New Colorado Initiative Could Destroy Local Real Estate
Voters entertain policy to limit housing supply
Lakewood just won major litigation that previously derailed a growth initiative that limits new residential development to 1 percent of the existing housing stock. What are the implications of this law?
There is a proposed ordinance in this Denver metro suburb to limit residential growth annually. Last year, 1,500 housing units were permitted, while the proposal would have made the number more like 600. This initiative would also require Lakewood City Council to hold a public hearing and vote on any projects greater than 40 units.
This initiative was not included in the last ballot due to a pending court case in which a property owner claimed they would be harmed. The case against the initiative was recently dismissed, allowing the initiative to appear on a special election ballot.
Prices will increase.
According to the nonpartisan director of research of the Colorado Legislative Council, the initial fiscal impact of the initiative will be the "value of existing housing units may increases in communities where there are binding growth limits, impacting homeowners and landlords. For Colorado residents that would like to move into communities with binding growth limits, this measure may make it more expensive to find homes to buy or rent. Limits on housing permits will also impact the distribution of construction employment, retail trade and population within Colorado."
There was another prior initiative to limit growth throughout the Front Range that was withdrawn from the ballot, but there was a fiscal impact estimate which predicting that if the initiative passed, the housing crisis in Colorado would worsen and home prices would further increase. I doubt this initiative would tank the Colorado economy, but it would have substantial impacts on the construction industry and real estate market.
Boulder has a similar ordinance limiting growth to 1 percent, which has led to skyrocketing prices and elimination of any housing for middle class workers. Either housing is more than $1 million or it is considered affordable housing. With land costs and building costs so high due to the restriction on growth, it is impossible to build a middle-class property.
Lakewood would be the first city of its size to create a growth ordinance in the metro area. If this passes in the Front Range, I would suspect other counties and communities to pass similar initiatives.
WILL IT PASS?
I think there is a greater than 60 percent chance it will.
If you look at the political climate along the Front Range, it is clearly trending more liberal. This new political climate has passed a green roof initiative, affordable housing initiatives and other progressive policy.
Furthermore, many people living in the state for a while would agree the state has changed quite a bit with all the new growth and building, and many would like to see some limit to moderate the growth.
WHAT DOES IT REALLY MEAN?
I'm always amazed by human psychology.
On one hand, voters overwhelmingly passed initiatives throughout the state to fund affordable housing; while at the same time, voters are entertaining initiatives to further limit growth – a.k.a supply. This is quite counterintuitive.
If this initiative passes, there is no doubt residential construction will be substantially reduced. If there is a cap on growth of 1 percent, where do you think builders will focus? They will spend their time on projects with higher margins. For example, if a builder could only build one house due to the cap, would they build a $300,000 home or a $2 million home? Let's assume the builder has a 20 percent profit margin: on the $300,000 house, the profit would be $60,000; on the $2 million house, the profit would be $400,000. It is not difficult to see which one the builder would select, and this will further erode affordable housing options. This is exactly how the growth initiative has played out in Boulder.
Along with the increases in price, taxes will also go up. The amount of taxes paid is based on the value of the property. As prices increase, so do property taxes. The new initiative will have far reaching impacts on real estate throughout the Denver metro and the entire Front Range corridor if other cities follow suit.