A Different First Step to Solving the Housing Crisis

In Santa Barbara County and elsewhere in coastal California, the cost of both rental housing and home purchase is extremely high, taking up an ever-increasing portion of family income. However, this housing affordability crisis is not universal across the United States. The most expensive housing nationwide is found in California. At least part of the explanation for this may be the unintended consequences of Proposition 13, the 1978 property tax limitation initiative.

Moreover, the problem is actually getting worse. In California, home values climbed 4.9 percent over the past year, according to the Public Policy Institute of California, and rents similarly continued to increase. While the general rule is that tenants shouldn’t pay more than 30 percent of their household income toward rent, almost half of California renters exceed 35 percent of their household income. As a consequence, neighborhoods age, with fewer young families who can afford to move in, and businesses have a more difficult time recruiting and retaining employees.

In response the governor recently signed a series of bills aimed at the lack of affordable housing, as well as expanding the housing supply overall. The bills seek to streamline the construction of certain new housing by reducing local agencies’ ability to deny or reduce the density of new housing developments. If a proposed development satisfies certain conditions, cities would be unable to restrict or halt the proposed development. Similar legislation was passed last year that required cities to automatically approve accessory dwelling units (ADUs) under certain conditions.

However, we still need to look at the underlying conditions for why housing costs are so high. One factor that separates California from states with lower housing costs is Proposition 13. As a result of Prop. 13, properties are re-assessed to current market value only upon a change in ownership (or completion of significant new construction). When ownership does not change, Prop. 13 limits increases in the property assessment to 2 percent of the value of individual parcels (or inflation, if lesser), thereby limiting increases in property taxes for a particular parcel.

The problem is that Prop. 13 can discourage some people from changing their residence as their circumstances change. For example, as families grow, instead of moving to larger homes, they may choose to stay in their current, smaller homes to avoid incurring a large jump in their property tax. The supply of affordable “starter homes” is thereby constrained. The same type of problem exists as children move out of their parents’ homes; the parents may choose not to move to a smaller home (particularly for those adults who are younger than 55 years of age).

Thus, the effect of Prop. 13 can be to “lock in” some portion of the population. One estimate found that the median residency length increased by about 18 percent because of Prop. 13’s restrictions.

Recognizing the effect of this “lock-in” effect on senior citizens, in 1986 voters passed Proposition 60, which provided that any person over the age of 55 may transfer the assessment value of a primary residence to a new one of equal or lesser value, subject to certain conditions and limitations (e.g., the replacement property must also be the buyer’s principal residence). And homeowners used Prop. 60. One estimate of the lock-in penalty found that 55-year-olds in California were 25 percent more likely to move than comparable 54-year-olds (who would not be eligible for Prop. 60).

This leads to the expectation that if people were not subject to a large property tax increase by purchasing their next, larger home, people would more readily move from their “starter” house, leaving behind their smaller, presumably less expensive, home for others. Conversely, if people could leave larger homes for smaller ones without incurring a large tax penalty, the larger homes would be available for growing families.

In other words, one step toward helping to alleviate California’s housing problem would be to expand Prop. 60 (and the related Prop. 90) to all homeowners, not just those over the age of 55, but on a temporary basis, perhaps a four-year window. This temporary property tax re-assessment moratorium should add to the number of houses of all sizes on the market, without having to build new ones that compromise open space and encourage sprawl.

In addition, expanding the re-assessment property tax “holiday” to all age groups could be applied to sales and purchases across the entire state. Currently, only 11 counties allow property transfers between counties. Prop. 60 had restricted the new house purchase to the same county as the old one; Prop 90. allowed that to expand, but not all counties opted to participate.

Certainly, any change in the current law creates its own set of challenges. If property changed hands without updating the property assessments, property tax revenues would likely decline (although, initially, higher sales volume may offset the reduced assessment levels). To alleviate the problem of reduced revenues, the re-assessment holiday’s rates could be made temporary. Thus, the new homeowners’ property taxes would gradually revert to the 2018 acquisition values (or the current market value, whichever is lower), starting after a period of 10 years, for example.

When I was in the Peace Corps, I was occasionally called upon by the U.S. Agency for International Development to evaluate proposed small projects. One project I reviewed was to help purchase new livestock on a small ranch because the ranch’s existing stock was of very poor quality. What became apparent is that we couldn’t evaluate the quality of the livestock until the quality of the pasture was first improved. We didn’t know if the livestock didn’t grow and gain weight due to the poor pasture or due to the inherently poor quality of the animals. Therefore, the landowner needed to first fix the pasture before the investment in new cattle could be considered.

So, too, for the state — before pursuing dramatic or expensive reforms or adjustments to housing policy, we should make sure that we’ve taken care of the other simpler or more fundamental problems first.