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What Is Different About Legal Liability In Proposition F?

Last month, an essay from occasional host and Eventbrite marketing director Eric Meyerson, who is writing as an individual and isn’t representing his employer, went viral.

But half of the issues Meyerson raises in his Medium essay are actually already in the existing law. You can read the current ordinance here. 

Criminal misdemeanors with the potential for jail time? That is in the current law.

(e) Criminal Penalties. Any Owner or Business Entity who rents a Residential Unit for Tourist or Transient Use in violation of this Chapter 41A without correcting or remedying the violation as provided for in subsection 41A.6~!£ilifil shall be guilty of a misdemeanor. Any person convicted of a misdemeanor hereunder shall be punishable by a fine of not more than $1,000 or by imprisonment in the County Jail for a period of not more than six months, or by both. Each Residential Unit rented for Tourist or Transient Use shall constitute a separate offense.

Neighbors getting the ability to take hosts to court? That is in the current law. 

(B) An Interested Party who is a Permanent Resident of the building in -which the Tourist or Transient Use is alleged to occur, is a Permanent Resident of a property within 100 feet of the property containing the Residential Unit in which the Tourist or Transient Use is alleged to occur. or is a homeowner association associated with the Residential Unit in which the Tourist or Transient Use is alleged to occur may institute a civil action for injunctive and monetary relief against an Owner or Business Entity if….

Quarterly reporting requirements for hosts? That is in the current law. 

(C) Reporting Requirement. To maintain good standing on the Registry, the Permanent Resident shall submit a quarterly report to the Department beginning on January 1. 2016. and on January 1, April 1. July 1, and October 1 of each year thereafter, regarding the number of days the Residential Unit or any portion thereof has been rented as a ShortTerm Residential Rental since either initial registration or the last report, whichever is more recent, and any additional information the Department may require to demonstrate compliance with this Chapter 41A.

There is one big difference though.

Under the current law, neighbors can pursue action in civil court against hosts after about four months if the city hasn’t initiated its own civil proceedings. If they win, they’re entitled to attorneys’ fees and costs of covering the lawsuit.

Under Proposition F, neighbors can pursue action after about 90 days and if they win, they’re entitled to attorney’s fees and damages of between $250 and $1,000 per day. If you want to read the legislation yourself, the text of the bill is here and the relevant section is from page seven to 10.

To be fair, no one can predict how the right to win criminal penalties in court would be used or abused. One of the reasons supervisors like Farrell and Scott Wiener have opposed this proposition is because they’re worried about creating an opening for “drive-by lawsuits.” California already has an extremely litigious culture around land-use with the state’s environment law CEQA getting invoked to block bike lanes and high-speed rail for years.

On the other side, Sara Shortt, who runs the Housing Rights Coalition and organized some of the Google bus protests last year, says the right to injunctive relief is what gives the regulation teeth, especially when Proposition F supporters don’t feel like the city has even enforced its own laws for seven years. They say that filing a lawsuit is so time-consuming and expensive anyway that few people, if any, will actually do it.

The Impact Of Losing A Housing Unit To Full-Time Short-Term Rentals

Let’s be conservative and take Airbnb’s estimate: 348 units.

This is a tiny percentage of the city’s overall housing stock at 380,000 units and California’s affordability crisis has been going on since the 1970s. As I’ve written before, there are myriad reasons for the Bay Area housing crisis from restrictive zoning to overseas capital flows to a rapidly widening income distribution that is making it hard for lower- and middle-income to keep up with housing costs.

Californian home prices started splitting from the behavior of the rest of the United States residential real estate in the 1970s. It’s a very long, ongoing crisis that predates the existence of Airbnb by several decades.

However, if San Francisco wanted to construct 348 new units that are affordable to moderate or low-income residents to replace units that are lost, it would cost the city and taxpayers around $100 million. Recent budgets for affordable housing projects range from $250,000 in subsidies per unit to $889,000 per unit in a recently approved 72-unit project on South Van Ness.

This map is from an SF Planning Department study earlier this year and it shows that the Mission District appears to have the highest amount of permanent short-term rentals in the city. At least 78 units appear to have been rented for more than half the year in the neighborhood.

