Los Angeles

Los Angeles Wants to Make Housing Affordable by Making it More Expensive

The city's new Linkage Fee law piles millions in new costs onto developers.

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L.A. Mayor Eric Garcetti

A general rule of thumb is that you shouldn't tax something if you desperately need more of it. This common sense wisdom has eluded the Los Angeles City Council.

The council Wednesday voted to impose a linkage fee—so named because of a supposed link between the construction of new housing and the increasing costs of housing—as a solution to its housing and homelessness problems.

"When we see luxury condominiums going up," said Mayor Eric Garcetti, a major proponent of the new fees, "we can make sure that there is money paid in to build housing for the rest of us."

Michael Manville, assistant professor of Urban Planning at UCLA, says this is precisely the wrong approach because it treats housing construction as the source, not solution, to the city's housing problems. The new linkage fee law does little to create additional new housing units, he says.

"We keep passing laws that suggest that housing is a huge source of our problems," Manville tells Reason, when the real source of Los Angeles' woes is that "we don't build enough housing."

There is a very real chance the new linkage fees will raise the costs of housing, or reduce the number of housing units built. The fee for new residential developments would range from $8 to $15 a square foot depending on which area of the city they are built. Given that the average size of a one-bedroom apartment in Los Angeles is 702 square feet, the city's new linkage fee would add between $5,616 and $10,530 to constructing a unit that size.

A report prepared by Los Angeles city staff was dismissive of the idea that adding thousands of dollars to the final costs of new housing units would raise rents or home prices. Developers, they reason, will instead pay less for the land they buy or accept less profit.

Manville says that logic makes sense for some developments where parcels of land are interchangeable, but doesn't stack up in most of Los Angeles where most of the land is already developed.

"If I want to buy an existing apartment building and just operate it, as opposed to buying an existing apartment building, tear it down and build 30 percent more units, one of those comes with a linkage fee and one doesn't," he tells Reason. The developer is always at a disadvantage, he says.

Developers themselves have been pretty explicit that at least some of the new linkage fee costs will be passed onto renters. The Los Angeles Times quotes developer L.A. Michael Heslov, who says that he would likely raise rents on future projects because of the fee. "It's like anything else. If the cost of avocados goes up, it gets passed on to consumers."

The fee is expected to generate $100 million a year, which is supposed to pay for new affordable housing developments.

It currently costs an average of $448,500 to build a single new affordable housing unit in the city of Los Angeles. At that rate, linkage fee revenue would pay for about 225 new units per year. The city estimates by leveraging additional affordable housing funds the city can bring that number closer to 1,500 units.

The city actually needs 32,862 affordable housing units by 2021, according to a 2014 Regional Housing Needs Assessment. Los Angeles County—which includes the city of Los Angeles and surrounding communities—had, as of January 2017, an unsheltered homeless population of 42,828.

Manville suggests that other funding mechanisms, like a fee on real estate transactions, would provide more money for affordable housing without punishing new developments.

Libertarians would reject the notion that government needs to spend any money on affordable housing. But people of all political stripes should appreciate that piling costs onto something you desperately need more of is just wrong.

"You don't have to like developers," Manville says, "to understand that the product they produce is actually really important."

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  1. If building more houses makes houses more expensive, the LA City Counsel should consider going around and blowing up existing houses to decrease the supply and thereby the price. Once there are no houses left in Los Angeles, everybody will be able to afford one!

    It’s possible they’re counting on the fire to do this for them.

  2. Wealth redistribution scheme #48,163.

  3. “The fee is expected to generate $100 million a year, which is supposed to pay for new affordable housing developments..”

    Yeah, right, buddy! The $100 million will mostly go to new enforcement fat-cats and their pensions! The only “affordable housing” that will be bought with that money, is the mansions that the enforcement fat-cats will now be able to afford. The peons will get nada, as usual.

  4. “A report prepared by Los Angeles city staff was dismissive of the idea that adding thousands of dollars to the final costs of new housing units would raise rents or home prices. Developers, they reason, will instead pay less for the land they buy or accept less profit.”

    You have to wonder if this was written with a straight face.

    1. Why would anyone believe what a bunch of bureaucrats with no business experience and no skin in the game think that business people with lots of money on the line will do?

      1. Los Angeles only hires graduates of the finest schools for its staff.
        Their credentials are impeccable, their education not so much.

    2. Developers, they reason, will instead pay less for the land they buy or accept less profit.”

      No, not the smart ones. They will set up shop somewhere else. Or go broke. Either way, they’ll be gone.

  5. This law might be even more economically illiterate than Certificate of Need laws, though it still falls in the same category (“X is more expensive. We’ll make it cheaper by restricting the supply of X!”).

  6. As a general rule, if Garcetti is in favor of it, it’s almost certainly dumb. That holds true here.

  7. I live in San Jose and the progs will just never get it. Ever. They bitch about how expensive everything is in CA, how “unaffordable” housing is, etc, then in the same breath they talk about moving to Arizona / Texas etc.

    They will never fucking accept it is their failed ideology. That CA has leftist supermajorities and Texas is solidly conservative must not mean anything to them. Never quite understanding that they are getting exactly what they voted for in California…

  8. I could only imagine if Government started taxing food companies to provide “affordable” food to people, or taxing haircuts to provide affordable haircuts to people, or….

    The stupidity of these leftist hacks knows no bounds

  9. They’ve had such a program here in Aspen for a few decades. It’s rife with corruption and cronyism, and has produced the highest housing costs in the country — over $5000 per square foot in some cases.

  10. It costs $500k to build a 700 sq ft housing unit? Wtf.

  11. I have news. If new units are made more expensive, then old units will also be able to raise their rates.

  12. Los Angeles is not alone in its insanity, as San Francisco has got a jump or two ahead of it down this road.
    In fact, the entire state has jumped off the deep end without a PFD, and the lifeguards are all on compassionate leave.
    California, you were such a nice place; why’d you have to go and ruin it?

  13. Location, location, location.
    What determines the cost of housing is the size and where it is situated.
    A small shack in the middle of nowhere is eminently “affordable”.
    Trying to put “affordable” housing into the middle of the most expensive housing markets, and, of course it must rival that which “the rich” own, borders on insanity.
    But, then again, no one has credibly accused progressives of being sane.

  14. Providing affordable housing for a growing city is a cost of doing business, no less so than paying for more traditional infrastructure. Although I am a less government guy, the failure of the private sector to provide housing is a critical failure requiring government intervention.

    These costs should be born by all new construction, not just residential. Building higher density housing in our urban centers is problematic. When it is built to meet demand, it works. When it is the product of a social scheme it is just a reinvention of the problematic gang ridden project. 10-20% lower income housing in a project does work.

    Stop using your failures to provide basic human needs through the private sector as a rationalization for escalating abuse.

    1. Had to read this a few times and still. So you are all in favor of saying doing away with property taxes right? I mean that would make housing a lot more affordable.

      Why is the housing supply and demand different in your mind? The area is built up. So making it cost more to build is your answer right? You seem to think the government milking contractors is ok.

      Here’s a better question for you, why does your “lower income housing” have to be built in an urban center? Why not outside the city?

      Government intervention is what has caused this housing issue. Maybe if you could see though the smog filled clouds of LA you would realize that.

  15. Haha this is really amusing. Los Angeles has a housing shortage because conservative homeowners fight every development. They fight upzoning, housing for the poor, and pay lawyers to stop any and all projects.

    The left is no better but let’s be real about how we got here.

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