Removing perverse incentives in housing

On Thursday, October 27, 2022, staff presented City Council with  background information about why so little for-sale middle-income housing has been created in Boulder since 2016 despite the adoption of a goal that year to achieve 3,500 new middle income units by 2030. Council is determined to remove the current incentives to build large, expensive homes rather than smaller ones. 

One of the major disincentives they will have to consider is illustrated in the simple graphic below—a major design flaw in the current affordable housing regulations.

The problem is that the fee paid into the affordable housing fund for new residential construction is based on the number of units rather than the square footage of new construction.  I will illustrate the problem, and then explain.

The very definition of a perverse incentive: A new 6,000 sq. ft building pays a $47,297 fee if it is a single unit; but if that same 6,000 sq. ft. building contains four smaller 1,500 sq. ft. units, the City’s fee is $189,187 (4 X $47,297—a clear disincentive to building smaller, more affordable units.

Assume a vacant lot in Boulder on which the property owner can build up to 6,000 square feet of new construction. The owner can build one 6,000 sq. ft. house or four 1,500 sq. ft. houses. If the owner builds one large home, they will have to pay a fee of $47,297 into the affordable housing program. If they build four small homes, they will have to pay $189,187 into the affordable housing program. Incentives work. The owner builds one big house rather than four small ones, and saves $141,890 in fees to the City. You can play with these numbers yourself by using the city’s online calculator for Inclusionary Housing contributions.

That result is the opposite of what we want. It creates a perverse incentive to build the large home, saving the property owner money, but depriving three households of a smaller home in which to live. Council wants to change that, so that the fee is assessed based on square footage of buildout, rather than on the number of units created.

Council wants to reform the way that permanently affordable housing is funded so that there is still robust financial support, but contributed through regulations that do not incentivize large houses as illustrated above. 

Council also reviewed the City’s progress on the creation of middle income housing. Virtually no new for sale middle income units have been produced in the last five years. This is true despite the City’s 2016 adoption of a Middle Income Housing Strategy, which calls for creation of 3,500 middle income homes by 2030.

This goal was adopted in 2016. Little progress toward the goal has been made in the last six years.

Recognizing that existing regulations are not producing the housing people want and need, on Thursday Council unanimously called for prompt outreach and action to address the City’s critical housing shortage. They scheduled their next discussion of the topic at their next study session on November 10, 2022. The need is great, so it is important that housing advocates let Council know of their support for prompt action.

Some of the items to be discussed November 10, 2022 include reforming occupancy limits and ADU restrictions, permitting duplexes by right in certain zoning districts, eliminating parking requirements, and reducing delays and red tape for affordable and middle income housing projects. 

Some Council members spoke forcefully about the failure of current policies and regulations to address the magnitude of the crisis. Rachel Friend said that if duplexes  were permitted by right in residential zoning districts, it could make a large dent in the housing shortfall. Matt Benjamin advocated for changes to regulations that would lower the cost of building attainable housing. Tara Winer spoke of the importance of providing a variety of housing types at  different  income levels, while Mayor Brockett advocated for process changes that would reduce the cost of housing. 

Councilwoman Lauren Folkerts, an architect, led the discussion. She framed the housing goals before the meeting with a hotline post to her colleagues. She advocates changes that will create “higher numbers of both for rent and for sale affordable and middle-income housing units, while also ensuring that the [affordable housing] Program doesn’t create an incentive for larger market rate units,” referencing the perverse incentives illustrated above. A majority of Council appears to support a change.

Next steps will be taken at the Council Study Session November 10, but it sounds as though this Council is determined to take prompt, meaningful action to create additional housing. Don’t let them do this alone.  If you support these things, please communicate that to Council, and soon! Tell Council about your experience with housing in Boulder. November 10 is a study session, so public comment will not be accepted at the meeting.

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