If the city loses units to permanent short-term rentals, there is immense political pressure to replace them for low- or moderate-income residents. The Latino community of the Mission, which has the highest number of long-term Airbnb rentals in the city, used the Mission Moratorium ballot initiative, or Proposition I, to pressure the city to convert a 72-unit market-rate housing proposal on South Van Ness to affordable housing over the summer. The land alone cost the city $18.5 million, or 1.5 times the amount that Airbnb says its community pays to the city in taxes every year. The total cost of this project is estimated at $64 million, or more than five years of Airbnb tax revenue to the city. That’s a budget of $889,000 per unit.

Moreover, when you lose housing units at lower-priced tiers and do not have a way to finance replacing them, there can be systemic and irreparable consequences.

For example, one of the contributing factors to the emergence of widespread homelessness in San Francisco and New York City in the early 1980s was the destruction of thousands of SRO (or single room occupancy) units. Policy makers and the public misunderstood the role these units played as the housing of last resort for the poor. Between 1975 and 1980, about 6,000 SRO units were converted or demolished in San Francisco.

On top of that, the federal government retreated from public and low-income housing, and community centers that were supposed to in-take mental health patients released through de-institutionalization were under-funded.

U.S. Senator Dianne Feinstein, who is advocating for Proposition F, was the pro-business and pro-landlord San Francisco mayor who had to deal with the homelessness crisis in the early 1980s. Airbnb had criticized her for having a conflict of interest because her husband owns The Claremont Hotel in the East Bay.

U.S. Senator Dianne Feinstein, who is a proponent of Proposition F, was a San Francisco supervisor and mayor through the late 1970s and 1980s who had to deal with the emergence of urban homelessness in the city. She also was mayor when rent control was implemented. Amid a housing crisis in the late 1970s, Feinstein passed a weaker rent stabilization ordinance, which pre-empted a stricter version from being passed via ballot initiative. Her husband, Richard Blum, also owns the Claremont Hotel in the East Bay, which Airbnb has criticized as a conflict of interest. (Source: Nancy Wong, CC BY SA-3.0, Wikimedia Commons)

But she was also the mayor whose administration had to open shelters when homelessness initially became visible three decades ago. At first, they thought it was a temporary problem. But it was systemic and required permanent supportive housing.

Thirty years later, “Housing First” policies have been vindicated in other American cities like Salt Lake City as a more humane and less expensive of caring for the homeless, compared relying on emergency medical care and the police. However today, land costs in the Bay Area are so high that it might cost a billion dollars or more to create permanent housing for every homeless person in the city.

And the homeless population’s size? It’s stayed at around 6,000 people for the last decade even though the city has spent $167 million on it annually. A few blocks away from Airbnb’s headquarters, almost one out of every five children at Bessie Carmichael Elementary School is homeless.

More broadly speaking in the United States, cities have historically carried the burden of providing low-income housing, because the immediate surrounding suburbs have practiced exclusionary zoning and fought affordable projects.

In the early 1970s, the wealthy Silicon Valley suburb Los Altos Hills mandated a minimum lot size with one house per one acre. A pair of Mexican-American lawyers then sued on behalf of a Latino group, La Confederacion de la Raza Unida, that had the option of building affordable housing in Los Altos Hills if they could get the density higher than one house per one acre. A California court ruled that even though the minimum lot size meant that lower-income people could not afford to live there, it was not discriminatory. Today, Los Altos Hills still has its lot requirements and its median home price is $4 million.

There are court cases like this scattered literally all over the Bay Area. The Wire creator David Simon even produced an entire six-part series about this dynamic in HBO’s recent “Show Me A Hero.”

More importantly, Latinos began arriving in the Mission in the 1930s around the time that the Federal Housing Administration shut down lending capital to the neighborhood because its racial composition was shifting away from an all-white population. The racialized practices of both the private real estate industry and FHA in the mid-20th century allowed property values to rise much faster in all-white neighborhoods, which has left enduring differentials in household wealth between racial groups that have lasted to this very day.

Today, a similar dynamic is playing out in a different way. The Silicon Valley suburbs are not adding enough housing to match their job growth, which has pushed a critical mass of workers into the urban core in San Francisco and Oakland over the last decade.

Cupertino, for example, approved Apple Campus 2, which will bring an additional 13,000 workers to the city on top of the 16,000 Apple employees that are already there. But the city has pledged to build only 1,400 housing units over the next seven years. A group called Better Cupertino is battling the existing housing commitments because it doesn’t want more children in the suburb’s elite public schools.

