October 25, 2016 by Justin Ewers
New McKinsey report offers 15 big ideas for tackling California’s housing crisis
(Photo Credit: NOISH/Flickr)
California is facing an unprecedented crisis in housing affordability for a one simple reason: Nearly every community in the state has been failing, for decades, to build enough housing.
And not just by a little bit, according to a new McKinsey Global Institute report released this week. In A Tool Kit to Fix California’s Housing Shortage: 3.5 Million Homes by 2025, McKinsey estimates that California has fallen several million homes behind since the last major housing construction boom in the 1980s. To match the number of houses per person in New York or New Jersey, the state would need to build 3.5 million more homes over the next decade.
This chronic underproduction is having far-reaching economic impacts—with rising home and rental prices swallowing up $140 billion in economic activity each year and forcing nearly half of California households to struggle to buy or rent a home in their community.
The only way to solve a problem of this magnitude, McKinsey concludes, is to move toward policy solutions on a similar scale. The new toolkit does exactly this, offering a rigorous, first-of-its-kind quantification of how many housing units different policy options could actually produce.
“California’s housing shortage is the product of years and years of not building enough,” says Jonathan Woetzel, a McKinsey Global Institute senior partner, who led the team responsible for this new analysis of the state’s housing crisis. “This undersupply is at the root of rising home and rental prices, increased displacement, looming transportation issues, expanding homelessness—all of it. The state simply doesn’t have enough housing in the face of increased demand. To bring demand and supply back into balance, though, will require new thinking on a grand scale.”
With the assistance of the California Economic Summit network, McKinsey spent this summer identifying 15 levers that could allow California communities to close the affordability gap. In its final report, McKinsey highlights how these changes could produce as many as five million new units in the next several decades, many of them in “housing hot spots” where, as the report puts it, “large numbers of housing units could be built with attractive returns.”
McKinsey’s ideas will be featured at the next Summit on December 13-14 in Sacramento, and the Summit is also working to ensure their analysis is included in state policy conversations in the coming year.
“The work McKinsey has done in this report is vital, must-have information for state and local leaders who will be tasked with solving the state’s housing challenges,” says Jim Mayer, president & CEO of California Forward, one of the partners leading the California Economic Summit, a statewide sustainable growth coalition that has made housing a top priority with its One Million Homes Challenge. “This new toolkit is grounded in careful analysis and has been road-tested with many of the state’s foremost housing experts. Most importantly, it gives all stakeholders in this issue—and in the case of housing, that’s every single Californian—a sense of both the scale of the problem and the scale of the solutions that will be needed to solve it.”
How many units different policy ideas could produce
So where does McKinsey see the potential for five million more homes, condos, apartments, and other dwellings in California? A short list of some of the toolkit’s most impactful ideas—with estimates for the number of units each could produce by 2025—are listed below. The first five focus on local land use options for new housing. The final two offer ideas for expanding the state’s role in housing production. (For more detail, including McKinsey’s analysis of the economic impacts of these numbers, see the full report here.)
Vacant land – 225,000 units: After conducting a GIS mapping analysis of California’s urban areas, McKinsey estimates that cities with populations over 100,000 have the capacity to build as many as 225,000 housing units on vacant urban land already zoned for multi-family housing. While McKinsey notes that a third of this opportunity is in Los Angeles County, cities like Fresno also have the potential to produce as many as 27,000 units. The report offers several ideas for getting building underway, from tax changes that could push owners to bring vacant sites to market to accelerated land-use approvals akin to the administration’s 2016 by-right proposal.
Transit oriented housing – 1,200,000 units to 3,000,000 units: Without dramatically changing existing growth patterns, McKinsey estimates up to three million new units could be produced by 2035 within a half-mile of California’s existing 1,095 transit stations. While some rezoning would be required, this estimate relies on a model of housing production that mirrors existing “urban types” around these stations—with suburban areas (the Hanford Amtrak Station, for example) currently built out at less than 6.5 units per acre, urban centers (like the Virginia Light Rail Station in San Jose) at 6.5 to 15 units per acre, and regional hubs (like the Wilshire and Vermont Metro Station in LA) at higher densities.
Accessory dwelling units – 800,000 units: McKinsey estimates that as many as 800,000 units could be produced by allowing homeowners to build additional small units on their property, an approach embraced in several bills signed by the governor in September. While further action at the state and local levels may be necessary to get construction underway, McKinsey reached its statewide estimate by assuming that 5 percent of homeowners will convert a spare bedroom or garage into a new unit and one out of 100 single-family homes will add a new backyard “granny unit.” (By comparison, after an aggressive policy push in Vancouver, Canada driven by fast-rising prices, as many as 35 percent of single-family homes in the city now include some form of accessory dwelling unit.)
Underutilized land - 1,000,000 units: In perhaps its most politically sensitive proposal, the report also focuses on the potential of repurposing “underutilized” land—that is, parcels with densities well below what existing zoning ordinances allow. More than 30 percent of San Francisco’s multi-family parcels are currently “underutilized,” according to McKinsey’s analysis, as are 28 percent of multi-family parcels in Los Angeles. The report suggests that if cities focus on these parcels, while creating zoning carve-outs and mitigating for the risk of displacement, they could produce one million units of housing—70,500 units in San Francisco and 306,000 units in Los Angeles.
“Adjacent” land – 600,000 units: While much of McKinsey’s focus is on infill development, the report also explores “smart growth” opportunities in other areas close to jobs and transit. Applying a methodology that puts a premium on small lot sizes and proximity to transit and existing development, McKinsey estimates as many as 600,000 single-family housing units could be built in three counties alone—San Bernardino, Sacramento, and Contra Costa—with all of this growth occurring within 20 miles of a jobs center and most of it within five miles of public transit.
RHNA incentives – 330,000 units: Every local government in California already has a housing production target assigned to it through the Regional Housing Needs Allocation (RHNA) process. But while cities are required to plan for this development, no region has come close to actually hitting their housing target. McKinsey estimates that if the state could entice local governments to raise their housing performance by even 30 percent—for example, via fiscal incentives for cities that approve “already planned-for housing”—communities could produce 40,000 more units annually, or 330,000 units by 2025. The report notes that regional incentive programs such as the One Bay Area Grant Program are already achieving results.
Public investments – More than 20,000 units per year: While market solutions can expand overall housing supply, McKinsey notes that officials will still need to consider greater adoption of inclusionary zoning, affordable housing tax credits, new local tax-increment financing tools, and state investments in below-market housing to successfully close the gap. McKinsey focuses on five potential sources of funding that could generate more than 20,000 affordable housing units per year. These include:
- New state General Fund expenditures: This year’s $400 million proposal from Assembly Democrats would have resulted in 5,000 affordable housing units per year.
- New state General Obligation bonds: McKinsey estimates that a $3 billion proposal considered this year could be expected to produce at least 4,000 units per year (with leveraged funds more than doubling that number).
- Widespread adoption of county General Obligation bonds: If half of the 18 urban counties passed $500 million bonds every ten years, McKinsey estimates they would produce an estimated 5,000 units a year.
- New permanent funding source: A $75 fee on recording real estate transactions could produce more than 5,000 units of affordable housing each year.
Read the full McKinsey report here: A Tool Kit to Fix California’s Housing Shortage: 3.5 Million Homes by 2025