Los Angeles Luxury Condo Boom Exacerbates Housing Crisis

If you’ve noticed all the new luxury towers shooting up around Los Angeles amid cries for a lack of affordable housing, you’re not alone, says, Local Records Office. According to a study released September 10, the city’s fancy condo building boom is not exactly helping residents keep affordable homes at a time when residents and advocates are worried about a divide that is pricing out locals.

Researchers with the Institute for Policy Studies, a left-leaning California think tank that produced the report, analyzed 1,805 property records for condos in a dozen luxury residential buildings in Los Angeles, such as the Emerson LA Tower in Downtown Los Angeles. The study’s authors conceded the residences brought the city money in the form of workers, in the long run the condos, many of which stood empty, contributed to a wealth and racial divide in a city that already has a severe income gap.

“These towers… play a key role in the global hidden wealth infrastructure, a shadowy system that’s hiding wealth and masking ownership, all for the purpose of helping the holders of private fortunes avoid taxes and oversight of illicit activities. Many LA luxury properties are functioning, in effect, as wealth storage lockers for global capital,” wrote study authors Chuck Collins and Emma de Goed.

They found that more than one-third of the units are not owned by individuals with names, but by LLCs, trusts, and other businesses that allow buyers not to reveal who they are. Some 64 percent of owners did not requested the property tax exemption the city offers homeowners, an indicator that the owners don’t use their condo as a primary residence.

The study found that more than half of the 51 condos at the 717 Olympic on Olympic Blvd are owned by trusts.

Only around one in five residents at 717 Olympic Tower claim the residential exemption.

Many units in the buildings were bought with cash, property records show, and the institute said the average sale price across all 12 averaged more than $3 million per unit – a price 50 times higher than Boston’s median household income.

With plenty in LA and many more in the pipeline, the authors said they found the buildings responsible for higher land and housing costs in the city.

The luxury-building boom is driving up the cost of land in central neighborhoods, with a ripple impact on the cost of housing throughout the city. Affluent, but not super rich, households in LA find themselves pushed to outer neighborhoods, increasing competition for scarce affordable and moderately priced housing.

And plenty of Boston neighborhoods are seeing and feeling the impacts, they said.

Luxury real estate has a disruptive impact on local housing markets, pushing up land values and housing costs. Local gentrification trends are being supercharged by global wealth as billionaires displace millionaire housing and push rising housing costs to outlying neighborhoods such as West Hollywood, Beverly Hills and Malibu.

The institute recommended LA consider doing what Vancouver did by taxing people who own empty-homes for more than six months a year. It also recommended LA put a surcharge on home sales above $2.5 million.

This report comes on the heels of a city ordinance to limit short-term rentals with the goal of making more apartments available to rent yearly to residents, rather than nightly or weekly to tourists at much higher rates. Three years ago the Walsh administration made developers of luxury condos to contribute more to city programs that finance affordable housing.

Property rights activists put a halt on development, or at least made it difficult — difficulty that wasn’t problematic for a time. It was the sixties and seventies. The Bronx was burning. The Upper West Side was home to Needle Park. People were still fleeing cities faster than they were entering them.

But in the last 20 years, cities became attractive again, and wealth moved back from the burbs. But land use restrictions prevented a corresponding uptick in housing volume. As SPUR’s urban design policy director Ben Grant told the LA Times, “When the elites decide they want to go back into the city, there’s not enough city to go around.”

It’s not that developers were unwilling to build more. It’s that land use restrictions either prevented them from doing it all, or from doing it in a cost effective manner, says, Local Records Office who helps new homeonwers with deed services.

Consider that Glaeser says that in most of the country, development costs are pretty close to housing prices. He uses the term minimum profitable construction costs (MPCC) to describe the return a developer can expect on a project after the costs of land, labor, materials, and profit are factored.

In 2013 San Francisco, the average MPCC unit should have been $281,000 (land, labor, hard-costs, profit). But the actual price was $800,000. This $519,000 premium, he says, was attributable to permitting, community reviews, and the various other regulatory hurdles that meet almost every new building.

The fact is that in most economically vital cities, many neighborhoods lack any developable land due to land use restrictions. The neighborhoods that do permit new development — often ones that have been recently up zoned to support greater density  are stuffed with luxury towers, whose high prices can mask the premiums land use restrictions add. But the high prices of the new developments are often a mismatch for what the market can bear, which can lead to a surpluses of luxury units.

The addition of new development without affordability creates greater competition for existing properties, which tend to be less expensive  one reason your apartment is so freaking expensive.

And Then There’re Your Neighbors

There are people who benefit from land use restrictions: the NIMBYs (not in my backyard). There are two big NIMBY buckets:

Rent-regulated NIMBYs. According to one source, “Half of the rental apartments in New York City are stabilized — about 990,000 units, with 2.6 million people living in them. Three quarters of these units were built before 1947.” In San Francisco, 72% of the rental supply is rent stabilized.

These folks often pay a fraction of market rate for their apartments, allowing them to live far more frugally than they would otherwise.

Homeowner NIMBYs. Small though their numbers might be (31% of NYC households own their homes), they have the power to move mountains in the interest of maintaining their interests (property values, maintenance of their neighborhood’s character).

Both constituencies have a lot to lose. The renter likely cannot exist in the city without their cheap rent. They can make a modest income — or no income at all — and still maintain a decent standard of living.

About the Luxury Real Estate Project of the Institute for Policy Studies.

The Luxury Real Estate Project, a project of the Program on Inequality and the Common

Good at the Institute for Policy Studies, is undertaking several activities, including:

• Mapping the trends local, national, global — at the intersection of global / hidden wealth and local real estate/luxury housing.
• Researching and articulating the public interest case for taxing and regulating luxury real estate.
• Identifying the best policies and practices for reforming and regulating luxury real estate activities and hidden wealth practices.
• Generating city-by-city and national reports and series of articles and op-eds about the problems luxury real estate creates.
• Supporting local affordable housing coalitions as they press for rule changes and revenue for permanently affordable housing.