Public Comment

Three little scams: manipulating the housing crisis

Steve Martinot
Friday June 17, 2016 - 03:53:00 PM

During the recent election, a measure was passed in San Francisco that requires greater "inclusion" of "affordable" units in all new housing developments. This is something that many have been working toward in Berkeley as well. In the San Francisco measure, all projects of 25 units or more must include 25% affordable units for low income families (i.e., one affordable for every three market rate units). In Berkeley, the comparable measure, passed this past April, only required that a sixth should be affordable (for every five market rate units, one affordable unit would be included). It is important to bear in mind the inherent incommensurability in such plans.

“Affordable housing” stands on different economic grounds than “market rate housing.” The term "affordable" signifies that rent is pegged to the tenant’s income. According to HUD’s definition (as a federal standard), housing is considered "affordable" if its cost (rent or mortgage) does not exceed 30% of the resident’s (tenant’s) income. In contradistinction, "market rate" refers to housing rental that is unregulated, charging “what the traffic will bear.” As will be explained below, it is the inability to regulate “market rate” housing that is responsible for the current housing crisis. We must be clear on this.  

The crisis is not one of supply and demand. The imbalance of supply and demand is one of the problems. The actual crisis consists of hundreds of families being driven out of their homes by artificial rent increases, and those rent increases are driven in turn by the plan to build massive market rate housing developments. Ironically, both San Francisco and Berkeley developed their respective "inclusionary" measures in order to resolve the housing crisis. They will, however, only make the crisis worse because of what such "inclusionary plans" ignore. First, they ignore the distinct class bias contained in each proposition. Second, it is a bias that is unavoidable as long as housing development is linked to corporate financing. And third, there is the fact that all corporate developers have the same ability to avoid fulfilling their “affordable housing” requirement (a legal escape hatch). Ultimately, it is the class bias inherent in these plans that serves to mask the fact that “market rate” housing is the source of the crisis itself. 

The class composition of inclusionary housing 

"Inclusionary housing” means that each building, while fundamentally composed of “market rate” units, will also have a modicum of units to be rented as affordable, that is, in relation to the tenant’s income. Yet this is an inversion of the situation into which it is injected. The vast majority of those requiring housing nowadays are low income. And that is precisely because their ranks are swelling rapidly owing to their displacement and dislocation by landlords who raise the rent beyond what the tenants can pay. Many actually suffer harassment, pushing them to move out. Once on the street, very few find housing they can afford. In contradistinction, high income people have no problem finding housing these days. Some move into those units from which low income tenants were “economically evicted.” As this process progresses, rents in general reach a level which only high income families can afford. To call this an imbalance of supply and demand is to miss the point. 

But let"s look at the demographics. In Berkeley, two-thirds of all residents are renters. The vast majority of them are “low-income” (according to HUD’s definitions). How do we know? The statistics tell us. HUD categorizes income levels according to their relation with an Area Median Income (AMI), calculated on the basis of counties. The "median" (of income) is that number which divides a population in half – half earning less and half earning more. “Low income” is defined as those earning less than 80% of AMI (with further division into very low, and extremely low categories). In Alameda County, the AMI is $92,000 a year. 80% of $92K is $73,600 a year. Those families earning less than $73,600 are eligible for low income affordable housing, paying 30% of income for rent (roughly $1800 a month). 

But the median income for the city of Berkeley itself is less than $64,000 a year. That is, the cutoff point for low income in the county area is higher than the median income for Berkeley. That means that more than half of all the residents in Berkeley would be characterized as “low income” by HUD. More than half!! Evidently, those with higher incomes in the area live in the county’s suburbs. There’s part of your class distinction. If housing is to reflect the needs of the people, and two-thirds of Berkeley’s residents are renters, the vast majority of which are “low-income,” then the majority of housing units should be "affordable" (pegged to income) and not "market rate." As a ballpark figure for Berkeley, the ratio of affordable housing to market rate in new housing development should be at least 2 to 1. 

The Berkeley city council proposition only requires one affordable unit for every five market rate units (available now only for high income people). That means it is off by a factor of 10. 

While low income renters are being forced from their homes by greed and economic eviction, and need protection from this greed, the city grants permits for housing for the wealthy. That amounts to a serious class bias; the wealthy minority get care and attention, and the low income majority get booted out of town. 

That is the first scam. 

We cannot neglect the racialized dimension of all this. Job discrimination has historically kept black and brown people in lower paying jobs, and living in low rent housing. And they are bearing the brunt of this crisis as a result. Where people of color were once 25% of Berkeley’s population, they are now down to 8%. The housing crisis is not just a class problem, it is also an example of institutional racism. 

Why does market rate housing create a crisis?  

Let us begin by re-emphasizing that the housing crisis is not one of supply and demand, but a result of the economic dislocation of real people. Hundreds of families face “being migrated” out of town. And the inception of this social travesty lies in the original plan to build thousands of new housing units in huge apartment buildings charging unregulated (market rate) rents (called “Plan Bay Area”). The fact that the developers are corporations, and that they have available to them the ability to pay a "mitigation" fee rather than include "affordable" units (their escape hatch) are a real part of the problem. 