“Save Our Schools. Stop Condo-tino.” Old patterns are re-emerging as South Bay cities like Cupertino, where Apple is based, refuse to build adequate amounts of housing. Cupertino has approved Apple Campus 2, which will bring 13,000 more workers to the city, but has only pledged to build 1,400 units over the next seven years. Neighborhood groups like the one staging this protest have opposed more housing because they don’t want more children in the city’s top-performing public schools.

That has created pressure for tech workers to migrate into cities like San Francisco or Oakland. San Francisco houses almost twice as many Bay Area Apple employees as Cupertino does, which is squeezing out working-class communities. They have nowhere to go or afford except for out on the region’s periphery, which induces two or three hour mega-commutes.

If you read studies on generational social mobility, a parent’s transit time is the strongest factor predicting a child’s chance of escaping poverty, according Harvard economist Raj Chetty’s study of five million U.S. family incomes over several decades.

Roberto Hernandez, the activist who collected the signatures for the Mission Moratorium ballot initiative (which I’ll get to later), has got constituents including an 89-year-old sleeping in a closet for $700 a month. Then he’s got Latino families who have been pushed out to Pittsburg in the far East Bay.

“They have to get up at 3 or 4 a.m. in the morning to get to the BART. They jump on the MUNI bus, they drop their kids off at the school, then they jump on another bus to get to work. They’re spending $389 a month on BART and MUNI and they’re making $12 an hour,” he told me over the summer. “What kind of life is that?”

Across the United States, poverty is suburbanizing in places that do not have the infrastructure or ability to serve low-income communities.

To be clear, I am not blaming Airbnb for this. These are just the pre-existing inequities in the American housing system that the company is intersecting with and amplifying.

Airbnb’s Impact On Rents

Again, we don’t have independent data. But an Airbnb-commissioned study suggests that it raises rents slightly by $19 per month or $228 per year in San Francisco.

“Here’s the crazy thing. Now there’s a Proposition — Proposition F. Basically, there are some opponents of Airbnb. They are saying — we are anti-affordable housing. It is pretty weird because the founding story of Airbnb was about allowing people to stay in their homes. Fifty-two percent of our hosts depend on it to pay their rent or mortgage. In many cities, they’re not building supply fast enough. Rents are rising and people are hanging on to be able to keep their homes and they’re looking to Airbnb. That is vast majority of the story. You can literally go on the website and read the profiles and read the stories. The good news is that 100 percent of our homes are available publicly. You can read the stories yourself.”

–Brian Chesky, Airbnb CEO

Land-use, housing and real estate form one of the most morally complex and ambiguous pillars of any society. The central dilemma in the U.S. and U.K. systems is that housing is both a durable good as shelter and an investable asset as a person’s primary form of wealth. That introduces a fundamental tension between policies that maximize property values and conversely, policies that support the goal of affordability.

Any behavior that would increase the cashflow that one can earn from residential housing — from regional employment growth to Airbnb revenue — can at scale get priced into the underlying property value. That would advantage those with the right to the space — mainly the property or homeowners — and disadvantage those who don’t, like tenants or future homebuyers.

Under San Francisco’s law, tenants, who make up two-thirds of the city population, have to abide by their lease agreements around subletting or short-term rentals. Presumably, most of them can’t legally host on Airbnb, because their leases don’t allow it.

Of the seven hundred or so law-abiding hosts who have registered with the city, nine out of 10 are homeowners.

So while it may be true that Airbnb helps many hosts pay their mortgages, that is a statement that only focuses on one segment of the housing market and ignores the impact of higher short-term rental cash flow on the rest.

Why Don’t We Build More Housing?

San Francisco is building housing at the fastest pace in more than two decades.

But a big challenge for San Francisco policy makers is that they have to figure out how to add housing while knowing that at any time, a group of residents can just go and collect 10,000 signatures, put something on the ballot and circumvent them.

That’s what happened a few years ago with 8 Washington, a condo development near the Ferry Building that neighboring residents killed with a ballot initiative. The same group of people — some of whom are Prop. F backers — returned the following year with Prop. B, which requires a vote on any changes to height limits on the waterfront. So now, the entire city has to vote on whether a parking lot should become a 1,500 unit housing development built by the SF Giants.

