Outside Sources Influence Our Housing Demand

By Aldo Giacchino

POSTED: 11/11/17, 4:55 PM PST|

The community disquisition about housing that is currently underway has highlighted quite well the unavailability of low and moderate cost housing. The misguided solution that has been put forth is that if we build a lot of new housing, prices/rents will come down. The city bureaucracy has jumped on this bandwagon, enthusiastically promoting higher densities and the construction of thousands of units in six- to seven-story buildings. The city’s motivation, however, is stimulated mostly by the growing city deficit which is caused by somewhat static tax revenues while operating costs increase at a much faster pace. The single solution that council and staff are promoting is that the new housing will bring more net revenue. But this is a fallacy that requires some sober analysis.

Housing demand in Santa Cruz is generated, mostly, by outside sources such as students rotating through UCSC, young professionals from Silicon Valley seeking lower prices, and by second-home part-timers from a wide area. Much of this demand is bolstered by the city’s appeal as a small coastal town and the quest for relief from an overly dense and overly expensive Silicon Valley. These factors are of such magnitude that there is no amount of housing density and market-rate construction increase that will reduce demand or prices. With what is going on in the densification of Silicon Valley, the demand spillover into Santa Cruz will continue, no matter how much we build.
Another part of the overall demand is the local component of low and moderate income workers who are needed to provide services to us all. No amount of market-rate housing is going to help to these people: they need subsidized housing.

With such intense demand, the proposed “build baby, build” solution will be futile. It will not reduce housing costs and will adversely impact the livability rating of Santa Cruz. The transportation, circulation and mobility infrastructure, which is already grossly inadequate, will be severely over capacity. Developers will be the only beneficiaries of such policy. The rest of us will get more gridlock and continuing rises in home prices and rents.

The fact is that new housing does not generate enough municipal revenue to match the increased cost of extending services to the new housing. City expenditure growth is driven mostly by ever-rising employee costs (65 percent of all general fund expenditures), while growth in the primary revenue sources (real estate taxes and sales taxes) is severely restricted by Proposition 13 and by the switch to internet commerce.

For sure, new housing will increase tax revenue at first, as it comes on line, but the predominance of inelastic tax revenue sources cannot sustain the ever increasing municipal costs. There will be no net gain.

Different strategies are needed. Housing for low and moderate income workers requires local/state subsidies and must have a mandatory requirement that each new market-rate housing development include 30 percent-40 percent units for low and middle income workers. The city deficit problem requires expense reductions and also the increase of revenue sources to pay for the growing cost and quantity of city services.

Building more market-rate housing will only increase the severity of the city’s financial problems and, through increased congestion, will certainly bring about a steep decline in the livable qualities of the city. As the business saying goes, when a product produces continuing net losses, you cannot make it up in volume.

Aldo Giacchino is a Santa Cruz resident, a retired city planner, and a retired health care facilities planner and business manager.

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