Why the Market Can’t Solve Our Housing Crisis

Some think we can build our way out of the housing crisis — relax the rules, maybe cut out “excessive regulation.” Developers will respond, prices will decline, and regular people will be able to afford Santa Barbara.

It won’t work, and here’s why.

Santa Barbara is part of a property market beyond local borders. Whether it’s condos, rentals, or single-family houses, the market operates as an interlinked whole. That’s why our housing cost changes are in synch with the rest of the state and region. Forty years ago, the median Santa Barbara house sold for $145,000. In Los Angeles that same year, 1981, median house price was significantly less — $107,710. Today, by Zillow numbers, L.A. is still cheaper than S.B., about 20 percent cheaper — not all that changed over the 40 years. And just as prices have recently “gone crazy” here, so they have done elsewhere. The problem is not local.

A frequently proffered remedy is to exploit the so-called “law” of supply and demand. Put more units on the market to push prices down. Would that work? The case of Vancouver, Canada is instructive. To deal with its rapid housing price inflation, starting about 30 years ago, Vancouver okayed massive downtown high-rise and upped densities in residential areas. Akin to our ADU (accessory dwelling unit) program for second houses on the same lot, Vancouver encouraged so-called “alley houses” — and more.

The result? Vancouver became second only to San Francisco as the continent’s least affordable city.

Watching all this unfold was enough to change the attitude of a key backer of density increase, Professor Patrick Condon, head of landscape architecture at the University of British Columbia. He has recanted. In his new book Sick Cities, he explains just why it has worked out so poorly.

Developers and landowners certainly liked it. With higher allowable densities, they could do more with their land. To the degree that land price can be spread over more units, landowners get more money. If you sell two units on a given land parcel instead of just one, there is potential to double your money. With eight units, the windfall further escalates.

For the prospective buyer or renter, it is a different story. The developer will try (and succeed, says Condon) to charge the same per finished unit — as if there had been no density increase. Of course, developers must pay for other things besides land, but land is the fundamental driver of housing price. This is key to understanding the Vancouver outcome: the city’s land became more valuable with the density increases. This inflation got passed on to the end-user. Build it and they will pay for it.

If the market can’t do the job of lowering house prices, what can be done?

A simple answer, and one with tried-and-true results in Santa Barbara — and far more extensively in other parts of the world — is for the city to itself build housing. Go visit projects of the Santa Barbara Housing Authority; they are dense, handsome, and delightful. Private nonprofits have created hundreds of units more. Together the city and the nonprofits now account for about 15 percent of our total housing stock. That’s high for a U.S. city, but we need to get still more housing out of the market altogether.

A tactic only sparingly used in Santa Barbara is “inclusionary zoning.” Developers must provide affordable units as part of their projects. Another strategy is to demand that employers create housing to offset impacts of their business or institutional expansion (UCSB is a local case). Cities like Boulder, Colorado and Cambridge, Massachusetts have tried more ambitious versions of such tactics. While the overall market does not get restructured, a city can gain some social and income diversity even when prices remain otherwise very high.

Increasing land value is the last thing you want to do. Ironically, if you restrict what can be done with land, land price will tend to go down. Land investors will pay less for property that has more restrictions — speculators hate that. Government regulation, on the other hand has delivered great public benefits: open space, more beautiful buildings, gardens, playing fields, beaches, trails, concert spaces, street trees, bicycle paths, and open vistas. We must not in the false pursuit of affordability undercut these hard-earned gains.

Somehow, as the rich get richer and property costs escalate, we need to capture more of the bounty for public purpose, housing most especially. Taxes — federal, state, or local — is one route. Somehow, we need to put resources into people’s hands — by building them places to live or getting them enough income to pay even outrageous prices. Either way is going to be an uphill climb, but facing reality is better than downward delusion.

Harvey Molotch is professor emeritus of sociology at UC Santa Barbara and at New York University. He was also a Centennial Professor in the Cities Program at London School of Economics.