At the current moment, the planning department is in the process of upzoning Central SOMA to add about 50,000 jobs and 11,700 housing units. This is a plan that will affect the burn rates of hundreds, maybe thousands, of startups over the next decade because it will influence the availability of office space. In the spring, sf.citi arranged some meetings to educate the tech community about it. But the only person who showed up was a receptionist, Steve Wertheim, who oversees the plan, told me.

San Francisco is considering increasing housing production in the Western neighborhoods for the first time in recent memory. A density bonus program will award more height to developers if they build more affordable housing.

It is also pushing a density bonus program that will bring housing to the more suburb-like Western neighborhoods by granting a couple more floors to developers in exchange for affordable housing.

But because that land is privately owned, out of the 30,850 parcels of land that city studied for the program, the planning department projects that maybe a few hundred parcels will turn over in the next 20 years and become available to developers. Those will produce another 7,000 to 8,000 extra units. Western neighborhood residents are apparently already organizing against this on Nextdoor.

Residents below showed up to a city-organized meeting this past week to jeer at 1,000 units that may be added to the Outer Sunset over the next 20 years. Meanwhile, between 10,000 and 20,000 people have been moving to the city since 2010.

SF wants to bring density to the westside so of course there’s standing room only at comm meeting. (Civil so far) pic.twitter.com/UvamppWJ17

— Cory Weinberg (@SFBTCory) October 30, 2015

Why Doesn’t SF Just Build Really Tall Buildings?

Upzoning, or raising height, is an intensive process that requires the input of the impacted communities and takes at least a year, if not several.

Back in 1975, the California State Supreme court ruled that downzoning someone’s property wasn’t a regulatory taking. Naturally, cities across the state of California then decided to downzone a lot of property because they didn’t have to compensate land owners for reducing financial value of their holdings. California went from issuing one out of every five housing permits in the country in the 1960s to being at the forefront of the growth control movement.

If you use Google Ngram, which graphically tracks the frequency of words and phrases in books, you can see that growth controls became more popular in the mid-1970s. William Fischel, a Dartmouth economist who has spent his entire career studying and practicing zoning, argues that stagflation in the 1970s shifted American perceptions of housing. Homes shifted from being a consumer good to an investment, giving rise to a political class he calls “homevoters.” Today, Airbnb is leveraging “home sharers” as its political class.

Going the other way, or upzoning, requires combing through a neighborhood practically parcel by parcel.

Californian municipal governments do not have a ton of flexibility in managing their revenue sources because new taxes require a two-thirds super-majority vote. 1978’s Proposition 13 fiscalized land use, so local governments have become more reliant on extracting benefits and fees out of developers and new construction for public services.

When you upzone, you are raising the financial value of the underlying land, which becomes an unearned windfall to land owners. If upzoning is not done carefully, it can wipe out existing communities and local institutions that don’t have the capital to keep up as parcels of land turn over to developers.

So upzoning is done conditionally; it’s a fine art of matching the needs and wants of tens of thousands of constituents with whatever is able to financially pencil out for developers.

This is probably a terrible metaphor, but think about it like pricing an IPO. You want it to be priced high enough so that you don’t leave money on the table and see a pop in shares. Likewise, when you upzone land and extract public benefits, you want to get back as much of the unearned increase in land values for voters. But you also still want it to be profitable for developers so they still build stuff and get their 15 or 20 percent return for their investors.

If you leave too much money on the table, your voters can revolt. That’s what’s happening in Redwood City around Box headquarters, where the city allowed a lot of taller, multi-family development but didn’t extract capital for affordable housing. Redwood City residents held candlelight vigils all last week to demonstrate for bigger affordable housing extractions.

The city is upzoning Central SOMA in a plan that it expects to extract about $2 billion in public benefits for affordable housing, transit, childcare, parks and more.

With the Central SOMA rezoning, the city is hoping to get about $2 billion in public benefits for transit, parks, non-profits and affordable housing.

Don’t like it?

Think the upzoning process is too slow?

Okay, well go figure out another place where the city can get $2 billion for infrastructure and affordable housing.

$12 million in taxes, LOL.

Why Are People Blocking Housing Development?

