Do Communities Adequately Plan for Housing?

Do Communities Adequately Plan for Housing? MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • MARCH 8, 2017 AN LAO REPORT 2 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT EXECUTIVE SUMMARY California’s cities and counties make most decisions about when, where, and to what extent housing will be built. For decades, many California communities—particularly coastal communities—have used this control to limit home building. As a result, too little housing has been built to accommodate all those who wish to live here. This lack of home building has driven a rapid rise in housing costs. Two important components of communities’ decisions about housing can limit home building. First, in crafting their long-term land use plans and implementing these plans through zoning, cities and counties can provide inadequate opportunities for new housing to be built. Second, cities and counties can create onerous processes for the approval of new housing developments. We discussed this latter issue last May in Considering Changes to Streamline Local Housing Approvals in which we looked at a proposal from the Governor to streamline approvals. We concurred with the Governor that state actions should be taken to limit local approval requirements faced by proposed housing developments that are consistent with local land use rules. And we suggested these changes apply to all types of housing development. In Considering Changes to Streamline Local Housing Approvals, we cautioned that efforts to streamline approvals could be undermined if local planning and zoning rules do not provide adequate opportunities for projects to take advantage of this streamlining. The state’s primary existing tool for combatting the problem of inadequate planning and zoning is housing element law. Housing element law requires cities and counties to develop a plan that demonstrates how their planning and zoning rules will accommodate future home building. In this report, we review the available evidence to gauge whether housing elements achieve their objective of ensuring that local communities accommodate needed home building. Our review suggests that housing elements fall well short of their goal. Communities’ zoning rules often are out of sync with the types of projects developers desire to build and households desire to live in. As a result, home building lags behind demand. There are no easy solutions to this problem. Although we offer a few changes the Legislature could consider, real improvement can come only with a major shift in how communities and their residents think about and value new housing. Such a change is unlikely to happen on its own. Convincing Californians that significantly more home building could substantially better the lives of future residents and future generations necessitates difficult conversations led by elected officials and other community leaders interested in those goals. Unless Californians are convinced of the benefits of significantly more home building—targeted at meeting housing demand at every income level—no state intervention is likely to make significant progress on addressing the state’s housing challenges. www.lao.ca.gov Legislative Analyst’s Office 3 AN LAO REPORT HOW LOCAL GOVERNMENTS PLAN FOR HOUSING California’s cities and counties make most and propose strategies to address those barriers. decisions about when, where, and to what extent State law generally requires cities and counties to housing will be built. Below, we describe the basics update their housing elements every eight years. of how local governments plan for new housing. The fourth housing element planning cycle, which began sometime between 2006 and 2008 for most General Plan Defines a cities and counties, recently ended. Most cities Community’s Long-Term Vision and counties now are a couple years into their fifth General Plan Charts Path of Future planning cycle. Development. Every city and county in California Regional Housing Needs Allocation Process is required to develop a general plan that outlines Defines Each Community’s Fair Share of Housing. the community’s vision of future development Each community’s fair share of housing is through a series of policy statements and goals. determined through a process known as Regional A community’s general plan lays the foundation Housing Needs Allocation (RHNA). The RHNA for all future land use decisions, as these decisions process has three main steps: must be consistent with the plan. General plans are • State Departments Develop Regional comprised of several elements that address various Housing Needs Estimates. To begin the land use topics. Seven elements are mandated process, the state department of Housing by state law: land use, circulation, housing, and Community Development (HCD) conservation, open-space, noise, and safety. The estimates the amount of new housing each land use element sets a community’s goals on the of the state’s regions would need to build to most fundamental planning issues—such as the accommodate projected household growth. distribution of uses throughout a community, as Household growth projections are based well as population and building densities—while on an analysis of demographic trends and other elements address more specific topics. population growth estimates from the Communities also may include elements addressing state Department of Finance. Each region’s other topics—such as economic development, housing needs are grouped into four public facilities, and parks—at their discretion. categories based on the anticipated income Housing Element Outlines How a Community levels of future households: very-low, low, Will Meet Its Housing Needs. Each community’s moderate, and above-moderate income. general plan