Growth controls, not Prop. 13, produced state deficits

Jan. 7, 2013

By Wayne Lusvardi

It is not Proposition 13 or greedy bankers, but the many layers of growth control laws that are the main instigator of the prolongation of California’s economic recession since 2007.  And with the recession has come state and local government budget deficits, pending municipal bankruptcies, an un-closable funding gap in the state public pension system and misplaced calls to reform Prop. 13.

What makes up the popular image of California is not just its weather and beautiful natural resources but its real estate. It once used to be said, “You can’t lose on California real estate because the prices only go up.”  And the reason that real estate values seemingly always went up was because of California’s  unique mix of population growth controls:

* The California Coastal Commission;
* Environmental impact reports and lawsuits;
* Local Area Formation Commissions (city annexations);
* State-mandated General Plans and Housing Element Plans;
* Local design commissions;
* Open space preservation;
* Santa Monica Mountains Conservancy;
* Local voter approved growth control measures (Petaluma, Oceanside Measure A, Contra Costa County Measure C, Ventura’s Save Open Space and Agricultural Resources, Escondido Measure S and El Dorado County’s Measure Y traffic initiative).

Such growth-management policies became especially toxic when coupled with housing affordability incentives such as low interest rates, low or no down payments and mortgage interest deductions. This toxic gas inflated the Housing Bubble from 2003 to 2008.

It was mainly growth controls that brought about highly localized bubbles, however.  California had 1 foreclosure per 173 homes, Texas only 1 per 1,000. Wealthy Santa Barbara hardly experienced the downside of the Bubble, but poor Stockton and San Bernardino are in municipal bankruptcy.

If we look at housing median price multipliers — the median home price divided by median household income — we can see the negative effects of growth controls (see table below). After the Housing Bubble popped in 2007 and 2008, home prices in growth-controlled cities were hardly affected or recovered faster.   Home prices have declined the most in inland cities where new homebuyers were compelled to buy. This is because growth controls over-inflated home prices in coastal cities way beyond what incomes could afford.

Multiplier

In the city of San Bernardino, the median home multiplier (median home price divided by median household income) rose to 8.8 times the median income during the Bubble and dropped to 3.2 during the recession. San Francisco’s home price multiplier actually has increased from 8.3 to 10.3 since the Bubble popped.

Housing Median Multiplier Trend from 2006 to 2012 — Selected California Cities

City	Median Home Price Multiplier as of 2006	Median Home Price Multiplier as of 2012	Change (decline)
GROWTH-CONTROLLED CITIES
Santa Barbara	11.2	11.0	(0.2)
Los Angeles	9.8	7.6	(2.2)
San Francisco-Oakland	8.3	10.3	2.0
San Jose	8.0	5.9	(2.1)
URBAN FRINGE CITIES
San Bernardino (bankruptcy filed)	8.8	3.2	(5.6)
Sacramento	8.0	3.0	(5.0)
Stockton (bankruptcy filed)	8.0	2.7	(5.3)
Bakersfield	6.7	2.8	(3.9)
Fresno	6.5	3.3	(3.2)

The decline in tax revenues from sales, income and property taxes resulting from the popping of the Housing Bubble has resulted in declines in revenue for state and local governments and school districts.  But blame has been wrongly placed on Prop. 13, rather than the real culprit: growth controls.

Prop. 13 reforms

The proposed reforms to Prop. 13 will only treat the symptoms and not the cause of these localized financial crises. It will make the situation worse by removing Prop. 13 protections on commercial properties, such as allowing more frequent assessments of property, to increase taxes on 97 percent of small businesses.

It is residential properties in politically Blue coastal counties, not inland commercial real estate, whose values increased beyond the rate of money inflation.

The city of San Francisco, for example, has not experienced any decline in property values since 2007. Housing prices in wealthy suburbs in Los Angeles County have bounced back, while those on the urban fringe are upside down. Ironically, the Occupy Movement’s “1 percenters,” whose home values were protected by growth management policies, are mainly in politically Blue jurisdictions.

If the Democrat-affiliated Occupy Movement were serious about all their “we are the 99 percent” talk, they would only tax wealthy Blue cities and counties whose property values were stabilized by growth controls.  Or they could consider repealing growth controls altogether. Since neither is politically likely, the Democratic Party will continue to push for increasing property taxes mostly on older, smaller commercial properties that haven’t re-sold in the past 20 years or more. This could result in “fire sales” or the forced re-development of older commercial properties during a recession in order to pay increased property taxes.

Supermajority

The Democratic supermajority in the Legislature also wants to close so-called tax loopholes on commercial property partnership transfers.  But it has been revealed that closing this tax loophole could be done without reforming Prop. 13.  Closing the loophole would only involve a small number of property transactions anyway. But this so-called tax loophole has politically symbolic value for Democrats that diverts attention away from their feudalistic land development policies.

Growth controls result in the rich cities and counties getting richer and the less wealthy areas on the urban fringe getting hit with most of the foreclosures and upside down mortgages.  Growth controls also result in property-tax premiums of about 15 percent due to over-inflated home prices in coastal cities during bubbles. The median housing multiplier data in the above table indicate as much as a 63 percent price premium in urban fringe cities during bubbbles. Those who want to reform Prop. 13 never mention this tax premium.

Prop. 13 is a circuit breaker on the effects of government-induced home-price bubbles.  The reforms to Prop. 13 currently proposed by the state legislature will only compound the problems. It will single out commercial property owners to carry more of the burden of the wild swings in property values during bubbles. And it will make it easier for school districts to raise taxes to meet unrealistic public pension costs.  But it will only worsen the problem.

Proposition 13 is a convenient bogeyman for tax-increasers to divert attention from California’s feudalistic land development system where wealthier cities reap the windfalls of housing bubbles and inland cities suffer the wipeouts.