Burying the Invisible Hand beneath Gobs of Public Financing

Among the propositions passed in San Francisco last Tuesday, ranging from the practical (consolidating elections), to the symbolic (reprimanding the U.S. Supreme Court’s decision on corporate personhood), was one that had backing both from the city’s moderates and its progressives. It was Proposition C, a measure that created a trust fund for affordable housing, which has grown increasingly scarce amidst the city’s technology boom. The trust will both give down payment assistance to homeowners, and either authorize or fund construction of nearly 35,000 affordable units. Many of these units will be built by private developers, who will have their city-imposed affordability mandates reduced as a way to encourage investment.

But the trust fund will come at a price. It will start with $20 million, and will grow each year so that by 2024 the annual sum added reaches over $50 million. This sum will be matched for each of the next 18 years, which means that over its three-decade span, the fund will accrue nearly $1.5 billion. This will be paid for from the city’s main account, and from property and hotel taxes. Meanwhile the barriers that make housing in San Francisco so unaffordable to begin with—and which make expensive trust funds like this necessary—will escape reform.

One of these barriers is the city’s rent control laws, which freeze prices for units built before 1979. This has burdened landlords who have to compete against those charging market rates, and caused the proliferation of under-maintained housing. It has also prevented new construction, since tenants living in these units cannot be removed, thereby delaying the wrecking ball on many buildings.

Another barrier is excessive tenants’ rights laws. For example if landlords wish to evict a tenant on “just cause”—a.k.a. bad behavior—they must issue multiple notices and endure lengthy litigation. If they wish to evict them on “no-fault causes”, they must pay thousands in relocation fees, and can do this only if planning to move into the apartment themselves. Such anachronisms have spiked the costs of doing business, which ultimately gets passed down to tenants.

A third barrier is the aforementioned affordability mandates on developers. The fact that officials recognized with Proposition C that decreasing such mandates would actually increase affordable units, by encouraging construction, was a refreshing breach of conventional wisdom. But it didn’t impel their cancellation altogether.  Even now if developers build something with 10 or more units, they must ensure that 12% of them are affordable—another regulation that adds expense.

However the biggest problem with San Francisco’s housing policy is that officials and citizens alike are hostile to new buildings, especially tall ones, even when they are constructed in proper locations. The most recent example is a residential project proposed in the financial district. The area now includes tennis courts, which are well below scale in comparison to the surrounding high-rises. Its zoning allows for buildings, also below scale, of 84 feet. The developers wanted to increase this to 136 feet, and after much wrangling, got approval from city hall. But in response a neighborhood group organized a petition, and now the rezoning will go up for vote next November.

One criticism of the project is that its units are not affordable. But it will still add to the overall number in the city, and curb the demands its wealthy residents would otherwise put on housing in surrounding neighborhoods. Nonetheless it has been resisted on behalf of the poor by local progressives, who believe that by preventing new housing, they somehow lower prices for the city’s existing stock.

What all this implies about San Francisco is that the city, because of its political leanings, mistrusts the private sector. If housing there is unaffordable, it is assumed that the market has caused this, and should be hit with price controls. The idea less explored is what would happen if the city, defying precedent, just left the market alone. In Sunbelt cities like Houston, this has produced fast growth rates and a multitude of cheap housing. If it were applied in San Francisco, with protections obviously built in for historic preservation, the same may happen. But we will perhaps never know, because existing policies, as entrenched as they are, call for the government to inflate prices with regulations, and then artificially lower them with subsides. This policy roundabout has undoubtedly placed power onto said government.  But what it has done for citizens struggling to pay the nation’s most expensive rents, or for taxpayers who must now fund a $1.5 billion trust, is less clear.

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