must include a housing element, (Very-low income is defined as less than which outlines a long-term plan for meeting the 50 percent of an area’s median income, low community’s existing and projected housing income 50 percent to 80 percent, moderate needs. The housing element demonstrates how income 80 percent to 120 percent, and the community plans to accommodate its “fair above-moderate income more than share” of its regions housing needs. To do so, 120 percent.) each community establishes an inventory of sites designated for new housing that is sufficient to • Regional Councils of Government Allocate accommodate its fair share. Communities also Housing Within Each Region. Next, identify regulatory barriers to housing development regional councils of governments (regional 4 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT planning organizations governed by government’s permitting authority until its housing elected officials from the region’s cities and element is approved, although this may have limited counties) allocate a share of their region’s effect on communities less inclined to development. projected housing need to each city and Zoning Implements the General Plan county. Cities and counties receive separate housing targets for very-low, low, moderate, Zoning Is the Primary Tool for Implementing and above-moderate income households. the General Plan. Cities and counties enact Each council of government develops its zoning ordinances to turn the broad policy goals own methodology for allocating housing outlined in their general plans into property- amongst its cities and counties. State specific requirements. A community’s zoning law requires, however, that each region’s ordinance typically defines each property’s allocation methodology be consistent with allowable use and form. Use dictates the broad their Sustainable Community Strategy—a category of development that is permitted on state-mandated long-range regional the property—such as single-family residential, strategy to reduce regional greenhouse gas multifamily residential, or commercial. Form emissions through transportation and land dictates building height and bulk, the share of land use planning. covered by buildings, and the distance of buildings from neighboring properties and roads (known • Cities and Counties Incorporate Their as setback). Zoning ordinances also often place Allocations Into Their Housing Elements. additional restrictions on property owners—such Finally, cities and counties incorporate as minimum parking requirements—to mitigate their share of the regional allocation into a property’s potential effects on surrounding their housing element. Communities properties. typically do so by demonstrating how Zoning Determines the Type of Housing they plan to accommodate their projected Built. Rules about form effectively determine how housing needs in each income category. many housing units can be built on a particular Some Communities Do Not Comply With site (referred to as housing density). A site with Housing Element Requirements. State law requires one- or two-story height limits and large setbacks HCD to review each community’s housing typically can accommodate only single-family element for compliance with state requirements. homes. Conversely, a site with height limits In recent years, HCD has found that most (around over one hundred feet and limited setbacks can 80 percent) housing elements comply with state accommodate higher-density housing such as laws. A minority of communities, however, have multistory apartments. Rules such as minimum either adopted a noncompliant housing element or parking requirements also can shape housing failed to submit their housing element to HCD for densities. If a community requires abundant timely review. Communities without an approved on-site parking, a developer would have to dedicate housing element face limited ramifications. more land to parking lots, reducing the number of Noncompliant communities are ineligible for housing units that can be built. various housing-related state grant funds, which Zoning Key to Meeting Housing Needs. represent a very small share of local government Zoning rules determine the size of a community’s resources. Courts may also suspend a local housing stock by dictating how many sites housing www.lao.ca.gov Legislative Analyst’s Office 5 AN LAO REPORT can be built on and at what densities. Zoning if a city or county is to meet its community’s rules, therefore, must allow for new housing on a housing needs. sufficient number of sites and at sufficient densities PLANNING FOR NEW HOUSING OFTEN FALLS SHORT Housing element law asks cities and counties housing is built to accommodate all those who wish to ensure that their planning and zoning rules to live here. This shortage means that households adequately accommodate future housing needs. compete for limited housing, bidding up home This is an incredibly difficult task, made more prices and rents. Households unwilling or unable difficult by residents’ resistance to building more to pay these high costs are forced to live somewhere housing. As a result, communities’ zoning rules else. Households forced to live somewhere else often are out of sync with the types of projects do not show up in California’s past demographic developers desire to build and households desire trends and therefore are not reflected in RHNA to live in. This, in turn, often results in too little calculations. They nonetheless contribute to the housing being built to meet demand. state’s heightened competition for housing and resulting high housing costs. Failing to account Housing Element Headwinds for this unmet demand can cause projections of Forecasting Housing Needs Is Hard. A housing needs to fall short of actual demand for