican caucus in the Senate, argues that California's housing market is vastly overregulated, starting with California Environmental Quality Act.

California law permits anyone to object to a project under the act, which, when it was signed by then-governor Ronald Reagan in 1970, was seen as a landmark effort to protect the environment from reckless development. Today, the law is often used as a legal battle-axe by anyone who wants to slow a project down or scuttle it altogether, Mr Jones and many developers and experts said.

"At very little cost, one individual can take a project and tie it up in years of litigation," said Douglas Abbey, a real estate lecturer at the Stanford Graduate School of Business.

Environmental protection is cherished in California, but there is also bipartisan agreement that housing prices are too high.

Governor Newsom has pushed through exemptions to the California Environmental Quality Act for homeless shelters, and says the state should consider more exemptions.

Mr Abbey, a former developer and real estate investor, said good intentions are backfiring. He argues that laws requiring developers to build a certain percentage of affordable housing as part of their market-rate projects are a hidden tax and a drag on overall housing construction.

"What the state government and local governments need to recognise is that the housing shortage is purely a supply problem," he said. "There are burdens to introducing new housing."

It is not uncommon for a project in California to be mired for many years in paperwork over zoning or objections by other property owners before ground is broken.

Judson True, the director of a department in San Francisco City Hall that seeks to speed up housing construction projects, says the process of building affordable housing is far too cumbersome.

Last year, San Francisco broke ground on 767 subsidised affordable apartments, but Mr True said this is "nowhere near" what the city needs.

Governor Newsom says he recognises the threat that the high costs pose to efforts to get people off the streets. The average cost of a single affordable housing unit is around US$500,000 in Los Angeles and around US$600,000 in Oakland, going by data from the Terner Center.

"One word: insanity. It's just insanity," he said in an interview last month. If affordable housing cannot be built more cheaply, he said, "taxpayers are not going to support these bonds".

His budget this year calls for US$6.8 billion in affordable housing funding, including mortgage assistance for first-time buyers and bonds for veterans' housing. He added that he is counting on innovations in housing construction to help reduce costs.

But even with significant savings, housing experts say it would be impossible at current cost levels to build homes for the state's entire homeless population. It would cost somewhere around US$70 billion to build housing for its current homeless population of 150,000.

Ms Reid at the Terner Center said she agrees with his emergency efforts to get people off the streets and into shelters as well as preventing people who have homes from losing them.

But she said California does not have the resources to build enough housing for the state's current homeless population, not to mention those who might become homeless in years to come.

"We are not going to solve the homelessness crisis if what people are expecting is that cities are going to build affordable housing for every one of those individuals," she said. "It's going to cost way too much." NYTIMES