Yesterday we wrote about a controversial proposal by a Seattle city council member to tax nonresident homebuyers. The notion, it seems, is that nonresident buyers somehow bid up housing costs (no compelling evidence has been offered).
Regulatory reform, we suggested, might be a more productive approach to improving housing affordability.
We want to follow that up by noting a couple of important Sightline articles that shed more light on the issue. Hat tip to Emily Makings of the Washington Research Council who wrote about the Sightline pieces in this same context yesterday.
In a post headlined “Yes, Red Tape and Fees Do Raise the Price of Housing,” Sightline senior researcher Daniel Bertolet writes,
For housing, the rules that govern development often conflict with cheaper production. Drawn-out permitting processes and legal challenges add cost because time is money. Minimum apartment sizes effectively mandate more expensive apartments. Requirements that complicate building design—such as setting back top floor facades further from the street—raise the cost of construction. A recent study conducted by the City of Portland, Oregon, estimated that on average, “government fees” add 13 percent of the total development cost of housing…
Affordable housing crises in expensive cities such as Seattle will never be completely solved by streamlining counterproductive regulations that add cost. Nor by trimming fees. Even with perfect rules, high land values and the raw cost of construction put new homes out of reach to people on the lower end of the income ladder.
But here’s the crux: the more costs can be cut, the further down on that ladder housing will reach. The lower the price of market-rate housing goes, the fewer households will need public subsidy to afford homes.
Another post by Bertolt, “Housing Delayed is Housing Denied (And rent increased)” looks at administrative delay.
Recent analysis by real-estate firm Trulia indicates that delay may be the biggest regulatory factor in the lag of homebuilding that sends prices spiraling in booming cities (see end notes)…
Seattle’s Housing Affordability and Livability Agenda (HALA) recommends revamping the city’s design review process to reduce delay. To assess the savings yielded by a two month shorter process, city planners assumed the following cost reductions:
- Interest: 2 percent
- Developer management: 10 percent
- Consultant fees: 15 percent
- Permit fees: 10 percent
If those numbers are right, and you’re trying to build an ordinary 135-unit apartment complex, a two-month time reduction converts into a savings of $4,000 per unit. That’s $540,000 for the whole project, which is roughly the same as the full cost of building two apartments. In other words, every month’s delay costs as much as building and throwing away a free apartment. If the delay stretches out to six months (not unusual), your estimated loss swells to $1.6 million, approximately the same as the affordable housing fee the project would be required to pay under Seattle’s proposed Mandatory Housing Affordability program (see end notes).
The good news is that the necessary fixes are relatively straightforward and come at little cost to cities—in fact, streamlining permitting is likely to cut a city’s administrative expenses. The challenge for policymakers is to get out of the way as much as possible while striking a balance between the costs and benefits of regulation. There’s much to be gained by getting it right: a city that welcomes more people.
Recommended reading for Seattle city officials.