community’s future housing needs are almost housing. impossible to predict with precision. These Identifying Ideal Sites for Development Also needs depend on a multitude of factors, many of Is Difficult. It is also difficult for communities to which are largely outside of the state’s and local anticipate which particular sites will be profitable communities’ control—such as demographics, for developers to build on in the future. This is employer location decisions, broader economic because developers’ decisions about which sites trends, and happenstance. Because of this, to build on and when are based on a multitude of projections of future housing needs developed considerations, many of which are not apparent to through the RHNA process are imperfect at best. planners or rely on information available only to Beyond the inherent difficulty of forecasting, developers. These considerations also can change other factors can drive a wedge between RHNA significantly over time. In addition, decisions of projections and actual demand for housing. The landowners can significantly influence which sites most important of these factors is the reliance on are developed. In some cases, planners and builders projections of household growth as an indicator may agree that certain sites would be ideal for new of demand for housing. These projections are housing but landowners may be unwilling to sell based, in part, on extrapolations from past trends their land to home builders. As we discussed in in population growth, migration, and household Common Claims About Proposition 13, this may formation. Past demographics trends, however, fail be exacerbated by California’s property tax system to capture the full extent of demand for housing. which can encourage landowners to hold onto As we discussed in California’s High Housing vacant or underutilized properties longer than they Costs: Causes and Consequences, California has otherwise would. a significant housing shortage—that is, too little 6 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Community Resistance Complicates Already tasked with reviewing the housing elements of the Difficult Task. The difficulty of crafting planning state’s 58 counties and 482 cities. Many housing and zoning rules that accommodate future growth elements are lengthy and complex documents. is often compounded by resistance from residents. Some housing site inventories contain thousands Residents often push back against projections of properties—for example, the city of Los Angeles’ of future housing needs, question whether it is site inventory contains over 20,000 sites. To carry their community’s responsibility to accommodate out this task on a statewide basis, HCD receives just such growth, and attempt to block necessary under $1 million dollars annually to fund seven zoning changes. This resistance is understandable staff. In contrast, local planning departments— and perhaps inevitable. Many residents see new which are tasked with developing, implementing, housing—and the changes it will bring to their and enforcing general plans and zoning and community—as a threat to their well-being. At building codes—receive over $1 billion per year the same time, many who would benefit from in total funding from local sources. In addition new housing in a community do not live there to having far greater resources, local planning and therefore have little say in planning decisions. departments also have more insight into their local This imbalance results in many residents looking communities. Faced with these realities, HCD’s unfavorably upon new housing. reviews of housing elements often cannot extend Outdated Plans. Reflective, in part, of their beyond ensuring that communities have complied residents’ disfavor towards new housing, many with the law’s basic procedural requirements. communities seem to place a low priority on Perhaps most importantly, HCD lacks the capacity updating their planning and zoning standards to to thoroughly vet the thousands of potential accommodate future housing needs. As shown in housing sites identified in communities’ housing Figure 1, about half of cities and counties have not elements. completed a comprehensive update of two major elements Figure 1 of their general plans (land Many General Plans Are Becoming Dated use and circulation) in over Distribution of Cities and Counties by a decade. About one-fifth of Time Since Last Comprehensive Update cities and counties have gone Land Use Element longer than 20 years without 35% Circulation Element an update. 30 Practical Limitations 25 of HCD Oversight. Although HCD reviews 20 each community’s housing 15 element, resource constraints 10 and lack of knowledge of a locality’s particularities 5 limit what this review can achieve. Over the course of Less Than 5 Years 5 to 10 Years 10 to 20 Years 20 Years or Longer a few years, HCD staff are www.lao.ca.gov Legislative Analyst’s Office 7 AN LAO REPORT Evidence That Housing Element not identified for housing in a jurisdiction’s housing Process Falls Short of Goals element. Figure 2 shows our estimates of the share of all larger housing developments that were built Recent RHNA Projections Appear Misaligned on unplanned sites in select cities. (These numbers With Housing Demand. As we discussed in are rough estimates based on publicly available more detail in A Look at Recent Progress Toward information. Data quality and timing issues Statewide Housing Goals, comparing RHNA complicate this analysis. Readers should focus on goals to actual building in recent years suggests the general magnitude of the numbers and not the that RHNA goals did not fully capture demand precise estimates.) As the figure shows, failure of for housing in many communities. This is best housing elements to anticipate