California is in the throes of a few crises: it leads the nation for homelessness, it boasts the highest rate of poverty in the country, and housing is both expensive and scarce. Lawmakers say – in fact, they insist – that more housing is the solution to the housing crisis. But is it?
Increasing housing supply is a chief priority of Gov. Gavin Newsom, who, while running for office in 2017 pledged to add 3.5 million housing units by 2025. While that goal is yet to be reached, he has invested billions in pro-housing grants and programs.
Last year, San Diego County added 9,642 new housing units, down from 10,163 in 2021, according to data from the Construction Industry Board. Most of those units were multifamily dwellings, and most were built within the City of San Diego. Coronado built 54 new units.
California’s official housing goal is 180,000 new units per year, and the state’s Department of Housing and Community Development sets regional quotas compelling cities to zone for additional housing.
But few of these units are actually built, and cities across California are suing the HCD over its Regional Housing Needs Allocation (RHNA) numbers. In response, the HCD has threatened litigation against cities out of compliance – including Coronado, which is slated to zone for 912 additional units.
Meanwhile, San Diego’s soaring rent prices are projected to increase by $250 by 2023, according to a University of Southern California Casden economics forecast. The City of San Diego’s current 2.5% vacancy rate for rentals is projected to increase to 3.4% in that same time. A healthy vacancy rate falls between 7 and 8 percent, according to Bloomberg.
Supply and demand would suggest, therefore, that adding more housing units would curb housing costs and correct the supply imbalance, and that has been California’s goal for decades.
But with the HCD in its sixth decade of its Regional Housing Needs Allocation with no end to the housing crisis in sight, some critics are considering alternate solutions.
Taxes on Vacancies
Skyrocketing rent isn’t a problem singular to San Diego County, and some cities have begun taxing vacant properties to dissuade owners against letting homes sit empty.
The United States has a home vacancy rate of 11.6 percent, according to the U.S. Census Bureau, with San Diego County’s overall vacancy rate at 7 percent.
Though San Diego County’s vacancy rate is low, Coronado has the highest vacancy rate in the county, with 23% of its units empty. About three-quarters of Coronado’s empty homes are used as temporary, recreational properties: second homes. If supply is an issue, enticing those units into the rental market could curb prices, supporters say.
Vancouver introduced an empty homes tax in 2017, and since then, empty homes have decreased by 36%, according to city data. Last year, the tax generated $67 million CAD ($48.9 million USD), which was put toward affordable housing initiatives. During that time, rent increased by 20 percent, to land at an average $2,187 USD for a two-bedroom unit in March 2023.
In San Diego during the same period, the average rent for a 2-bedroom unit increased from just over $2,000 per month to just over $3,000 this month — a 50 percent increase.
Vancouver still lacks requisite affordable housing. Latest census data shows that nearly 40 percent of renters in Vancouver are spending more than the recommended 30 percent of pre-tax income on housing. But in San Diego, 54 percent of renters are putting more than 30 percent of their pre-tax income toward housing, and a staggering 28 percent are putting more than half their incomes toward housing.
Vacancy taxes are taking hold in California: San Francisco and Berkeley last year both passed them in efforts to coax down rental prices. San Francisco’s tax is projected to generate a $15.4 million annual revenue by 2026.
Rent control
If rent is increasing so much that people are spending the majority of their income on it, some say, the government should intervene. In fact, California’s already has, and restricts annual rent increases to 5 percent plus inflation, with a 10 percent maximum.
Sen. MarÃa Elena Durazo, (D-Los Angeles) introduced in February a new bill that would hold that maximum at 5 percent annually. It also would impose stricter eviction rules. Other bills introduced this year would limit security deposits or offer tenants the first right to purchase their residences from landlords wishing to sell.
Most economists agree that rent control is a bandage and not a solution to skyrocketing rent, because it does not address the root cause of high housing costs. The traditional thinking is that holding the price of rent down dissuades developers from supplying more housing — thus furthering the housing shortage and holding rent high.
However, these arguments are rooted more in economic theory of supply and demand than practice: There is little empirical research on rent control and its impacts.
A 2012 study found that, after lifting rent control measures in Cambridge, Mass., rent increased, and so did nearby property values, implying that holding prices artificially low did impact housing costs. However, the study showed that rent control also created negative externalities on neighborhoods, lowering their desirability and livability.
Restrictions on vacation rentals
Coronado restricts short-term rentals, and does not allow any properties rented for fewer than 26 consecutive nights (with a few exceptions). The city has sued property owners in the past for violating its short-term rental ordinances.
But a search on AirBnb yielded several apartments for rent on the island for just a weekend. AirDNA, a market analysis tool, estimates that Coronado has 263 active vacation rentals, whose average price per night tops out at $464 in July, earning an average monthly revenue of just under $5,000. These properties boast an 83 percent occupancy rate.
To enforce its short-term rental ordinances, the city contracts with Host Compliance, a third party service that monitors activity in Coronado. Any violating properties are sent notices of violation with the chance to comply before incurring fines, civil penalties, and associated legal fees, city officials said.
Across the bridge, San Diego requires a license for vacation rentals, and the number of licenses is capped at 1 percent of the city’s total housing units. If more applications than licenses available are received, the city holds a lottery, but last year, it received applications for fewer than half of its maximum 5,416 licenses allowed, so no lottery was held.
AirDNA lists just under 10,000 active rentals in San Diego, implying that not all vacation rentals in the city are licensed.
Critics of the short-term rental market say properties used this way reduce inventory for residents, drive up rents, and reduce occupancy taxes cities collect from hotels. Restricting them, or ending them altogether, would put more rental properties into the market for residents.
But some argue that most vacation rentals were never going to be affordable housing anyway, as they cluster in vacation hubs such as Coronado.
Freer markets
As state and local governments grapple with California’s affordability crisis, some say the government’s role is what got the market here in the first place.
In 1970, for example, the state passed the California Environmental Quality Act (CEQA) in effort to protect the environment during development. But instead, it is “the biggest regulatory impediment to new housing,” according to a brief by California Ideas in Action.
The law pushes impact fees for construction well above those of other states, mandates costly environmental review projects, and “results in fewer housing units being built than the initial proposal or add(s) costly delays to projects due to legal challenges,” according to a report from the Southern California Association of Governments.
Critics also say that passing affordable housing mandates decrease development by pushing developers to build at below market value.
“The net effect isn’t more affordable housing for all,” wrote Gary M. Galles, an economics professor at Pepperdine University and research fellow at the Independent Institute, in a 2016 editorial. “Rather it is a reduction in the construction of new homes, which pushes prices upward.”
An ongoing problem
As development experts argue over how best to address housing in San Diego County and beyond, some construction moves forward. Although its current housing cycle won’t end until 2029, the HCD is planning ahead for its next Regional Housing Needs Allocation.
Part of that plan includes public input, and residents can take a housing needs survey and learn more about future plans for California housing cycles on the HCD’s website.
