Seattle is now the 18th largest city in the U.S., and growing. Demand is driving the cost of housing higher, resulting in record-high rents and soaring home prices. 

Since World War II, the median home price has been approximately three times the median household income. In the 1980s, housing prices in some metropolitan areas began to outpace incomes. In San Francisco and San Jose, for example, home prices are as much as nine to 10 times local incomes.  In Seattle, Denver and Portland, housing prices are five times the average income and rising. (www.builderonline.com, April 12, 2016.)

There’s an often overlooked factor that influences the price of housing: regulations. A lengthy building permit approval process, land-use restrictions and development fees play a key role in Seattle’s increasing housing costs.

The state’s Growth Management Act is another factor, severely limiting building in rural areas.Created in 1990 out of public concern that sprawl would destroy our state’s unique environment and character, the act is responsible for an artificial shortage of land. This drives up the price of land in urban areas, adding to the cost of development, and reducing housing affordability.

In fact, the cost of land-use regulations in Seattle has twice the financial impact on housing costs compared to other major cities. “In a nationwide study, it can be shown that Seattle is one of the most regulated cities and a city whose housing prices are profoundly influenced by regulations,” according to Theo Eicher, economics professor at the University of Washington. Eicher is the founding director of the UW’s Economic Policy Research Center. The center’s goal is to provide analysis that will inform policymakers. Eicher received no outside funding for his study and stresses he makes no value judgments about whether regulation is good, bad or needs to change.

Eicher estimates that home prices have been driven up $200,000 by the cost of regulations (based on a 2008 study). Compared with 250 major U.S. cities Seattle ranks first in terms of the impact of state political involvement in land issues, according to Eicher.

“The statewide growth-management plan gave King County few options but to require that landowners in rural areas that haven’t already cleared their land to keep 50 to 65 percent of their property in its ‘natural state.’ This forced greater density in Seattle”. “The state is intervening to restrict supply. It’s not that there’s no land at all,” Eicher says.

Economists attribute rising housing costs to supply and demand. But Eicher argues that “demand does not need to drive up housing prices.” Other cities, including Houston and Atlanta, with fewer growth restrictions have been able to increase the supply of housing to meet demand, and their home prices have risen more slowly than heavily regulated cities like San Francisco and Seattle.

“Extraordinary development and compliance costs” are not only stifling the construction of new homes and frustrating builders, they’re also driving up costs”, according to Jody Kahn of John Burns Real Estate Consulting.  The Burns firm surveyed more than 100 home building executives across the U.S..  Kahn, a senior VP with Burns, said they also identified local and regional issues that impeded builders. These included items such as school fees, infrastructure requirements, “beautification” requirements, tree ordinances, park fees, firewall treatments, stormwater discharge permits and greenhouse gas fees.

Research from the National Association of Home Builders indicates the cost to comply with regulations for new home construction has added nearly 30 percent to the cost of home construction over the last five years. During the same period, new home prices rose 33.8 percent. (NW Reporter, June 2016).

The limits on development and the added cost of compliance “appear to come with positive consequences for the environment, neighborhoods, or city finances,” says Kahn. Most people will tell you they want to preserve our environment, and encourage growth in cities, thereby preserving our rural areas. Unfortunately, that means home prices continue to rise faster here, making homeownership unaffordable to everyone except the wealthiest buyers.

Eicher believes Seattle residents want all the regulations. “My sense is land-use restrictions are imposed to generate socially desirable outcomes,” he says. “We all love parks and green spaces. But we must also be informed about the costs. It’s very easy to vote for a park if you think the cost is free.”

 

Ray Akers is a licensed Realtor for Lake & Co. Real Estate in Seattle. Send your questions to ray@akerscargill.com or call 206-722-4444.