The block that Prop. 13 built: Too few homes

Too few homes

Is Prop. 13 to blame for the state’s housing shortage?

Matt Levin/CALmatters

Michelle Krasowski is the most glass-half-full victim of California’s housing shortage you’ll ever meet.

She has decked out her converted basement apartment on this block in North Oakland like an eclectic bohemian loft. Boutique fabrics and artwork adorn the walls, craft supplies and a film projector from the 1970s are scattered about the living room.

Krasowski loves the neighborhood, which she moved to about a year and a half ago. The friendly neighbors that know each other by name, the old church down the street, the taqueria and pizza place a few blocks away. It fits her.

“It’s not as new and shiny as some of the other places that have been converted around the East Bay, and I really like that,” says Krasowksi.

But like so many Californians these days, Krasowski doesn’t know how much longer she can afford to stay here. She pays nearly $2,000 a month in rent, which she says is nearly two-thirds of her take-home pay as a librarian for Contra Costa County.

“I feel like it’s the new normal, and actually like a good value for the Bay Area,” says Krasowski, 38, “which is insane.”

Michelle Krasowksi would like to buy a home one day, but she knows that day is a long way off. (Sean Havey for California Dream)

California, and particularly the Bay Area, hasn’t built enough housing to keep up with demand. By one estimate from the California Department of Housing and Community Development, the state needs to build 1.8 million units over the next seven years just to keep pace with population growth. Right now, California isn’t close to building that quickly.

There are lots of reasons for the state’s deep housing shortage. You can blame broken state housing laws, high construction costs, and recalcitrant “not-in-my-backyard” communities that oppose new building across the state.

But experts say some unintended consequences of Proposition 13 help explain why the state doesn’t build housing like it used to.

The vacant lot problem

Just around the corner from Krasowski sits an undeveloped lot, overgrown with weeds and surrounded by a chain-link fence.

Brian Smith has lived next door to the empty lot since he bought his house in 2004. It used to be owned by his neighbors two lots down, who had it for decades before selling last year.

“We always assumed somebody would develop it at some point, but it’s been sitting here the whole time,” says Smith, who reported the lot to the city after the weeds had grown to near-eye level.

With houses up the street now fetching million-dollar offers, Smith marveled at how long it took for someone to snatch it up and start building. He knew that land had to be incredibly valuable.

That’s where an unintended consequence of Prop. 13 may be at play. After Prop. 13, all California properties—even vacant ones—are taxed based on the original purchase price, not their current value. That makes it relatively inexpensive to hold onto land, even when the market is hot.

“In other markets where Prop. 13 policies aren’t in effect, the taxes on that property would continue to go up with land value,” says Ralph McLaughlin, a housing economist with Veritas Urbas Economist and former chief economist for the real estate website Trulia. “And that incentivizes development, it increases holding costs, it makes it more expensive to hold it vacant.”

A report from the nonpartisan Legislative Analyst’s Office found that vacant lots in California were less likely to be developed the longer they were owned, even when compared to similar vacant lots in the same neighborhood. Oakland, where the average house is now worth $750,000, has more than 3,000 vacant residential lots.

Michelle Krasowski is the most chipper victim of California’s housing shortage I’ve ever met.

Defenders of Prop. 13 argue that other regulatory barriers to new development—permitting fees and other bureaucratic hurdles that new construction must navigate—are far bigger impediments than Prop. 13.

“Most people who own land don’t own land so that someday they can sell it,” says Michael Shires, an associate professor of public policy at Pepperdine University. “They own land because they want to do something with it someday. What prevents them is they can’t get permission for what they want to do.”

Diluted incentives for cities to permit new housing

Less than two miles from the vacant lot stands another example of how Prop. 13 could be limiting the supply of new housing in California: a Target store. Next to a Best Buy. Next to a Home Depot. All stretched across a massive parking lot, on 40 acres of some of the priciest real estate in California.

For the most part, cities decide what gets built within their borders. In an ideal world, they’d permit construction of what’s needed. So if housing prices got too high, they’d permit more housing, according to Jonathan Zasloff, a professor at UCLA School of Law who specializes in land use issues.

All California properties — even vacant ones — are taxed based on the original purchase price, not their current value. (Sean Havey for California Dream)

But cities have another, more immediate imperative to consider when deciding what gets built—revenue for city coffers.

“If you’re a city, you’re going to want to have land uses in your city that provide a big revenue stream for services,” says Zasloff. “And in California, you want enterprises that generate sales taxes, which is basically retail.”

Prop. 13 changed how California cities get their money. Before the initiative passed, 90 percent of local government revenue came from property taxes. Today, that share is less than two-thirds—and has been replaced by things like sales taxes and hotel taxes, according to the Legislative Analyst’s Office.

Big box stores also don’t generate the need for expensive things like schools and libraries and parks that accompany new housing. So when a city is deciding between allowing a Target or a new apartment building, the math isn’t so friendly to the apartment building.

“If it’s gonna cost the city ‘x’ amount of tax dollars over time to provide services for the [apartment building], versus the tax revenue that it generates, Target is gonna win, hands down,” says McLaughlin, the housing economist.

This phenomenon, known in urban planning circles as the “fiscalization of land use,” is more theory than empirically tested truth. And it’s also more descriptive of suburbs than well-established cities like Oakland, which were already mostly built-out before Prop. 13 passed.

But examples of cities deprioritizing housing in favor of retail and hotels is still quite common. Voters in Brisbane, a small Bay Area suburb south of San Francisco, will have a chance next month to approve a new 2,200 home development on vacant land. A consultant found that if the city decided to build a hotel instead, it would net $8 million more annually in revenue.

Large fees on new development

At the corner of Broadway and 17th Street, the skeleton of a high-rise apartment building extends into downtown Oakland’s skyline. It’s one of two high-rises going up in the area, amidst a construction boom all over the city.

When those new housing developments come on line, they’ll need additional infrastructure to serve new residents. Schools and roads, parks and police, fire and public transportation.

Before Prop. 13, a good deal of that infrastructure was paid for with property taxes. After Prop. 13, and increasingly in recent years, cities have levied high “impact” fees on developers to pay for those costs.

Oakland currently levies a fee of at least $10,000 per unit, up to a max of $28,000 per unit. That money goes toward a fund for subsidized, below-market rate housing. Critics of impact fees say those costs get passed onto renters or future homeowners, and only inflate housing prices.

And the fees in Oakland are low, at least compared to other cities.

“So the problem is if a fee is set too high, you could cause construction to slow down,” says Darin Ranelletti, policy director for housing security for Oakland. “So you’re contributing to the housing shortage.”

The city of Irvine in Orange County, on average, charges more than $80,000 in impact fees on new single family homes, according to an analysis by the UC Berkeley Terner Center for Housing Innovation. The city of Fremont, in the Bay Area, charges more than $140,000 per home.

Back in North Oakland, Michelle Krasowksi — already stretching to pay her rent — has started looking into whether she can tap some affordable housing dollars for help. One day she wants to buy a home. She even subscribes to some real estate newsletters. But she knows that realistically, that won’t happen for some time.

“It’s not really a buyer’s market right now,” Krasowski says, smiling.

Meanwhile, her monthly rent of nearly $2,000 is more than what some of her neighbors pay a year in property taxes.