future development illustrated by looking at the San Francisco Bay patterns seems to be ubiquitous among the cities Area. During the 2014 through 2016 period Bay surveyed. Area communities (those in Alameda, Contra Pattern Appears to Have Continued in Costa, San Mateo, San Francisco, and Santa Clara) Fifth Cycle. To date, this pattern appears to have permitted roughly the amount of housing projected continued into the fifth planning cycle. Roughly to be needed via the RHNA process. Nonetheless, two-thirds of larger housing developments there remains significant evidence of unmet permitted in 2015 through 2016 in the cities of demand for housing. Typical rents exceed $2000, Los Angeles, San Francisco, and San Jose appear more than double the national average. Available to be on sites not identified in a housing element. rental housing also is difficult to find. As of 2015, vacancy rates (the share of Figure 2 all rental housing available Many Developments Not Foreseen by Housing Elements to new tenants) were around 2.5 percent, less than half the Share of All Projects With Five or More Homes Built on Sites Not Identified in Fourth Cycle Housing Element national average. Fourth Cycle Housing Palo Alto Elements Often Failed South San to Anticipate Future Francisco Development. Communities’ San Jose plans for accommodating housing growth during Sunnyvale the fourth planning cycle San Francisco also appear to have often Sacramento been out of sync with the home building that actually Santa Clara occurred. Our review of home Mountain View building in cities for which we could obtain data suggests San Mateo that the majority of larger Redwood City housing developments (those with five or more homes) were 20 40 60 80 100% constructed on sites that were 8 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT Further, we could not identify any recently however, these zoning changes likely do not occur. permitted developments in Sacramento that will be Because of this, zoning rules for overlooked sites built on the city’s housing element sites. Among the often can prohibit development—for example, the minority of projects permitted on housing elements property’s allowable uses may not include housing sites, many projects appear to have needed a change or its allowable housing density may be too low for to zoning rules despite being on a planned site as profitable development. Further, sites identified in a shown by Figure 3. In San Francisco, the typical housing element may be planned for lower housing project was permitted for more than three times densities than would be profitable for developers. the number of housing units planned for in the The data above suggests that these challenges are housing element. Similarly, the typical project in present for many projects. Los Angeles was permitted for more than twice the Need for Zoning Changes Raises Costs, number of units as planned. Discourages Home Building. A request for zoning changes can involve multiple administrative Drag on Home Building processes and public hearings and often takes Housing Element Shortfalls Can Limit several months or years to complete. One past Housing Production. Housing production lags survey of local building officials found that an when housing elements fail to anticipate the types average zoning change takes just under a year of housing developers will be interested in building to complete in California’s high demand coastal and households will be interested in living in. This is jurisdictions. Further, some changes may not because many projects will have a need for changes be approved at all or may be approved only if to planning and zoning rules which often require a lengthy Figure 3 approval process, if they are Many Projects Require approved at all. Upzoning From Housing Element Plan Sites Overlooked in Average Number of Homes in Projects Housing Element Likely Built on Housing Element Sites, 2015-2016 Need Zoning Changes to 100 Accommodate Housing. Planned 90 When a proposed project is Actual Construction inconsistent with planning 80 and zoning rules, a developer 70 must ask the city or county 60 to modify these rules. The 50 housing element process is 40 meant to forestall the need for these types of changes, as 30 communities are supposed 20 to make proactive zoning 10 changes to accommodate home building on designated Los Angeles San Francisco sites. If sites are overlooked, www.lao.ca.gov Legislative Analyst’s Office 9 AN LAO REPORT developers meet other conditions not outlined projects. A study of jurisdictions in the Bay Area in planning or zoning rules. These delays and found that each additional layer of review a typical uncertainties increase costs for home builders project must complete is associated with a 4 percent and discourage builders from pursuing certain increase in a jurisdiction’s home prices. HOW SHOULD THE STATE RESPOND? In the prior section, we discussed evidence that Increase Local Fiscal Incentives to Build suggests the state’s primary tool to ensure that local Housing. As we discussed in California’s High governments adequately plan for new housing—the Housing Costs: Causes and Consequences, cities and housing element process—falls short of its goal. counties face fiscal incentives that are adverse to new How should the state respond? There unfortunately housing. Few city and county revenue sources grow is not an easy answer to this question. Some proportionately with increases in population. This options are available that might bring about can lead to fears that accommodating new housing— limited improvement. Ultimately, however, major and therefore new people—will increase demands improvements will require a substantial shift in for public services faster than the funding available how communities and their