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California laws keeping homes beyond reach of the average Joe

More cities in California are seeing rents rapidly outstripping incomes because regulatory hurdles are placed in the way of developers who want to build cheaper homes

Pedestrians taking in the view of Victorian- style homes and the downtown skyline in San Francisco, California. The average Joe can't find affordable housing because he has to grapple with environmental mandates, building codes, parking minimums and lawsuits filed by querulous neighbours who want everything to stay exactly as it is, forever.

I HAPPENED to be in Santa Barbara, California, last week to give a speech, and at the lunch afterwards, I found myself talking to a local real estate agent.

She told me that trailer park homes in the town can go for US$600,000. "They're really lovely," she said, of these mobile homes. "There's a private lake."

I'm sure the view is splendid. Nonetheless, US$600,000 is an insane price to pay for a trailer and a place to park it.

Yet, this sort of insanity is found all over California, to the point where it is approaching collective madness. That's because California laws make it so expensive and difficult to build new homes.

Between the environmental mandates, the building codes, the parking minimums and the lawsuits filed by querulous neighbours who want everything to stay exactly as it is, forever, it's small wonder that so many California cities top the list of places where rents are rapidly outstripping incomes.

To economists, the solution to this problem is fairly obvious: Build more homes. Or rather, pare back the laws that make it so appallingly expensive for private developers to construct homes.

That was the thinking behind SB-827, a law that would have given the legislature the power to increase density in mass transit corridors.

It died last month, unable to even survive at the committee level.

The state Energy Commission, meanwhile, just barrelled ahead at full speed on a plan to require that all new homes built in California feature solar panels.

One can certainly sympathise with the Energy Commission's goals. Even if you are sceptical of the more extreme predictions about global catastrophe, it's best to be leery of running a one-way experiment with the only climate we've got. Weaning our homes off fossil fuels seems like a good place to start.

However, solar panels cost money - about US$3 per watt the system is capable of generating.

It's hard to say exactly how much this new mandate will cost, since the requirement will vary by the size and location of the house.

But it is safe to say that buying and installing panels, and paying the energy consultant to tell you how much capacity you need, will be in the high-four or low-five figures, even with the commission's unproven assumption that the cost of solar installations will continue to fall.

But what about the fabulous savings these homes will enjoy on electricity? A conservative sceptic might retort: "If the savings are so fabulous, how come the market isn't already installing the solar panels without regulatory prodding?" But I won't.

Consumers can be shortsighted, and developers stuck in their ways; it is not impossible that they are looking past their own self-interest.

And yet, I wouldn't be too sure that's the case. The cost estimates do indeed promise fabulous lifetime savings from the solar panels and other energy-efficiency requirements - an average of US$80 a month, reported The Los Angeles Times.

Meanwhile, they say the average mortgage payment will only go up by US$40 a month.

But I am unable to replicate the commission's analysis. At an average cost of US$9,500 for all that efficiency, using today's mortgage rates, I get a number that's closer to US$50 a month.

And we probably shouldn't use today's mortgage rates, which come at the end of a decade in which housing debt has been unnaturally cheap.

If mortgage rates were where they were in 2003 - the last time that inflation was roughly at its current level - we'd all be paying 1.5 per cent more a year.

If we assume that mortgages will return to pre-crisis levels as the Federal Reserve Board unwinds its heroically expansionary monetary policy, the monthly cost inches up towards US$60, even before we factor in the increase in the size of construction loans developers will have to take out.

If the commission turns out to have been as optimistic in their estimates of the benefits as they have been about the costs, the net benefit to homeowners could easily turn into a net cost.

There's also the matter of the downpayment to consider, an average additional cost of almost US$2,000.

The effects of all this will be highly regressive; adding US$10,000- US$20,000 to the cost of a US$1 million home is trivial, but it will be a significant burden on starter homes - which is to say, exactly the sort of homes needed to alleviate California's housing crunch.

A cleaner environment is, of course, a laudable and important goal.

Unfortunately, governments are rarely in the position of weighing good against bad, important against unimportant; more often, they have to decide which good goal is more important when two or more come into conflict.

It's always tempting to say, well, this is only a fraction of the total cost of a new home, and we'd all be much better off in a low-carbon world.

But that's how California got to its current conundrum. Every regulatory hurdle placed in the way of developers has been aimed at achieving some worthy goal; every hurdle has, by itself, raised the price of housing by only a fraction.

But little fractions quickly sum up to big numbers if you string enough of them together.

Unfortunately, no one in government ever does string them together, or ask "Each of these goals is worthy - but are all of them more worthy than housing our citizens?"

Every provision is debated independently, without anyone taking responsibility for the whole (this latest decision, tellingly, was a rule made without legislation, and by a body that isn't even responsible for housing).

Unless California steps back and focuses on the cost of housing, even at the expense of other good aims, then the State will keep ploughing down the road to disaster, step by step, rule by rule. WP

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