When it comes to the California housing crisis, policymakers have often taken the narrow approach of spending money on efforts to boost the supply of below-market rate units, with relatively little focus. on the dynamics that fuel the demand for low-rental housing.
According to the California Budget and Policy Center, more than one in five Californians face “heavy housing costs”. In other words, their income is too low to be able to afford market rents.
More than half of the annual production of low-income housing in California is fueled by $ 3.5 billion in tax subsidies called Low-Income Housing Tax Credits (LIHTC).
By Department of Housing and Urban Development standards, among those most likely to face this predicament are 370,000 construction worker households in California – the very people we depend on to come out of this crisis.
Recent data from the Bay Area shows housing charges for carpenters and construction workers are similar to janitors and generally worse than for workers in distribution centers.
A closer look at the state’s housing policy helps explain why.
More than half of the annual production of low-income housing in California is fueled by $ 3.5 billion in tax subsidies called Low-Income Housing Tax Credits (LIHTC). LIHTCs are paid to high net worth investors in exchange for financing home construction at below market rates. The governor’s last three budgets increase LIHTC by $ 500 million.
however, Studies show that LIHTC investors receive up to $ 26,000 more in credit per unit than the state ever recovers in project finance. It also shows that investors, bankers, developers and construction business owners keep an average of 35% of every dollar of the LIHTC-funded project budget for themselves – while construction blue-collar workers burdened with disproportionately they employ only get 14%.
Unlike other types of publicly funded construction, LIHTC projects are not required to pay the prevailing wages to their workers. This is the minimum wage based on the local market for different types of skilled construction work.
Most of the peer-reviewed research has concluded that project costs are not affected by the current salary because labor represents such a small part of project budgets,
So when LIHTC-funded projects are allowed to overturn that standard, it virtually ensures that California’s go-to policy tool for creating housing at below-market rates creates even more workers who need it.
A balanced housing policy cannot be limited to supply. To avoid an endless repeating cycle, it has to deal with factors that are driving demand.
Requiring Caliornia’s LIHTC-funded affordable housing projects to pay the going wage would help do just that.
Over the years, armies of academics have examined how current wage laws affect overall construction costs and the livelihoods of construction workers.
Most of the peer-reviewed research has concluded that project costs are not affected by going wages, as labor is such a small share of project budgets, and higher wages tend to be offset by better safety outcomes and other expense savings – including reducing the number of construction workers living in poverty and dependent on other forms of public support, such as housing subsidies.
Tying the current salary requirements to the receipt of LIHTC credits would not mean less or more expensive construction. Instead, it would ensure that as we strive to expand our supply of affordable housing, we also don’t create even more demand as part of the market.
It’s the same reason why our national response to COVID-19 is not limited to building more ICU beds. We employ a range of preventative measures: we wear masks, wash our hands and take vaccines to reduce the demand for hospital care in the first place.
When it comes to the California housing crisis, we should use a similar approach. It is not a choice between building more units or reducing poverty which leads to housing insecurity. If we hold LIHTC projects to the same standards as other types of publicly funded construction, we can do both.
Editor’s Note: Scott Littlehale is a research collaborator for Smart Cities Prevail, a non-partisan construction research and education organization based in California. Click here to read his latest report on the LIHTC program and the housing crisis.