The announced purpose of the Plan was to bring people in from the suburbs, to alleviate commuter traffic. These would be higher income people, who could be charged higher rent. In preparation for this planned influx, landlords started forcing low income people out of their homes in order to opportune on the coming bonanza. The second thing the Plan did was attract speculators whose operations started driving up real estate values. As rents began their upward climb, those ejected from their homes by this process found it increasingly difficult to remain in in the city. The wealthy do not face that problem. Two bedroom apartments today go for $2800 a month. That would be 30% of income for a family earning $110,000 a year. Some such apartments are now renting for $3300 a month. A family earning $130,000 a year could handle it. In Berkeley, that would be twice the city’s median income. 

Thus, even before the first major developments were started (4th and U, the Avalon, 5th St and University, with others on deck – 1500 San Pablo, 2100 San Pablo, 2902 Adeline, the Kennedy building over the CIT site between Telegraph and Regent, and the SW corner of Blake and Telegraph), rent levels rose. It wasn’t supply and demand that drove them, but the promise of a change in the class composition of the city. And it insured that the new apartments would be very expensive, not because of supply and demand, but because of a thing called “market rate.” 

Still, there are those who chant college economics rhetoric, claiming that just building more housing will resolve the crisis. Maybe in the sweet bye and bye – but by then, entire classes of people who will have been driven out of town, to become commuters on still crowded expressways. 

What’s the hangup? 

Neighborhood movements, of course, have formed that are calling on the city to impose a moratorium on rent increases until enough affordable housing (pegged to income rather than an artificial market) can be built to meet the low income demand. The city begs off, saying that would violate the Costa-Hawkins Act, which prohibits cities from passing any kind of rent control law. 

The other hangup is that corporate developers don’t want to build affordable housing. It has to do with the fact that they depend on bank financing of their operations. If a developer runs into financial problems, the project (whether finished or not) will have to be recapitalized to clear the developer’s debt. That means selling it to someone who can absorb the debt. Because affordable housing units are income-linked rather than market oriented, they create financial uncertainties that make recapitalization more difficult. Thus, original financing is harder to come by. 

In addition, the banks insist that buildings be above a certain minimum size. They do so in order for it to provide earnings greater than the bank could have gained through securities speculation. As a result, developers have been known to insist (often unreasonably) that only a large project will be considered (e.g. a building of seven stories rather than five stories). 

Because the banks are finicky about financing inclusionary housing projects, they prefer to finance mitigation fees, which reduces financial risk. The city assists them in this by giving discounts on mitigation fees. Instead of charging $34,000 per affordable unit not built, it reduces this to $30,000 for those who pay up front. 

That is the second scam the city is running. It pretends to be for the people in advancing housing development, but it is only supporting the development corporations and the banks. 

The third scam  

Inclusionary proposals swill not stem the crisis, because it is a crisis of dislocation, which market rate housing will not alleviate. Yet both the city council and the media pretend, in the midst of this crisis, that only market rate housing counts, and that affordable housing is a secondary concern. We see this in the language they use. Affordable housing is called Below Market Rate housing ("BMR" housing). That hides its categorical difference from market rate housing, and disguises the fact that the market is the source of the crisis. 

That is the third scam. To prioritize the market in this way makes it seem like it is the only norm, with affordable housing being some special case. But if housing is a human right, and the majority of the people clamor for affordability, then the market norm is anti-democratic and dictatorial – a process of deporting people out of town – and should itself be demoted to “special status.” 

What do we really have to do to resolve this crisis? 

Three scams are being perpetrated on us by the city council and its business associates. The first, the claim that inclusionary housing will alleviate the crisis, signifies that council has heard the neighborhoods’ demand for protection against dislocation and is undermining that protection. The second is the inversion of the class relation, helping the wealthy while leaving low income families to suffer their exile. The third is that affordable housing is just another form of market rate housing. 

Though the Costa-Hawkins bill prevents the city from acting proactively toward this problem which threatens the life of its neighborhoods, it could not prevent the city from declaring a state of emergency (as it has with respect to the homeless and the issue of shelter against inclement weather). The fact that hundreds of families will be driven out of town by economic eviction – families that are the constituency of the city council – would amount to a horrendous emergency. Like an epidemic of ebola or anthrax, it would require extreme measures. The city could declare an emergency, and under its umbrella, impose a moratorium on rent increases until sufficient affordable housing has been built.  

But that would only be stop gap measure. What the city of Berkeley really has to do, and has not taken any steps toward, is to initiate a state-wide movement to repeal Costa-Hawkins. 

After all, two-thirds of the residents of Berkeley are renters. What that law says is that the renters of Berkeley have no democratic avenues by which to protect themselves against forced economic eviction, landlord greed, corporate imposition, or city council corruption. Their ability to do so has been fettered by anti-democratic laws at the state level. 

But that isn’t the only measure the state has imposed on cities that is patently anti-democratic. There is also the density bonus law which gives landlords the ability to violate neighborhood zoning regulations. That law removes zoning codes from the domain of democratic policy-making. And now, to top it off, the state budget includes a measure that gives developers carte blanche to build whatever they want without going through city design review, environmental impact studies, or zoning oversight, if they follow certain minimal rules. It is called a “by-right” permitting process, and is designed to "streamline" the development process. 

All three of these laws are designed to curtail or obstruct the ability of the people of cities to democratically resolve the problems that they face. They all should be repealed – in the interest of justice and democracy.