News publications across the country have affirmed the existence of a near-crisis in providing affordable housing options for first-time homebuyers and low-income housing consumers. Mayoral elections in Minneapolis and St. Paul emphasized the need to address this problem. There are numerous private for-profit and nonprofit housing developers who would love to serve this market; indeed it is the largest segment of the housing market that is not being served adequately by anyone. If asked, builders will tell you they cannot afford to construct housing that is affordable at the low end of the market. We know that the cost of land, labor and materials has risen substantially since the recession; that is a function of the market that can’t easily be addressed through public policy. One other well-documented factor is the cost of regulation, both by state and local entities. When it costs a builder $20,000 more to build the identical home in one state vs. another state, that is compelling evidence that regulatory costs are unbalanced in the high-cost state. Regulatory cost can be addressed by public policy, if there is the will to do so.
States and cities across the country have thrown hundreds of millions of dollars at the problem and barely moved the needle. What has been lacking thus far is a constructive discussion with housing developers about what it will take for them to serve this market.
What have state and local governments been doing to address this problem? Well, not much, actually. The governor of Minnesota recently convened a housing task force to come up with ideas to address housing affordability; curiously the trade organization representing the largest concentration of Minnesota homebuilders was not invited to serve on the committee. To the contrary, what a growing number of cities are contemplating is a new illegal tax on housing that would compel housing developers to pay a fee as a condition of being approved for a new development, unless the developer agrees to construct a certain number of housing units that will be held for sale or use by consumers at a certain income scale. Some refer to this as inclusionary zoning. The theory is that a housing developer ought to have to fund a public housing initiative as the price of securing government approval of a new private, unsubsidized housing project. Aside from having no statutory basis, at least in Minnesota, it’s a nice little maneuver that shifts responsibility for addressing a serious public policy problem from the responsible governmental body to developers of new multi-family and single family housing – thus, it’s now the housing industry’s problem.
Theoretically, a housing developer could bury the added cost of meeting this new tax by inflating the cost of its remaining housing stock (that is what occurs with other government fees). In this instance, not only is this approach arguably illegal, but in a tight housing market, it will also be very difficult for the for-profit housing sector to absorb this new tax. And the only way the nonprofit sector can satisfy such a requirement is for the government to subsidize it. How ironic.
It’s time for government entities concerned about housing affordability to sit down with those folks who would like to build more affordable housing. Simply adding a new tax on housing may feel good to public policymakers, but it only makes housing that much more expensive for housing consumers.