No on California Proposition 1

Proposition 1 issues $4 billion in general obligation bonds for subsidized housing, infrastructure, homeownership subsidies, and home loans for veterans. While some of these programs could make housing more affordable, the inclusion of homeownership subsidies is questionable, and the bond repayment comes at the price of other important state government expenditures.

General obligation bonds mostly take funds from education and health programs

Before getting into the bond uses, it’s worth emphasizing this last point: California general obligation bonds are repaid as interest each year from the General Fund. In the case of Prop 1, that’s $170 million less in the General Fund, each year for the next 35 years. Prop 1 is not a new tax, so the pie is not grown, only reshuffled.

What does that mean for California? The 2017–18 budget includes $125 billion for the General Fund, of which 55 percent is spent on Education and 28 percent is spent on Health and Human Services.

Prop 1 would remove $170 million, or 0.14 percent of the current General Fund, from this set of programs for the next 35 years. By adding to the 5 percent of the General Fund currently spent on repaying previous bonds, this would likely take a toll on education and health programs.

That trade-off might be acceptable if we needed a large one-time capital project, or if it’s some other real emergency requiring an infusion of investment. That’s what general obligation bonds are intended for, but neither describes Prop 1: it encompasses a large set of projects that could be funded over time from the General Fund to address what needs to be a sustained solution to the housing shortage. Housing projects can go through the normal legislative process each year, where legislators can evaluate what’s working well and adjust funding accordingly, rather than voters tying their hands for the next 35 years.

The above section generally also applies to Propositions 3 and 4.

Prop 1 does some good, but homeownership doesn’t need more subsidies

Prop 1’s $4 billion breaks down as follows:

The Legislative Analyst shows State Housing Programs separately from the Veterans Housing Program because it expects veterans’ loan repayments to cover the latter at no cost to the state (the $170 million therefore does not include this piece). Of the former set, housing programs get 70 percent (affordable multifamily plus farmworker), while infrastructure and homeownership get 15 percent each.

HOUSING PROGRAMS

Prop 1’s housing programs serve two purposes:

  1. Producing housing. California is currently short an estimated 4 million homes, so if this adds homes that wouldn’t otherwise be constructed, rents would fall across the state.
  2. Subsidizing housing. By subsidizing developers who build housing conditional on providing below-market-rate housing, this serves an indirect welfare purpose to low-income families.

On the production side, Prop 1 would certainly build homes, but probably under 10,000 units,1 and of those it’s unclear how many wouldn’t have been built as market-rate. The biggest barrier to housing production is zoning, permitting, and other ambiguous and abuse-prone regulation, not funding. Best case scenario, Prop 1 fills 0.3 percent of the housing gap.

As a subsidy, affordable housing programs are better than nothing, but have significant drawbacks. The units come at a discount and are limited by income, so demand always greatly exceeds supply. To win a spot, applicants must complete demeaning application forms, then hope to win a lottery. Even if they qualify, most applicants end up waiting years. Given the significant discount, they then uproot their lives, moving across town even if it’s not really the neighborhood they want. If they get a new job farther from their new discounted home, they might take the longer commute or decline the job to avoid having to move.

Prop 1’s affordable housing programs remove $120 million per year from the General Fund over the next 35 years. With that money, we could have passed Senator Steve Glazer’s proposed expansion of the renters tax credit, giving low-income renters up to $430 per year. Maybe that’s less sexy than building new affordable housing buildings, but it would reach several hundred thousand households automatically — no lottery or waitlists — rather than Prop 1’s estimated 37,500.

INFRASTRUCTURE PROGRAMS

This $450 million would support housing and related infrastructure in urban areas and near transit, the greenest and most economically sensible areas to invest in. Without Prop 1, these projects may be worth funding through the normal legislative process.

HOMEOWNERSHIP PROGRAMS

Prop 1’s homeownership programs largely provide down payment assistance for first-time homebuyers. This assumes that homeownership is a valid policy goal. It is not:

  • Homeowners lock up the bulk of their net worth in an illiquid, volatile asset (this contributed to the 2008 crash). Personal finance 101 says to diversify; policy should instead move people to save in index funds.
  • Homeowners are tied to the location of their home, and this immobility has negative consequences at both the individual and economy-wide level.
  • Homeowners are more likely to show up to zoning boards to block new housing. Their incentives to keep property values high by reducing supply take a toll on newcomers and contribute to California’s housing shortage.
  • Homeownership subsidies are inevitably regressive, from the mortgage interest deduction, to capital gains tax exclusion for home sale profits, to California’s Prop 13 (from 1978, capping property tax rates and locking in assessments).
  • Younger people and urbanites are less likely to own. This could be due to affordability, but preferences may also play a part, considering the accompanying maintenance, volatility, lock-in, and perverse incentives. Public policy should not favor people based on their housing preferences.

Rather than doubling down on failed homeownership subsidies, we could invest in affordability for everyone. The $25 million per year we’d spend on these programs could bump up the maximum renters credit to $550. While the veteran home loans will be repaid, the availability of those funds will still produce the negative consequences above.

Prop 1 provides some valuable funding for infrastructure and indirect housing subsidies, but there are far more effective ways to spend the money, especially the distortionary homeownership subsidies. To better address high housing costs, the state should get serious about zoning reforms like SB 827, and provide direct subsidies to low-income renters. The mild benefits of this measure are not worth the inflexible cut to other General Fund programs.

[1] A report from UC Berkeley’s Terner Center estimated that “The cost of building a 100-unit affordable project in California […was] almost $425,000 in 2016.” Dividing the $2.1 billion spent on new housing by this amount shows that we can expect Prop 1 to produce 4,900 new homes. Including a portion of the $450 million in Prop 1 infrastructure, which will also fund housing development, and amplification from federal funding as anticipated by the Legislative Analyst, this could grow to 10,000.

Economist. Founder and president of the UBI Center. Studied at MIT and UC Berkeley. YIMBY. Former Google data scientist.