A California Chamber of Commerce-opposed job killer that increases the cost and reduces the supply of housing by authorizing local governments to make inclusionary housing a condition of development, will be heard in an Assembly policy committee today.

AB 2502 (Mullin; D-South San Francisco/Chiu; D-San Francisco) is a job killer because the legislation imposes a costly and inflexible price-controlled inclusionary housing requirement and, in doing so, legislatively repeals an established court decision upholding developers’ ability to set initial rental rates for new dwelling units.

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Exacerbates Housing Affordability

This bill will further exacerbate the already problematic housing affordability crisis in California by expressly authorizing local governments to condition all housing developments on the “provision” of affordable housing.

Even more problematic, AB 2502 would allow such provisions to prohibit developers’ ability to set initial rental rates for new dwelling units, thus legislatively repealing a well-established court decision in Palmer/Sixth Street Properties, L.P. v. City of Los Angeles (Palmer).

Palmer is an extremely narrow decision which held that the Costa-Hawkins Rental Housing Act precluded the City of Los Angeles from enforcing its inclusionary housing ordinance against newly built rental units.

Importantly, the very policy AB 2502 seeks to promote was criticized by the Legislative Analyst’s Office in a February 9, 2016 study entitled “Perspectives on Helping Low-Income Californians Afford Housing.” According to the LAO, “[m]any housing programs—vouchers, rent control, and inclusionary housing—attempt to make housing more affordable without increasing the overall supply of housing. This approach does very little to address the underlying cause of California’s high housing costs: a huge housing shortage.” (LAO Report, at p. 5.)

The report went on to state that, without policies promoting additional supply, the housing affordability crisis will continue to worsen.

The state is facing a significant crisis in both housing affordability and supply. The two are inextricably linked. During the Great Recession unemployment in the housing construction industry reached as high as 90% in 2009. Although it is increasing production to help address the current crisis, the industry still is very fragile.

New Regulatory Costs

The Department of Housing and Community Development estimates that the state needs 200,000 housing units per year in order to keep pace with need. Currently, the industry is producing approximately half that amount. Bills like AB 2502 that impose significant new regulatory costs on housing construction make a full recovery just that much more difficult, exacerbate the housing crisis, and threaten to stifle construction, which will have a deleterious effect on the state economy in whole.

What’s more, given that California’s housing inventory is already low and prices have been on the rise, unless the state allows homebuilders to keep supply on pace with demand, this forced mandate and misguided subsidy program could trigger another artificial housing bubble.

Inclusionary housing artificially restricts California’s housing supply so it can’t keep pace with demand. Studies have demonstrated that a 10% inclusionary requirement increases the cost to produce new housing by 7%–10%. Too often, inclusionary housing becomes exclusionary as these mandates drive up the price of market rate homes, effectively forcing middle class families out of the housing market, and even forcing some to relocate out of state.

An economic study by Dr. Benjamin Powell, Ph.D and Dr. Edward Stringham of San Jose State University found inclusionary zoning to be an ineffective public policy response to high housing prices. Among other things, the study reveals that inclusionary zoning is a poor affordable housing producer; imposes huge costs on middle-income homebuyers; and robs lower-income homebuyers of equity.

Encourage Local Flexibility Instead

In order to address the affordable housing and larger housing dilemma, the state needs to encourage more local flexibility instead of a one-size-fits-all solution as suggested by AB 2502.

Better examples of successful affordable housing policies involve flexible, negotiated incentive-based trade-offs that make it financially feasible to provide the increased density and/or units or alternatively to dedicate land or pay in-lieu fees. AB 2502 contains no such incentive-based requirements.

Action Needed

AB 2502 will be considered in the Assembly Housing and Community Development Committee on April 27. The CalChamber is asking members to contact their Assembly representatives and urge them to oppose AB 2502.