According to traditional urban economic models, developers in well-functioning housing markets will choose to build apartments where land is expensive and housing demand is strong.  The theory itself is sound: high rents provide strong financial incentives to developers that should lead to an increasing supply of new multi-family housing.

But a new report from the Terner Center for Housing Innovation—“Is California’s Apartment Market Broken?”—analyzing how California’s local governments regulate apartment development and whether local zoning regulations are limiting multi-family housing construction  in California, shows that local land use regulations are artificially limiting the construction of new multi-family housing.  The report concludes that “underbuilding of apartments is a statewide issue—California’s metros build fewer apartments than expected by housing costs, relative to most U.S. metropolitan areas.”  As we wrote in a May 31, 2019 Daily Journal article—“Who should control basic land use policy in California’s ongoing housing crisis?”—zoning reform is thus not the end goal but a necessary step to increase housing production.

According to the report, many California cities do a variety of things that result in a severe undersupply of new multi-family housing, such as zoning most of their land for single-family homes rather than apartments.  Other typical regulatory approaches include restricting the height of multi-family buildings to less than four stories and limiting the number of units that can be built per acre.  The report explains that even the cities with the highest rents permitted almost no multi-family housing units during the 2013-2107 study period, which “runs contradictory to what economic theory would predict . . . and illustrates how poorly housing markets in California cities are functioning.”

The report’s authors suggest a serious solution that ought to be squarely on the table in Sacramento:

“If state policymakers want more apartments to be built, they should attach financial incentives directly to housing production, not merely to zoning revisions on paper . . . Until residents of exclusionary communities face financial penalties for their resistance to development, they will not change their behavior.  But increased state oversight of local land use will be politically unpopular, especially among affluent communities.”