Over the last few months politicians across Chicago and Illinois have been working overtime pursuing the impossible dream, trying to wave their magic legislative wands to conjure up affordable housing out of thin air. While it will probably succeed in getting them the votes they’re after it will ultimately fail, as it always does, in producing the desired outcome. It’s as if they never took an economics course.
The Laws Of Economics Apply To Housing
First of all let’s establish that the real estate market is indeed subject to the laws of economics – in particular supply and demand. When the pandemic hit New York hard people fled the city in droves. As apartment vacancies skyrocketed rents dropped dramatically. See? Demand goes down and prices fall. Keep this in mind for later.
Free Lunch With Rent Control
Everyone loves a free lunch. That’s why whenever there’s a referendum in parts of Chicago (at least those parts facing evil gentrification) about whether or not we should lift the current ban on rent control the majority of voters approve lifting the ban. Voters mistakenly believe that this will keep housing affordable in the neighborhood without any negative consequences.
The only problem is that rent control is not a free lunch. This older blog post of mine is a great gateway to a lot of information on the rent control disaster. Just off the top of my head it basically kills a landlord’s incentive to maintain and upgrade their properties and it prevents people from seeking lower cost neighborhoods. In other words, it artificially raises housing demand in high cost neighborhoods and what does Econ 101 tell us about this? It inflates housing costs – just the opposite of what politicians want.
But politicians, who lack this basic understanding of economics, pursue what gets them the votes. So there is a bill (HB0116) bouncing around in Springfield to lift the ban on rent control.
The Affordable Requirements Ordinance 2.0
For some time Chicago has had an affordable requirements ordinance designed to encourage developers to build affordable housing. Applying to developments that receive a zoning change or are built on city owned land or receive city financial assistance, this ordinance has required developers to build a certain amount of affordable housing or pay a penalty. This blog post explains how the old affordable requirements ordinance has been working for Chicago. Not well.
So the Chicago city council just tweaked it a bit and now I’m sure the new affordable requirements ordinance is going to just flood the market with affordable housing (not really). In a nutshell this new version:
- Increases from 10% to 20% the percentage of a development that needs to be affordable downtown, in neighborhoods with lots of displacement, and in neighborhoods lacking affordable housing.
- Instead of paying a penalty on 75% of the required units in lieu of actually building the units developers can now only pay the penalty on 50% of the units.
Do you really think these tweaks are going to make a difference? If they do it will only come at the expense of higher prices for the non-affordable housing being built or lower prices paid for the land on which these developments are going to be built. You can’t change the laws of economics.
Legislate Gentrification Away
Of course, if you could just stop wealthier people from moving into neighborhoods it would keep a lid on home prices, right? That makes a ton of sense because the last thing we need is more wealthy people in Chicago to pay taxes to dig us out of the fiscal hole we are in and it’s OK and easy to pass laws to keep an entire class of people (wealthy people) from moving into a neighborhood.
So the solution that the city council came up with was to pass an ordinance that tacks on a $15,000 fee for permission to demolish buildings throughout most of Pilsen and along the western portion of the 606 trail. Now, raise your hand if you can see where that goes. It should be obvious. They just lowered those property values by $15,000, possibly raised the cost of whatever is built to replace them, and did nothing to stop the demolitions. As Jim Cramer once said: “They know nothing!” As I’ve written on numerous occasions resisting gentrification is futile.
And What About Investing In Underserved Communities?
Does anyone else see the irony that the city now feels a need to put a lid on rising property values that resulted from a city plan (the 606 trail) to improve neighborhoods? So they keep talking about investing in underserved communities, which is a good thing, but when you do that how do you prevent property values from rising due to the neighborhood improving? What do they think is going to happen around the Obama Center? Why would you want to prevent property values from rising? Let’s not forget that long term property owners benefit from rising property values, despite having to pay higher property taxes. I’m so confused.
#ChicagoRealEstate #AffordableHousing #RentControl
Gary Lucido is the President of Lucid Realty, the Chicago area’s full service real estate brokerage that offers home buyer rebates and discount commissions. If you want to keep up to date on the Chicago real estate market or get an insider’s view of the seamy underbelly of the real estate industry you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.