Luxury Housing Creates Affordable Housing: Another Free Market Myth

LOS ANGELES

PLATKIN ON PLANNING--It is a serious chore to keep up with the deceptive claims about Measure S. Today I heard that it would cause rents to increase because of supply and demand, while yesterday I heard just the opposite. Supposedly Measure S will block the construction of luxury housing (partially true), and it therefore reduces the amount of affordable housing because of supply and demand. (Graphic above: Caruso luxury development on Burton Way, Los Angeles.) 

Only one of these contradictory claims could possibly be true, even though as a city planner, I think they are both false.   This is why. Rents for luxury apartments, like Caruso Affiliated's at 8150 Burton Way and 333 S. LaCienega, are not connected to middle class and affordable housing markets. 

In response to Caruso's projects, charging average rents of $12,000 per month, nearby landlords are not going to move their rents either up or down. They will continue to impose the three percent annual rent increases allowed through LA’s Rent Stabilization Ordinance. And, because of vacancy decontrol, they will attempt to rent-out newly vacated units at slightly higher prices. Finally, when given the right combination of carrots and sticks, some landlords will sell out to the likes of the Wiseman Company

As the new owner, they will evict the tenants they inherited and then demolish the small apartment building they just bought. All of this takes place in a universe separate from the luxury apartments that sprout up down the street through City Council spot-zoning ordinances. 

Anyone, including opponents of Measure S, who truly wants to maintain affordable apartments and houses, needs to first stop the dislocation caused by urban infill, whether for luxury mega-projects, medium-rise apartment buildings, Small Lot Subdivisions, or McMansions. They then need to toughen up LA's Rent Stabilization Ordinance to eliminate automatic rent increases and vacancy decontrol. 

Beyond those defensive steps, if they want to increase the supply of affordable housing, they need to campaign for the restoration of all the slashed HUD public housing programs and the local Community Redevelopment Agency. 

“Law” of supply and demand: But what about the miraculous law of supply and demand that can simultaneously cause rents to increase and affordable housing units to appear from thin air? This assumed feature of capitalism actually plays little role in LA’s housing market for one obvious reason.   Supply and demand only works within capitalism's one true iron law, profit maximization. 

Maximizing profit is the purpose of all capitalist ventures and investment decisions. As a result, no one buys or sells things for long – including real estate -- when they are not making sufficient profit, regardless of surplus supply or unmet demand.   

If you look at housing in LA, there is a massive unmet demand for middle income and affordable housing, even when thousands of foreclosed properties sit empty. There are also vast piles of underperforming capital available for housing construction, as well as ample building sites for new market and affordable apartment buildings. How so? Because all commercially zoned property in Los Angeles can be used for by-right apartment houses.  While it is true that Proposition U limits the Floor Area Ratio (FAR) on some commercial lots, the subsequent Density Bonus Ordinance allows developers to dodge this restriction by including 10 or 20 percent affordable housing in their projects.

So given available capital, potential building sites, and enormous demand, why is there is so little construction of market and affordable housing in LA? As far as I know, no Los Angeles developers are choosing to meet this pent-up demand for affordable housing by building low-priced housing, even though it would immediately fill up or sell.  They can't make enough money at it, so they don't do it.  They need subsidies, and these subsidies have totally dried up through the elimination of Federal housing programs and the dissolution of the Community Redevelopment Agency.

Nevertheless, some anti-Measure S true believers maintain -- without a shred of evidence -- that the construction of luxury housing increases the supply of affordable housing. Through CityWatch I have repeatedly asked them where in Los Angeles one can find these new affordable units. So far no one has given me an addresses or told me about a neighborhood where this affordable housing can be found. If some reader knows its location, please speak up. 

Until I learn otherwise, my explanation is simple. There is no area in Los Angeles where new luxury housing causes the price of older housing to go down. Even when there is a glut of luxury housing, such as Downtown Los Angeles (DTLA), the price of non-luxury housing stays fixed or also slowly rises, as part of broad market trends.  At best, the landlords of the luxury housing repond to high vacancy rates with offers of free parking or a month of free rent. That is as far as they go, which is many thousands of dollars away from affordability.   

Filtering: The anti-S diehards also argue that new luxury housing eventually filters down to become affordable housing, although it takes 25 years.  I have therefore asked them where in Los Angeles one can find affordable housing that was built as luxury housing in 1992 or earlier.  If it actually exists, it is such a well-kept secret that even those who make these claims do not identify these hidden locations. They are as mum as could be, so if they know, they, too, need to finally speak up.

Domino Theory: Another new anti-Measure S supply and demand argument is a domino theory.  It argues that a new tenant of luxury housing frees up a lower priced unit, and this cascades through the entire housing market, creating affordable housing at the lowest ends.   

But, quite frankly this is just a quack theory contrived by the anti-S campaign.  There are no facts and studies whatsoever to back up this newly minted domino theory.  There is simply no evidence that the construction of luxury housing triggers a chain reaction that methodically generates low priced housing at another location.   

If this were the case, Hollywood should have lots of new affordable housing, but reality is just the opposite. Affordable housing, including rent-stabilized apartments, has largely disappeared in Hollywood. The supply of low priced units and the low-income people who lived in them have plummeted, alongside the construction of new luxury housing.   

Part of the reason is the demolition of affordable housing, about 20,000 units, since 2000, as well as broad increases in rents that have displaced the poor.  They have no choice but to double up, live in cars, live on the streets, live in garages and warehouses, or move to far-flung regions like Palmdale. 

It is time for Angelinos to get real and stop believing in the fairly tales dreamed up by the no on S campaign. The only housing bans in L.A. are the end of affordable housing programs funded by the Federal government and the CRA, as well as the profit-based business model of developers. The supposed law of supply and demand will never substitute for these programs, which is one more reason Angelinos should vote for Measure S.

 

(Dick Platkin is a former LA city planner who reports on local planning issues in Los Angeles for CityWatch LA. Please send your comments and corrections to rhplatkin@gmail.com.)

-cw

BLOG COMMENTS POWERED BY DISQUS