It varies by jurisdiction. In most of the 101 cities around the Bay Area, tenants are just outnumbered by homeowners, who don’t have a strong reason to add more homes because they’ve already got theirs. In many Californian cities like Palo Alto, there’s almost nothing you can do because you may never mathematically have the votes.

But in San Francisco, it’s different. This is a majority tenant city.

So you’ve got classic NIMBY homeowners, but you also have a tenant base that is open to growth and development so long as it is inclusive.

Part of the reason that development battles here are so divisive is because state and federal funding for affordable housing has dwindled over the last several decades. Last month, Governor Jerry Brown vetoed a bill from San Francisco’s David Chiu that would have provided another $100 million in state tax credits for affordable housing.

Brown was concerned about the state’s budget in the event of a downturn. When he was a much younger California governor in the 1970s, the state’s voters capped their property taxes through Proposition 13. So the state’s revenue base shifted toward income and capital gains taxes, which are more prone to California’s boom-and-bust cycle and predictably put the state government into the red during recessions.

Because there are fewer recurring and stable sources of funding for low-income housing, working-class tenants have taken to blocking or stalling housing on a project-by-project basis to extract concessions out of them for subsidized units.

That’s what’s happening in the Mission, where non-profits are pushing a separate ballot initiative called Proposition I that would stop market-rate housing construction for 18 months.

The idea is to block market-rate developers from acquiring the last large re-developable parcels of land in the neighborhood, so that non-profit developers can try to buy them first. Only parcels that are large enough to support 40 units are eligible for federal programs that finance low-income housing. There are only 13 parcels of this size left in the neighborhood.

The ballot initiative is a kind of realpolitik to pressure concessions out of the city for lower-income residents. In most parts of the United States, zoning is used to exclude uses and poorer communities; but San Francisco neighborhoods like Chinatown, the Tenderloin and the Mission have historically used zoning to preserve lower-income communities in the face of successive waves of capital during boom times.

The Tenderloin actually pulled off what the Mission is trying to do back in the 1980s. It was supposed to be re-developed as Union Square West, but neighborhood activists organized and bought land to hold in perpetuity for low-income residents. The difference is that land was at bargain-basement prices back in the 1980s; now it’s running north of $250,000 per buildable unit.

Since getting the signatures for the Mission Moratorium initiative to pressure Mayor Ed Lee, the city has pledged $50 million to the neighborhood out of a $310 million affordable housing bond if it passes. However, to get to their goal of building 2,400 affordable units in the Mission for the historically Latino base, the neighborhood will need to find at least $600 million in funding.

“Everybody would be happy if we could get 3,000 more affordable units,” Roberto Hernandez, an activist who collected the signatures for the Mission Moratorium ballot initiative, told me over the summer. “Then you could build all the luxury condos that you want.”

(If asking for a unicorn’s worth of affordable housing sounds extreme to you, now you know how crazy bragging about paying $12 million in taxes sounds to anyone who understands anything about housing.)

Hernandez and non-profits like the Mission Economic Development Agency say they are doing this because the current strategies aren’t working. The median household income for Latinos in the neighborhood is $63,641, compared to $102,577 for white households. So the Latino community, which has been in the area since the 1930s, can’t keep up. A report from the legislative analyst last week said that the Latino share of the Mission’s population will decline to less than one-third by 2025 if current trends continue.

City economist Ted Egan released a study arguing that the moratorium won’t relieve displacement pressures and will jeopardize close to 1,500 units in the pipeline over the next two years. Egan said that 97 percent of upper-income residents arriving in the city end up living in existing units. 

Tech founders, are, of course, frustrated. They’d like to hire thousands of engineers over the next several years, but the competition for housing is driving up rents and salary costs higher and higher.

And again, the city can’t coerce land owners into selling their property to non-profit developers. So unless the moratorium is permanent, land owners might sit it out until the end because they don’t want to sell at a discount.

What about the 30,000 vacant units?

Let me correct this misleading graphic for you.

Lots of Proposition F opponents have pointed out this figure that there are 30,000 vacant housing units in San Francisco. The number actually comes from American Community Survey data in the U.S. Census.

It is split into four categories:

• Rental units that are in the process of being rented (“for rent”) or units that have been rented, but are not yet occupied (“rented, not occupied”) — about 8,900 units.
• Ownership units that are in the process of being sold (“for sale”) or units that have been sold but are not yet occupied (“sold, not occupied”) — about 2,400 units.
• Units used for seasonal, recreational or occasional use — about 9,100 units.
• Other vacant units not in any of the categories above — about 9,700 units.

