Trickling Down to Nowhere: The Free Market’s Failure to Fix LA’s Housing Crisis

LOS ANGELES

PLATKIN ON PLANNING-It goes by many names – the free market, trickle-down economics, supply side economics, market magic, market fundamentalism, and neo-liberalism – but its content is the same. Let the private sector maximize its profits through deregulation, bailouts, tax breaks, and financial incentives. Then the ensuing rising tide of investment will lift all ships. It will create jobs aplenty, while also building affordable housing. The resulting glut in pricey housing will not only drive down all housing prices, but grants to non-profit affordable housing corporations and inclusionary housing programs, such as LA’s density bonus program, will fill LA’s affordable housing vacuum. Just sit back, and market magic will fix what ails us, like a vibrating waistband that peels off extra pounds at the flip of a switch. 

The basic supply-side argument, whether articulated by the Mayor, the City Council, academics, realtors, LA Times editorial writers, dependent non-profit organizations, Chamber of Commerce boosters, or anonymous Internet trolls, is as straightforward as could be. Planning and zoning laws restrict housing production, and this is the main cause of expensive housing in Los Angeles. 

Therefore, if City Hall loosens up land use regulations, developers will march into LA, build oodles of housing, which increases supply and supposedly reduces prices to the point that housing again becomes affordable. 

What trickle-down got right and got wrong. 

Whatever the name, it is a superficially convincing theory, and one part of it is even correct. The deregulation of zoning and environmental laws has allowed real estate profits to soar in Los Angeles. Trickle-down has really been trickle-up, and the market fundamentalists at least got that part of the equation correct. 

But, as for the other part of the equation – fixing LA’s housing crisis – their theory has been a bust. Despite years of granting real estate developers every zoning request they request, as well as notoriously lax enforcement of the City’s building and zoning codes, LA’s housing crisis has continued to worsen, especially since the 2008-9 Great Recession. Gentrification, housing prices, and income inequality have all soared, pricing out many residents and newcomers. 

To begin, there is no evidence that trickle-down generates jobs. Real estate projects built through zoning deregulation -- such as pay-to-play spot-zones and spot-plan amendments, wide-scale up-zoning through Community Plan Updates, Community Plan Implementation Ordinances, re-code LA, or indirectly through slipshod code enforcement -- have not resulted in net gains of short-term construction jobs or long-term building management and maintenance jobs. 

In fact, this often repeated jobs claim has only served two other purposes. The first purpose is to justify City Council votes to deflect dangerous Environmental Impact Report findings with the untested claim that a project is really a major job-generator. The second purpose was to lasso trade unions and non-profit groups to oppose Measure S in LA’s recent March 7 election. 

But, that still leaves the second claim: an uptick in housing construction leads to greater housing affordability. Even if the new units are expensive apartments, condos, and houses, they supposedly pull down all housing prices. The result is alleged to be more affordable housing. In fact, according to this theory, some of LA’s 50,000 homeless  should finally be able to get a real roof over their head. 

Like other missing benefits of deregulation, there is still no evidence that increasing the supply of expensive apartments somehow increases the supply of affordable housing. One of the reasons should be obvious; the widespread gentrification of many LA neighborhoods has not missed a beat. In fact, since 2001 the LA Times reports a loss of 20,000 official affordable units. What took their place? More expensive housing, of course, for the new urban gentry. 

Gentrification: This gentrification process is now painfully obvious in Los Angeles neighborhoods experiencing mansionization, small lot subdivisions, and Ellis Act evictions. In all these cases, older housing, some of which is subject to LA’s rent stabilization ordinance, and all of which is less expensive than the new housing that replaces it, is sacrificed for new, expensive houses, apartments, condos, and townhouses. The evicted residents must then scramble for replacement housing, spending a higher percentage of their income to find a place to live. In fact, in Los Angeles, over 59 percent of renters are now officially cost-burdened because they spend more than 30 percent of their income on rent. 

