California Cities Have Room to Grow—Faster.

There are two policy questions at the heart of California’s housing crisis: how much new housing do the state’s affluent cities permit to be built, and how does the process of permitting them affect outcomes? So far, it has been difficult to disentangle issues of zoned capacity from permitting processes, but the indefatigable UCLA trio of Paavo Monkkonen, Michael Lens, and Michael Manville are on the case. In a hot new Terner Center joint, the professors analyze housing regulations and zoned capacity in cities’ Housing Elements from their general plans to understand just how regulatory stringency suppresses homebuilding amid high demand.

Key takeaways:

  1. Regardless of regulations, cities with lower rents build less housing because there is less demand. However, cities with relatively fewer jobs did permit more housing overall due to higher zoned capacity. Therefore, the state should enable more homebuilding in high-demand areas with higher rents by upzoning them.
  2. Process and zoned capacity are inextricably linked. More process alone does not reduce homebuilding; it’s a function of allowable density, too.
  3. Zoning is incredibly impactful on housing production, particularly for multifamily housing.

Higher prices mean rising demand. But people need places to live, and an inability to pay should not prevent someone from fulfilling their need for shelter in places of rapidly growing opportunity. So what’s the problem? Everyone agrees we need more housing, but increasingly, California cities have decided that the housing should go somewhere else. They are simply “built out.”

“In 1960, the zoned capacity of the city of Los Angeles was roughly 10 million people. By 1990, it had fallen to roughly four million, where it stays today…Yet Los Angeles did not add mountains or water between 1960 and 1990. Nor did it lose land area. Nor did the field of structural engineering revisit its foundations, and determine that buildings simply could not be as tall as once was thought. What changed was residents’ attitudes toward development, and the city’s regulations, in different ways, came to reflect these attitudes.”

 Monkkonen, Lens, and Manville (2020) seek to explain how being “built out” is a political choice local governments make by arbitrarily limiting residential densities through their zoning codes. However, there are some confounding variables that need to be addressed. Namely, zoning sets limits, as developers and policymakers alike well know, merely complying with these limits is not enough for projects to receive approvals. Places with lower demand and lower prices, moreover, by definition face less scrutiny over their land-use regulations. So how do the authors solve this puzzle?

First, the authors worked with a new dataset of survey responses on local land use regulations, the Terner California Residential Land Use Survey, with information from 252 cities throughout the state, to parse zoning capacity and permitting. Second, they measured zoned capacity in 458 Housing Elements, the only aspect of cities’ general plans that require state agency approval. With rising rents as a proxy for a higher potential return on investment due to higher demand, the authors could compare cities’ political will to allow homebuilding relative to where current and prospective Californians want to live.

When measured against residential permits between 2013-2017 as the dependent variable, the results should not be surprising. More expensive cities are relatively less dense, and allow for less additional density than the average California city. The cities with more zoned capacity tend to be further away from jobs. “The expensive cities have a median population density per mile of 2,940, compared to the overall median in the state of 3,570,” the authors note. This further reinforces the thesis that “built-out” is a political choice.

 The strongest correlation among all variables remains between new permitted homes and zoned capacity. This is the case even though more expensive cities tended to permit more overall, due to higher demand, because “a one standard deviation increase in prohibitions is associated with a roughly 10 percent decrease in housing units permitted.” Upzoning provides the most bang for its buck, since one standard deviation increase in zoned capacity resulted in 30 percent more permits. Multifamily accounts for most of the increase in permits, while one standard deviation increase in prohibitions reduced multifamily permits by 17 percent.

Although the correlation between an onerous permitting process and residential permits appears to be positive, the authors note that this is an inherently difficult variable to measure. Notably, when surveying city planners to estimate the difficulty of local permitting processes, planners may report more onerous regulations simply because they are more salient in cities with more permitting overall. Conversely, more development may spur policymakers to create more regulatory hurdles in the permitting process, zoned capacity notwithstanding.

 Nevertheless, permitting density is key to providing more housing in affluent, high-demand cities. As the trio says: “Zoned capacity packs a lot more punch when demand is higher—for all permits and for multifamily permits.”

 

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