The Path to Affordable Housing and Entrepreneurship

December 22, 2014

Affordable housing is one of the greatest ways to boost entrepreneurship and economic growth in America—and no one is talking about it. If housing were just about housing, the topic would be important enough. But it’s about more than that. Without affordable places to live, productive cities are denied talent and dynamism, particularly of Millennials.

Affordable housing means, among other things:

  • Enjoying the capital to invest in a business, whether from a mortgage on house or dollars not spent on rent;
  • Being able to live in proximity to communities of opportunity, capital, and talent;
  • Attracting and retaining a diversity of talent; and,
  • Encouraging job mobility.

Yet as it stands, the metro areas with the most economic opportunity are also the ones with the most restrictive housing regulations and, consequently, some of the highest housing costs.  Just look at the Bay Area. Wages and productivity are high. Raj Chetty of Harvard found that San Francisco has the greatest upward mobility in America. Even the weather is pretty great. And yet population growth is sluggish at best.

If you want to know why people aren’t flocking to the Bay Area, just look at housing. The median house price in San Francisco clocks in at over $980,000 while rents hover around $3,120 a month. Housing in the city is out of reach for many. Those with lower incomes, which include a lot of young people, are leaving as a result. Young entrepreneurs who have the most to give and the most at stake are particularly left out.

Meanwhile, land sits vacant or underutilized in otherwise prosperous downtowns. This is space that could be put to effective use but isn’t. And housing projects are built with nowhere near the amount of units demanded (or at the price needed) by the marketplace. Not only does affordability go out the window, but so do the gains in productivity and community from density. This lack of development is ultimately a policy problem.

 

The Path to Affordable Housing in Cities

Building housing in America’s largest cities is like going for a root canal in a bouncy castle—it’s going to be long, costly, and painful. First, there’s the zoning challenge. Land-use restrictions are rarely as flexible as the market around them. Many developers must wait for zoning to reflect the reality of what can be sustainably built. Then there’s the permitting process. Fees pile on fees, bleeding out sums to lawyers and accountants and expediters and the government. The process is opaque at best, often based on personal relationships, while being publicly left in the hands of the loudest objectors. Then there are the taxes—transfer taxes, mortgage recording taxes, capital gains taxes, and more. Yet in cities like San Francisco, developers can still have their projects pulled even after years and hundreds of thousands in expenses. Current residents often see new construction as a hassle, and high house prices often mean a boost to incumbent homeowners. “Not in my back yard!” they say.

Little research has actually been done on the connection between affordable housing and entrepreneurship. That reality has to change. I happen to know of one grad student at Harvard working on this, but few others. And I get it—showing such a connection is hard. But in our work with 1776, DC’s tech incubator, we hear of housing costs and, relatedly, commercial rents, being an impediment to entrepreneurship. Anecdotally it seems that affordability is not only a direct cost to doing business, but a hidden tax on opportunity. What could have been possible absent stifling regulations on development?

America’s most prosperous cities need to be open to the best and the brightest. Housing costs should never be an overwhelming impediment to living, let alone finding a good job or starting a business. We need big ideas to make housing more affordable for the little guy.

 

Localities, States and Land Taxes

Land taxes may be one such idea. Most municipalities today tax property values, meaning that development is a fast way to also increase the tax bill. Land is a fixed asset, so taxing it doesn’t distort markets or lead to large inefficiencies. Instead, as a replacement for property taxes, it incentivizes development and density, while discouraging the hoarding of underdeveloped land. Few municipalities have implemented such a tax, likely because gripping an electrified rail seems an easier task than messing with the tax structure. Additionally, until the advent of the big data age, it was difficult to accurately measure land values. But the timing is ripe for experimenting with a land tax, possibly within the innovation district of a major city.

States are also already involved in local land-use, and could be far more proactive in guiding cities to make housing more affordable. Ed Glaeser of Harvard recently put forth his own proposal along these lines for Cato:

Most localities don’t want building and they have little interest in wholesale change. Indeed, the problem of excessive regulation is far more extreme in suburbs which have become homeowners’ enclaves than in big cities where mayors internalize a wide range of interests. Change is most likely to come from states, which have the option to overrule local land use controls.

I think that the most natural solution is to give developers a get-out-of-jail-free card from local regulation, based loosely on Massachusetts’ Chapter 40B. The state could write its own code for building which might include impact fees. Localities can make it easier to build than the state code, but not harder. Essentially, we would just write localities out of the land use process.

 

Is Parking a Burden to Housing Development?

Perhaps the ripest low-hanging fruit can be found in eliminating minimum parking requirements, as Ingrid Gould Ellen of NYU has written. Yes, you heard that right. The median municipality in America requires 1.5 parking spaces for every two-bedroom unit. New York City demands 43 parking spots for every 100 housing units. Every developer in every large city points to this one rule as one of the biggest reasons for the lack of development. Adding more units means digging massive underground parking garages or purchasing more land, both of which are expensive options. Plus there are the negative externalities associated with congestion, streetscapes, and space available for housing. The sum of these efforts means we subsidize car ownership in Los Angeles to the tune of $30,000 a year and $50,000 a year in New York City. Parking should instead be seen as a community development, akin to a park, or as the equivalent of a tradable air right for developers. On-street parking can be managed through user fees, dedicating the resulting revenues to beautifying the neighborhood, and achieve the same purpose as minimum parking requirements.

These reforms are all remote possibilities at the moment. But the demand for housing remains high and America’s cities are just not keeping up. The consequence is highly productive cities walled off from many of the people who are best able to contribute to the local economy.

In an economy suffering under low startup rates, we need more ways to spur on entrepreneurs and new ways to look at this challenge. We could do a lot worse than offering job creators and recent grads decent places to live that don’t suck up all their capital or force them into far-off communities.

It’s time we made housing more affordable.

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