The Bay Area’s urban planning think-tank SPUR tried to use the vacant numbers to infer how many units might be taken out of the housing stock last fall. They estimated that only 2.4 percent of the city’s housing stock is seasonal based on surveys of brand-new condo buildings downtown. Even though Airbnb investor Sam Altman and others have insinuated that rent control might lead to vacancy, SPUR studied this and said it was impossible to tell.

But the bigger point is that data on Bay Area real estate markets is of horrifically bad quality.

At the higher-end of the market in suburbs like Palo Alto, there is overseas capital from China flowing into local homes because the property market abroad is slumping. Some of it is for buyers who genuinely want to live and work in Silicon Valley; immigrants have been a vital part of the Valley’s success story over its entire history. But at worst, some of the property is left vacant and none of the peninsula suburban governments are quantifying it. In Atherton, about half of home sales above $5 million are bought by LLCs that conceal the entity of the buyer.

At the lower-end of the market out closer to Central California, REO-to-rental is showing up as banks and REITs acquire homes to operate as single-family rentals. Sometimes, they’re the very same entities that offered unsustainable subprime loans to lower-income borrowers, who then ruined their credit on foreclosures.

Then at the very bottom end of the market, even the city’s homeless count is crude. One day every two years, bands of volunteers scour through the city’s streets to visually count how many people appear to be living without shelter.

The lack of good data on the market at all levels makes it harder to figure out solutions to the crisis. No one knows how many tenants genuinely need rent control based on their income and no one knows what levels of affordable housing will really financially pencil out for real estate developers.

To add another layer of opacity is counter-productive. If anything, Airbnb’s investors, who also back companies like Mixpanel and Optimizely, should understand the vital importance of high-quality data is designing well-functioning systems.

What About Reporting Where You Sleep At Night?

There are other U.S. state and municipal governments require you to document and prove where you are in order to qualify for tax benefits.

The state of Florida has zero income taxes. But in order to get this benefit, you must prove that you live there at least 180 days a year. The steps to prove that legally cover everything from changing your mailing address to moving your financial accounts to the state of Florida. But it also includes recording and reporting the days that you spend in the state.

Moreover, if you’re going to use the overnight excess capacity of your home as a revenue-generating business, it seems odd that you wouldn’t expect some privacy trade-offs associated with this decision. This is especially true in San Francisco, which doesn’t have a hard cap across the board; it has a split cap that is different based on whether the host is present or not.

What about rent control? Isn’t it a distortion?

I’ve seen several Prop. F opponents or tech workers allude to rent control being a major source of the housing crisis. It certainly complicates re-developing existing housing, but here are some things to keep in mind.

(This part is kind of in the weeds. Sorry. You can skip ahead unless you’re really interested in the structural problems of the Californian housing market.)

Rent control covers 46 percent of the housing units in San Francisco; it’s very unlikely that it would get voted away. The only major American city to get rid of rent control in recent memory is Boston in the mid-1990s, and that was done through a change in statewide law. That said, the California state legislature has watered down San Francisco’s rent control before, through laws like Costa-Hawkins which banned rent control on single-family homes and on new construction after 1995. Under the current laws, the only politically feasible way to phase it out is to have the city buy rent-controlled units and gradually convert them to income-tested affordable units or community land trusts. This would take a very long time and cost a lot of money.

A majority of economists deride rent control because it can disincentivize production of new housing.

However if you oppose rent control because it is a market distortion, at least consider the other major market distortions in the American housing system.

The American approach to housing is laced with an incredible amount of contradictions. The U.S. has the weakest tenant protections of all the OECD countries but has the world’s largest socialized mortgage market with government-sponsored enterprises handling 95 percent of mortgage securitizations.

Then, the ideal of the detached single-family home is based on self-sufficiency and individual property rights, but it is reliant on an enormous and submerged structure of tax subsidies. Moreover, single-family zoning is very much about controlling what other people can do with their property. In the U.S., the right to own property has been separated from the legal right to develop it for about a century.

The 30-Year Fixed-Rate Mortgage

Homeowners, which live in 36 percent of San Francisco’s housing stock, have something that effectively behaves like a price control in the form of the 30-year fixed-rate mortgage and property tax caps under Proposition 13.