The other reason why trickle-down economics has led to a housing market crisis should also be obvious. Luxury housing and affordable housing are separate housing markets. Developers rake in sizable profits by building, selling, and renting expensive housing. But, they would commit financial suicide if they went into the affordable housing business. This is why they don’t do it. Even when they overbuild at the expensive end, such as in DTLA, they never drop selling prices or rents to the point that their new units become affordable. Instead, they hold on to the vacant units until the market changes, turn to Airbnb short-term rentals, or offer modest incentives such as free parking. But, they never rent out expensive units at a financial loss. Never. 

This is why supply-side economics trickles down to a dry stream bed when it comes to affordable housing. The real process should be called trickle-up, which explains why the supply-side beneficiaries spent $11 million in LA’s recent Measure S election to perpetuate their trickle-up business model. 

Now, with memories of the March 7 fading away, the free market campaign slogans are not faring well. Campaign bluster can go a long way, but ultimately reality asserts itself; Los Angeles has had a continuous affordable housing crisis since the end of most Federal housing programs over 40 years ago. 

More empty claims about beneficial market forces: 

In case there are still a few true believers clinging to their faith in market magic, here are several more realities they should consider when the supply-siders resurrect their empty claims. 

1) They don’t work. Since the elimination of most HUD public housing programs in the 1970s and 80s, every county in the entire United States has a demonstrable shortage of affordable housing. Regardless of supply, demand, local land use regulations, local wealth or poverty, the private housing market is simply not capable of providing affordable housing. It never has and never will. 

2) Measure HHH is trickling-up. Until a few years ago, the Community Redevelopment Agency (CRA) filled some of this funding gap by devoting 20 percent of its budget to quasi-public housing. But the California State legislature dissolved all CRA’s several years ago. Since then, the closest the trickle-downers have come to replacing the CRA is Measure HHH. But as Patrick McDonald reported in the April 18, 2017, CityWatch, HHH funding is quickly moving into the “croneysphere.” City Hall now wants to use the affordable housing bond issue to bankroll mixed-use buildings and mixed-income housing. The trickle-down from this bond issue is, as expected by critics such as myself, already trickling up to real estate speculators. 

3) Un-tapped zoning potential. The free marketeers also claim that LA's housing crisis results from wide-scale downzoning since the 1980s, but this is bunk. According to detailed City Planning studies from the early 1990's, which are still the most recent official data, Los Angeles could reach a population of 8,000,000 people based on existing zoning. But, led by UCLA's Prof. Greg Morrow, these trickle-downers declare that Los Angeles has virtually no more un-used zoning potential for housing. But, this is simply not true. In addition to lots zoned R-3 and R-4, Los Angeles is filled with long, low-rise transportation corridors (e.g., Pico, Olympic, Washington, Vermont, Hoover) featuring commercial zoning. 

Since all of these commercial zones can be used for by-right R-4 apartments, Los Angeles still has an enormous untapped potential for housing construction. Furthermore, these future apartments could be built up to 35 percent over the zoning code's requirements. Based on SB 1818, developers could set aside 20 percent of their units to become affordable. They then obtain incentives that raise the overall number of market and affordable units. 

4) Developers’ Business model is the real culprit. The basic problem is, therefore, not LA's zoning build-out potential, but the private developers’ business model. They must make a serious profit, and this is only possible through pricey housing. We could totally eliminate planning and zoning laws in Los Angeles, like Houston has, and these real estate investors would still build expensive housing. They would simply build it in more locations.   

5) Short-term fixes. In the meantime, though, there are several things we can do in Los Angeles until the real fix appears, the restoration of Federal and local public housing programs: 

  • Eliminate vacancy de-control from LA's Rent Stabilization Ordinance.  
  • Apply the Rent Stabilization Ordinance to all rental units, not just those built before 1979. 
  • Prosecute the speculators who illegally evict people from small apartment houses in order to demolish the buildings and replace them with expensive housing. 
  • Demolish all speculative structures built through code violations. 
  • Properly fund and monitor LA’s Department of Building and Safety, LA’s Housing and Community Investment Department, the South Coast Air Quality Management District, and LA County Public Housing to ensure that zoning, building, and health codes are enforced.

 

(Dick Platkin is a former Los Angeles city planner who reports on local planning issues for CityWatchLA. Please send any comments or corrections to rhplatkin@gmail.com.) Prepped for CityWatch by Linda Abrams.

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