Paul Wellman

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Why isn't anyone talking about it? I feel like the kid in the parade in The Emperor's New Clothes. Don't you all see that the guy is stark naked?

I'm talking about the rapidly oncoming tsunami disaster of 250-300 condos coming to market in the downtown business area this summer and fall and into 2009. This is going to be a flood of highest-end marble- and granite-filled mini-mansions never before seen in the history of our fair city. The 89 units nearing completion on and close to Chapala Street are just the beginning. There is a planned 53-unit development on the corner of Carrillo and De la Vina streets brought to you by a Newport Beach developer, 141 units proposed by Bill Wright above Cabrillo Boulevard, and the St. Francis project, to name just the most obvious. And we're not even considering the impact of all those multimillion-dollar timeshares up for sale at the same time.

Part of this downtown high-end surge is due to developers seeing the nice profit margins during the market run-up and the "discovery" of the delights of living downtown in 2004-05. A larger part, however, is due to the inclusionary threshold passed by the City Council in 2004. This policy change has had an "unintended consequence" (oops, we did it again!), which is the euphemism used by politicians when their attempts at social/economic engineering backfire and create exactly the opposite of what they intended.

In this case, all the then-proposed condo projects with 10 or more units suddenly had to include affordable units at a rate of 15 percent, or 1.5 affordable units (round up to 2) for every 10 units built. Projects that might otherwise have been a mixed-use of mid-level and market-rate (read: highest-end) condos would have been feasible. But once saddled by the affordable component, developers had nowhere to go to recoup the building costs except to load up the "market-rate" units with luxury interiors, maximize their size, and hope the multimillion-dollar price tags would carry the cost of the other units.

The inclusionary theory might have worked had the market stayed hot and/or fewer units been built at the same time, but that was not the case. In fact, one project with six affordables and six market-rates has failed abysmally. The affordables were immediately filled, while the market-rates are still on the market as prices plummet a year after completion. Common wisdom tells us the same is likely to happen to many, if not all, of the high-end units coming to market downtown this year and next.

The inclusionary policy has been so unsuccessful that a City Council Housing Subcommittee, in an effort led by Helene Schneider and Das Williams (both up for reelection), is considering making it worse. Williams and Schneider have suggested lowering the threshold once again to require affordable units in projects of five or more (and possibly three or more) condos! Huh? Despite the empirical evidence of what is happening right now, they somehow think this will help matters. What it will do is create a de facto housing moratorium for middle-class, entry-level condo construction. Everyone who has ever looked at Santa Barbara real estate openly admits the vast majority of condo projects are for 10 or fewer units. However, the bigger projects are forced to include affordables, which means they are built to accommodate only the super wealthy and the very poor.

Some city councilmembers also support suggestions to raise the percentage of affordable units to 20-30 percent of each project. This would stop housing development in the city for all levels of buyers, as it would create an economic disincentive for the private developer who is already faced with razor-thin (if any) profit margins. Watch property values and rents take a major leap when this happens, once again with the biggest impact falling on entry-level housing availability.

Despite Santa Barbara's desirability, only so many people can afford to pay the $1,000-plus per square foot to enjoy downtown living. However, more people can afford to pay $600-$700 per square foot to get a toehold in the American Dream. Two-income families and retirees have demonstrated they can "buy in" at this level, but our city staff and politicians seem bent on denying them new housing.

Of course most of these attempts to fix the system are well intended, but, please, pay attention to their unintended consequences. Too many of our decision makers are not old enough to remember or chose not to learn about the infamous five-year plans of the former Soviet Union. Market forces, not government machinations, will always serve to best level the playing field.

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