From the perspective of global housing markets, the 30-year fixed-rate mortgage is a financial instrument that is largely unique to the United States and Denmark. Most other countries have shorter-term, flexible rate mortgages because there is too much credit, interest-rate and early repayment risk associated with such a long duration. The only reason 30-year fixed-rate mortgages exist so widely is because they are backstopped by the GSEs or government-sponsored enterprises, Fannie Mae and Freddie Mac, which guarantee $5 trillion in home mortgage debt. Their existence has amounted to an enormous and unquantifiable subsidy in borrowing costs to homeowners over the past 80 years since the Great Depression.

Even though global financial markets price these securities as if they will be backed by the U.S. government in the event of a default, U.S. Congress obviously doesn’t want to add $5 trillion onto the public debt.

But the mortgage market also can’t be privatized either because private insurers only cover about $10 to 15 billion per year, a drop in the bucket compared to the trillions that Fannie and Freddie support. Immediately privatizing the mortgage securitization market might crash American housing markets because borrowing costs would rise sharply.

Federal policy makers haven’t figured out how to design an incentive system to prevent what happened in the mid-2000s from occurring again. In fact, Fannie was created during the Great Depression to support a steady flow of capital into American housing markets, instead the boom and bust dynamic of private financing. So Fannie and Freddie have sat in purgatory and government conservatorship for eight years because U.S. Congress doesn’t know what to do with them.

Taxpayer Subsidies to Homeowners Are Much Bigger Than Housing Subsidies For The Poor

Then, if you look at tax subsidies, federal housing policy is regressive. The U.S. federal government spends more than twice as much on tax deductions for middle- and upper-income homeowners than it does on subsidies for lower-income Americans.

Californians make up a little more than 10 percent of the U.S. population, but they receive about one-fifth of the benefits of the mortgage interest tax deduction. That’s because the more expensive or larger a home you buy, the bigger your tax deduction becomes. The mortgage interest tax deduction ends up subsidizing Californians buying more expensive homes than they would otherwise buy.

California’s Property Tax System Favors Seniority

Then if you look at the state level, California’s property tax structure favors older homeowners. Property tax assessments are set at whenever a person bought their home, and rise no more than 2 percent per year after that.

This system was set up in 1978 after stagflation and growth controls sent Californian home prices spiraling higher and higher, with property tax assessments rising in tandem.

Californian voters put an end to this with Proposition 13, but that in turn cemented all other kinds of inequities in the state’s property system. The tax savings ended up being capitalized into even higher home prices. In 1980, a UC Berkeley study found that each dollar decrease in property taxes resulted in a seven dollar increase in property values.

Today, there are huge imbalances as newer homeowners subsidize the cost of public services for older homeowners. In Silicon Valley’s original home of Santa Clara County, homeowners who bought their homes after 1999 cover 78 percent of the county’s residential property tax assessments.

My mother in law purchased her Palo Alto home in 1964, value is approximately up 9,953%. Prop 13 means taxable value is 3.7% actual value.

— Louis Gray (@louisgray) October 5, 2015

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Prop. 13 also encourages land-banking because there’s no strong disincentive to sitting on and doing nothing with land while it appreciates. Property owners’ taxes are capped. That feeds into the strange behavior of the state’s housing market, where prices rise sharply and then plateau, but never go down. When markets cool, land owners simply just withhold supply and wait it out for the next upswing.

Then There’s Zoning

Lastly, if you look at the local level, there are the zoning regulations, which I’ve already written a lot about.

More than 70 percent of the parcels in San Francisco are for single-family homes. Because single-family homes are considered sacred and untouchable, that means that the burden of new housing development falls on the multi-family neighborhoods in the city’s Eastern neighborhoods, which are historically lower-income and have larger minority populations.

But Most Importantly…

The ideal of homeownership was not offered equitably in the many decades after World War II. It was deliberately cut off for minorities in policies that still leave a footprint today in disparate homeownership rates and household wealth levels between blacks, Latinos and whites.

