How To Create Affordable Housing

If you read my screed on tax breaks here, you can guess my position on the 421a program, which exempts new condos and apartment buildings from property taxes for years and years. Get rid of it.

The developer captures that benefit from the apartment buyer by charging more, or from the renter by renting for the same amount and pocketing the savings. The development site owner then captures it from the developer, by also charging more, leaving housing no more affordable, development no more profitable, and new housing no more likely. If the tax breaks are exchanged for new units dedicated to a few people earning $35,000 or less, then the taxes are instead collected from others equally less well off, or diverted from services such as schools.

The only case in which the break helps is if, without them, housing development costs plus housing operating costs exceed rents or sales prices, making new units infeasible, even with a development site cost of zero. In that case the break, by reducing operating costs, may allow housing to be built without subsidy where it would otherwise be financially infeasible. That was our problem when the program was enacted. That is not the problem today, when people are being burned out of Crown Heights to create development sites, to be sold to developers for big profits.

There is, however, a way the tax break could be used to create lots of affordable housing. Extend it for one year, allowing buildings with complete foundations to vest if they complete within two years subsequent. And THEN end it.

Developers who bought development sites at prices that could only be recovered with the break would rush to build, along with some others. A huge wave of new units, even huger than that already in the pipeline, would come on the market -- perhaps in a recession. Supply would exceed demand, and rents and sales prices would drop. Investors would lose, but you pay your money and take your chances. That's how Texas is so affordable.

It has worked here too. Developers rushed to build condos and coops in Manhattan ahead of the creation of the original 421a exclusion area there in 1985, leading to a glut that exacerbated a price collapse at the end of the decade. In the early 1960s, a "grace period" was enacted allowing developers a few years to build under the more liberal pre-1961 zoning. The resulting surge in building across the city was not even approached until the past few years. The subsequent bust wiped out much of the city's development industry.

I can almost feel the consternation of my old boss in the economics division at City Planning at the thought of creating a regulatory-induced glut, amplifying the inventory cycle. But hey, Eric, there is a lot of stupid money out there. Shouldn't we get some to subsidize our housing, rather than using tax dollars? And after all, isn't housing cheap in Texas?