residents think about to pay for those services. This can, in turn, amplify and value new housing. communities’ anxieties about allowing new housing. To counter this, the Legislature could look Options to Consider to allocate more funding to locals on the basis of Modify RHNA Projections. The process of population growth. To do so, the Legislature could developing RHNA projections could be improved to consider three options, each of which presents better account for unmet housing demand and give challenges: communities a more realistic idea of their housing • Modify Existing State Funding needs. One option could be to adjust the current Allocations. The Legislature could modify demographic-based projections to account for signs existing state funding allocations to cities of unmet housing demand, such as high rents or low and counties so that they are distributed vacancy rates. Our modeling of California’s housing based on population growth. Currently, markets in California’s High Housing Costs: Causes however, discretionary state allocations to and Consequences suggested that there is roughly a cities and counties are minor, representing one-to-one relationship between long-term housing a very small portion of city and county supply growth and long-term housing cost growth. funding. Consistent with this, one option could be to adjust upward RHNA goals for communities with high • Allocate New Funding Streams Based on rents by an amount proportionate to how much Population. The Legislature also could their rents exceed the statewide norm. For example, look to allocate any new funding streams a community whose rents are 25 percent above the to cities and counties based on population statewide average and whose current total RHNA growth. This option likely would be goal is 1,000 could instead be assigned a goal of limited by the need to pursue other policy 1,250. objectives. For example, a new funding stream aimed at paying for maintenance of 10 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT existing infrastructure may be less effective zoning outcomes. Nonetheless, it would avoid if allocated based on population growth, as compounding the challenges for the many housing maintenance needs and population growth projects already facing lengthy reviews to obtain may not be well aligned. zoning changes. . . . But Be Realistic About What Can Be • Alter Allocation of Local Taxes. The Achieved. At the same time, it is important to Legislature also could consider reallocating keep in mind that the effectiveness of state actions local government tax revenues— to streamline approvals likely would be limited particularly property or sales taxes—so without major improvements in planning and that these allocations better reflect zoning at the local level. Unless local planning and population growth. Such changes would zoning rules provide adequate opportunities for face several hurdles. The State Constitution housing development, few projects may be able to significantly limits the Legislature’s ability take advantage of a faster approvals process. to alter the allocation of local revenues. Also, past attempts to change the allocation Improvement Will Be Limited of local property taxes or sales taxes have Without a Shift in Views About Housing faced stiff resistance from local agencies While more dramatic changes to preempt concerned that such changes would local decisions could be considered, many local create winners and losers and disrupt the communities have fervently opposed, obstructed, financial health of some communities. One or even disregarded such changes in the past. Cities possible—albeit difficult—option could be and counties have long been vested with broad to allocate some or all of future growth in authority over planning decisions. This assignment local property and/or sales taxes within of authority to cities and counties reflects a deeply each county to the jurisdictions within the held desire of the state’s residents to control the county based on their population growth. environment of their communities and in many Making this change for property taxes cases to maintain the status quo. Any major would require a two-thirds vote from in changes in how communities plan for housing will the Legislature, while such a change for require their active participation and a shift in how sales taxes would require a voter-approved local residents view new housing. change to the state constitution. There is little indication, however, that such a Streamline Local Approvals . . . Last May—in shift is forthcoming. Convincing Californians that Considering Changes to Streamline Local Housing a large increase in home building—one that often Approvals, our office recommended that the would change the character of communities—could Legislature strongly consider a proposal from the substantially better the lives of future residents Governor to streamline local approvals for certain and future generations necessitates difficult housing. We also suggested going beyond the conversations led by elected officials and other Governor’s proposal by expanding it to include community leaders interested in those goals. Unless a broader category of housing development. We Californians are convinced of the benefits of more continue to recommend the Legislature look home building—targeted at meeting housing for ways to streamline local approvals. Doing demand at every income level—the ability of the so would not directly improve planning and state to alter local planning decisions is limited. www.lao.ca.gov Legislative Analyst’s Office 11 AN LAO REPORT LAO Publications This report was prepared by Brian Uhler and reviewed by Jason Sisney. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 12 Legislative Analyst’s Office www.lao.ca.gov