Growth controls, not Prop. 13, produced state deficits

Housing bubbles

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.

7 comments

Write a comment
  1. Susan
    Susan 7 January, 2013, 14:07

    This is a very important article and a “must read” for all Californians because, for one thing, it reveals once and for all how fake the screaming is by people who supposedly want Prop 13 “reform.”
    “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.”
    Once again it’s often what ISN’T happening and what ISN’T addressed that exposes such “reformers” as phonies whose goal is actually something different than what they say.

    Reply this comment
  2. Dirtbos
    Dirtbos 7 January, 2013, 14:52

    More fuel to the fire under the financial melting pot.

    Reply this comment
  3. Hondo
    Hondo 7 January, 2013, 17:06

    The greatest social program ever is a JOB. By increasing taxes on businesses you destroy jobs. Then you lose revenue. Then you can’t pay your pension benefits.
    Hondo…

    Reply this comment
  4. Rex the Wonder Dog!
    Rex the Wonder Dog! 7 January, 2013, 20:09

    The greatest social program ever is a JOB.
    ==
    The problem is the POLICY MAKERS have allowed our best companies to ship all the good jobs overseas for fats profits, while debasing the long term income/employment economy of the nation.

    Reply this comment
  5. Donkey
    Donkey 8 January, 2013, 17:17

    While I agree with most of the theme in your article Wayne, I would point out that it is the actual cost of government workers pay, benefits, perks, and pensions that has held the econmy in our state from recovery and the RAGWUS feeders greed is the poison that keeps it sick.

    Every RAGWUS employee is overpaid and underworked. With over 87% of all our tax dollars going to feed the RAGWUS porker at their trough, and built in raises and perks, the econmy will never recover. If the current RAGWUS system is not disbanded then California will end up becoming an extension of Baja. 🙂

    Reply this comment
  6. Hondo
    Hondo 8 January, 2013, 19:14

    Rex:
    I agree. We have an agreement with China. They buy our debt, then get all of our jobs as payment of interest on that loan. I am a capitalist, but companies like Walmart under cut mainstreet by buying slave made goods from china. The same with Apple and all the other computer and cell phone companies.
    But increasing taxes on american companies sends them off our shores.
    Hondo…..

    Reply this comment
  7. ArekExcelsior
    ArekExcelsior 11 April, 2013, 10:18

    Your own reasoning establishes why Prop 13 must be at least in part a cause. If property values constantly explode above 2% but property taxes are fixed at 2% growth per year, what do you THINK is going to happen?

    Reply this comment

Write a Comment

Leave a Reply



Related Articles

Pension spikes crumbling CA roads

From roads to bridges and well beyond, California’s neglected infrastructure won’t receive relief this election cycle. For years, the state

Snake Oil Legislators

APRIL 21, 2010 Nearly every person I talk to is either feeling the crush of the bad economy or knows

New CARB Scoping Plan claims fighting ‘climate change’ is a ‘great unifier’

Yesterday the California Air Resources Board released the first update of its Climate Change Scoping Plan. The original Scoping Plan