You think you know the racism of redlining. But then you read a description of one of the areas (the center red box). pic.twitter.com/zoNZqV0QUq

— Alexis C. Madrigal (@alexismadrigal) October 12, 2015

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If you want to read a national history of this, it’s here. If you want a local Bay Area version, I have one on how East Palo Alto and Palo Alto were formed in relation to one another. The inequitable residue of these policies are painfully obvious in the fights over the Mission, Oakland and other gentrifying neighborhoods in the United States — which coincidentally happen to be some of Airbnb’s hottest markets.

All of this is to say that wherever you go in the world, housing is a complex public-private system. 

The very capitalism-friendly city-state of Singapore is 80 percent public housing. In Japan, the building codes change with successive earthquakes, so property owners have to continuously tear down their buildings and reconstruct them to keep up with the law. This creates a culture where home values actually depreciate like cars. An interesting byproduct of this is that the country can sustain a much higher number of architects per capita. Because Japanese homeowners don’t have to worry about re-sale value, they can construct weird, radically expressive homes.

Germany doesn’t subsidize homeownership so its rate is around 40 percent, compared to the 63.4 percent homeownership rate in the United States. It has incredibly strong tenant protections, which behave like rent control. But Germany also balances this out with a right-to-build embedded in the Constitution, a standard set of zoning codes across the entire nation and a municipal financing system that allocates more capital as a region’s population grows. As a result, they’ve had relatively stable housing prices over the last 25 years.

MIT graduate student Matthew Rognlie had one of the most pointed responses to Thomas Piketty’s theory that wealth inequality will keep rising inexorably because the rate of return on capital is greater than overall economic growth. He separated out housing from non-housing investments and showed that it is almost entirely responsible for rising returns on capital.

In contrast, the U.S. and U.K. mix the role of housing as a person’s main store of wealth with its role as a human necessity of shelter. In the post-war period, this was arguably a great thing; cheaply-subsidized land and home ownership cemented the creation of the middle-class.

Today, this ideal has mutated into a tax on productivity in the U.S. and U.K.’s most dynamic cities like London, New York, Los Angeles and San Francisco. State and local zoning protections and tax benefits hardened around homeownership beginning the 1970s and are now intersecting with a widening income distribution and rapid globalized capital flows in a near zero-interest rate world.

In the United States, both the banking and political systems are structured to favor ever-rising home prices. Almost two-thirds of bank lending portfolios are made of mortgages while most of the political jurisdictions are majority homeowner. This might be totally great, except for the fact that the American system has never adequately covered the flipside of this policy for those who lack the capital to step onto the first rungs of the property ladder. This was a structure that affected minorities and the poor for decades. But now it is affecting the middle-class and younger people of all backgrounds in the U.S.’s most economically productive regions.

If Californians want to slow the unrelenting spiral of upward prices, they would have to do things that I don’t think Californians — especially homeowners — are prepared to do. They would have to reconsider the ideal of the single-family detached home and the zoning that protects it. They would have to reconsider the property tax structure and find a permanent and recurring source of funding to support the service workers and the poor through either outright affordable construction, housing subsidies or living wages. Even the most astute of political observers, Jerry Brown, who was governor of California in the 1970s and is governor today, does not believe this is possible.

So everything — including Prop. F, Prop. I and extra Airbnb cash-flow — is just about re-arranging deck chairs.

What Should You Do?

Both approaches are flawed.

In the current system, the city only has data on seven percent of hosts who are registered. Even though Airbnb is not the cause of the housing crisis, the company has declined to take responsibility in not making the current situation worse by cracking down on obvious commercial rentals or being transparent with data so that the city can do it for them.

The city’s soon-to-be six-person department can only reactively respond to neighbor complaints in order to protect housing from being lost to permanent short-term rentals. Each unit lost causes the city $250,000 to $300,000 in net negative impact, according to city economist Ted Egan.

But Proposition F is also deeply worrying. It opens the door to more neighbor-versus-neighbor lawsuits, which may wipe the market of hosts. It is also a ballot initiative that can only be amended through more ballot initiatives, which isn’t flexible enough for regulating a fast-changing market. The initiative’s backers add that even if they fail today — which looks likely based on polling data — they’ll be back next year with a different version.

If Airbnb had been more transparent and made a good faith effort in helping the city crack down on the commercial end of the market, maybe we wouldn’t be here. But instead, it spent money on those horrible bus ads and billboards.

So here we are.

Featured Image: UmWtd/Shutterstock

Article source: http://techcrunch.com/2015/11/03/prop-f/