If Metro & Lake Oswego want more affordable housing...

I was recently informed about a local couple who wants to create an accessory dwelling unit on their property for their visiting mothers-in-law.  The unit would be in a converted shop on the property.  When they applied for the building permit, they were told the SDCs (System Development Charges) for the remodel would be about $20,000 and that these municipal fees were on top of the remodeling costs.  The SDCs for a new house in Lake Oswego are about $30,000 and are equivalent to other area jurisdictions.  I was dumbfounded that the charges are so high, especially for simple guest quarters in an existing structure.  Clearly a granny-flat is out of reach for the average homeowner, yet it is being encouraged as a way to increase density in existing neighborhoods.

What is going on?  This article from Newgeography by Wendell Cox (11/01/10) explains how land and regulation costs have pushed the costs of housing up in cities where Urban Growth Boundaries (UGBs) have restricted the supply of land, and code restrictions, usually in the form of Smart Growth, have added thousands to the construction costs of new homes, and likewise increased the price of existing homes and rentals.  Unfortunately, Central Planners believe that affordable housing only comes in the form of subsidized housing, which itself makes housing less affordable.

* * * * *

NEW INDEX ESTIMATES NEW HOUSE COST IMPACT OF LAND REGULATION

The Land and Regulation Ratio

For decades, construction costs of tract house on the urban fringe in the United States have represented 80% or more of the advertised house price. The balance of 20% or less has been for land and regulation costs and will be referred to as the "land and regulation cost ratio." In metropolitan markets with less restrictive land use regulation, the historic 20% or less land price ratio remains in place. The Demographia Residential Land & Regulation Cost Index assumes a 20% expected land and regulation ratio.

In some metropolitan markets, however, house prices have increased far more rapidly than in the rest of the nation. The greater increase in house prices and escalation of land costs above the historic 20% land and regulation cost ratio has occurred in metropolitan markets burdened by more restrictive land use regulations. Urban growth boundaries, limits on the number of houses that can be built, large lot zoning and excessive development impact fees and the like are regulation strategies that increase the cost of land for building houses. These land cost increases are not the result of more rapidly rising construction costs or underlying market forces such as consumer demand.                                             

More restrictive land use land use regulation also creates obstacles to people buying houses, requiring them to devote more money to housing than necessary and increases their vulnerability to losses in the event of a financial downturn. This exposes mortgage lenders to increased risks of loan defaults. Finally, more restrictive land use regulation makes residential land development more dependent on politics, with the potential for greater influence through campaign contributions.

Economic research has associated rising residential land costs with more restrictive land use regulations. The table indicates some of the more important price increasing impacts of more restrictive land use regulation. 

More Restrictive Land Use Regulation: Factors that Can Drive House Prices Higher

1.. Increases underlying land costs

2.. Increases planning and development costs

3.. Raises financing costs

4.. Encourages more expensive houses.

5.. Increases construction costs

6.. Encourages concentration of market power and land banking

7.. Encourages land and housing speculation

Results

The overwhelming majority of new housing in the United States continues to be detached and is built near or on the urban fringe. For new detached homes, the Index is 1.0 in six metropolitan markets (Atlanta, Dallas-Fort Worth, Houston, Indianapolis, Raleigh-Durham and St. Louis). This indicates that land use regulation is less restrictive and does not add more than normal to the price of new homes.

In the other five metropolitan markets, the land and regulation cost ratio has risen above 20%, resulting in a higher Index. The Index is 2.4 in Minneapolis-St. Paul, 3.9 in Seattle, 4.5 in Portland, 5.7 in Washington-Baltimore and 13.2 in San Diego. It is estimated that more restrictive land use regulation raises the price of the least expensive detached houses from nearly $30,000 (in Minneapolis-St. Paul) to more than $220,000 (in San Diego) than would be expected if these metropolitan markets had retained less restrictive land use regulation.