More Infrastructure is Key to Lowering Home Prices

Housing. Shelter. Room at the Inn. A hearth and a home. From the moment neolithic humans emerged from caves to build structures in the open, atop a defensible hill or along a life giving river, having some place warm and dry to call home has been a primal necessity and a prerequisite for civilization.

This imperative is not lost on California’s legislators and elected executives, or its litigators and judges. In response to a chronic housing shortage in the state that has only worsened for the last several years, in the 2023 legislative session California’s state lawmakers approved and Governor Newsom signed a host of new laws designed to facilitate construction of new housing.

According to the law firm Holland & Knight, more than 32 new housing oriented statutes take effect on January 1st, 2024. There are 4 new laws to streamline the process of acquiring building permits, 7 that enact specific housing related exemptions to CEQA, 6 that impact “density, land use, and planning,” 3 that incentivize more construction of Accessory Dwelling Units, 2 designed to empower a greater role for state agencies to enforce housing law, 7 to reduce obstacles to construction of more affordable housing, 3 to reduce the required number of parking places to accompany new housing, and more.

If you’re a housing wonk, you may spend days analyzing these new statutes. But it doesn’t take an expert to identify a fundamental flaw in all this legislation, motivated perhaps in equal measure by good intentions and sops to subsidy guzzling politically connected developers who bankroll reelection campaigns. The flaw is simple: California’s state legislature created a housing shortage by engineering a regulatory environment that made it almost impossible for unsubsidized developers to build homes that people could afford. Instead of fixing that, they’re just imposing more laws and regulations.

There are plenty of things they could have done to rectify what has become a structural barrier to building affordable market housing. They could relax zoning laws that all but prohibit housing on open land outside of existing cities, instead of strengthening these defacto “greenbelt” cordons around every city. They could also mandate a cap on local building fees to some percent of a new home’s sale price, and they could restrict to county attorneys general and the state attorney general the ability to file CEQA lawsuits. These two steps, which are currently embodied in a ballot initiative that a pro-housing PAC – with the unsubtle name “Californians for Homeownership” – are attempting to qualify for the November 2024 ballot, would encourage more unsubsidized private sector developers to try to build and sell affordable homes while still making a profit. The state legislature has the power to do this without a ballot initiative, and they should.

Meanwhile, however, there is an even more fundamental obstacle to making housing affordable in California, and to explore the remedy is to challenge ideological schisms that limit innovation and impede consensus. California needs more energy, water, and transportation infrastructure. And even if they were not operating in a hyper-regulated environment, the job of upgrading and expanding infrastructure is beyond the capacity of private investment.

The economic argument goes something like this. The cost to build, for example, an aqueduct to transport winter floodwater from the Sacramento-San Joaquin Delta to capacious and quick-charging storage aquifers in the San Joaquin Valley, is so great, that if 100 percent of the construction cost was paid for by a private company, the ratepayers who eventually consumed that stored water would pay a price too high for low to moderate income households to afford. Agricultural clients might be able to grow pistachios and almonds, which fetch a high price per pound, but tomatoes, which bring in less revenue per ton, would disappear from California’s fields. The principle expressed by these examples extends to all enabling infrastructure. When end-users have to pay too much for energy and water, the standard of living goes down, the cost of living goes up, and economic activity falters.

Californians thus have to answer a tough question: Do they want to businesses to leave and residents to struggle financially, or do they want to subsidize the cost of public works in order to bring down the amount that private partners have to recoup from ratepayers? In the 1950s and 1960s, the so-called Pat Brown Democrats answered this question unequivocally. The State of California built the most magnificent system of water storage and interbasin transfers in the world. It built the best network of universities in the world. And it built freeways and expressways that connected every corner of the state and facilitated an era of spectacular growth. There was surplus energy and water, the state was affordable, and millions of people moved here to follow their dreams.

That’s over now. What’s changed? It isn’t so much that Californians aren’t willing to spend massive amounts of public money on infrastructure. The problem is the choices they’re making are terrible. They’re not pouring hundreds of dollars into enabling infrastructure, but rather into disabling infrastructure. Instead of upgrading our natural gas pipelines, retrofitting our natural gas fired power plants with advanced combined cycle turbines, building an LNG terminal in Ventura County, and drilling for more – all activities that are so inherently profitable that the private sector could pay for nearly all of this expansion – instead the state legislature has declared war on natural gas, is bent on killing the industry, and is spending or planning to spend tens of billions to subsidize solar farms, battery farms, and offshore wind. These are all technologies that remain unproven at scale and may be obsolete within a decade or two. There’s more.

Instead of permitting desalination plants on the Southern California coast, plants that could be built with a minimal infusion of public funds, or developing creative ways to divert flood waters from the Sacramento-San Joaquin Delta while at the same time reinforcing century old levees, California’s state legislature is going to build a 45 mile long tunnel under the Delta to transport water from just one river, the Sacramento, to southbound aqueducts. The estimated cost for this gargantuan undertaking is $20 million.

Which brings to mind a third hideous example of hideous waste, High Speed Rail, which was sold to voters as a system that would get passengers from San Francisco to Los Angeles in two hours flat, and only cost $30 billion to build. Estimated travel time has inexplicably expanded to over four hours, and total estimated cost is now over $130 billion. Will it ever get built? Pat Brown Democrats would have upgraded our railroads, widened and resurfaced our freeways, maybe – gasp! – even built a few more freeways, and spent a fraction as much doing it.

Again. What happened? The problem isn’t necessarily that leaving projects to public agencies breeds inefficiency. It does. For that matter, in a hyper-regulated environment, which California certainly is, inefficiency and cronyism is bred into private sector corporations as well. But something bigger is at work, which might be properly described as the spirit of the time. In the 1950s and 1960s there was a consensus that California needed to grow, that development was a good thing, and the state government went to work to build practical energy, water and transportation infrastructure that made everything else possible. The farm economy grew. Suburbs expanded around the old cities, and homes were affordable. The state thrived.

The spirit of the time is very different now. The consensus among California’s elite is that the state has grown quite enough, at the same time as literally everything affecting land development, land management, or energy and water policy has to be evaluated through the filter of the climate crisis. Hence “renewables” to the exclusion of clean, ultra efficient advanced natural gas power. Hence water rationing instead of investment in practical water supply infrastructure. Hence trains, light rail, and high-density housing instead of new roads and new suburbs. No wonder everything costs so much.

What ought to be blatantly contradictory in all this is how counter the result is to all the human values that California’s elites purport to cherish. We need extensive infrastructure because it fosters private sector freedom and growth. When the public subsidizes energy and water infrastructure, and deregulates land development, ownership is decentralized. When infrastructure is inadequate and prices soar, the only winners are the corporations and rentiers, who invest in the artificially inflated assets and artificially overvalued commodities, making excessive profits as the consumers struggle.

And so then we come full circle. The state government, having failed to invest on the front end to make life’s essentials within the reach of ordinary Californian households, finds itself captured by politically connected corporations that prosper when prices are high, and at the same time finds itself now spending more public money merely to subsidize, in perpetuity, those millions of low and lower-middle-income households who can’t pay their rent or their mortgage. What great irony.

A condensed version of this article originally appeared on the website of the Pacific Research Institute.

Edward Ring

Edward Ring is a contributing editor and senior fellow with the California Policy Center, which he co-founded in 2013 and served as its first president. He is also a senior fellow with the Center for American Greatness, and a regular contributor to the California Globe. His work has appeared in the Los Angeles Times, the Wall Street Journal, the Economist, Forbes, and other media outlets.

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