Will the value of your Colorado home double?
Your choices at the ballot box could have an impact
Anyone who has not lived under a rock the last five years has surely noticed the huge increase in both commercial and residential real estate prices (and also an increase in traffic with all the newcomers).
Why is Colorado so successful, with real estate prices predicted to double in some markets in the next 10 years? What is driving the sharp price increases? How could this be derailed by the upcoming election and two Colorado ballot initiatives in particular?
First, why is Colorado real estate on fire? The answer is the simple economics of supply and demand. What is driving this demand and causing the lack of supply?
On the demand side, Colorado has been recognized as a leader in quality of life and is considerably less expensive than many coastal markets (NY, LA, etc.). As a result, many companies have been attracted to Colorado, which has led employees to follow (or vice versa). According to the Denver Post, Colorado experienced the strongest and most consistent job growth since the 90’s. In a nutshell this strong job growth has attracted employees to Colorado increasing the strained supply of real estate on both the residential and commercial side.
With the increase in the in migration into Colorado, both commercial and residential properties have been in high demand. On the commercial side, these new companies will require space (offices, warehouses, etc.) and drive demand for other ancillary business.
Think if a high tech manufacturing company relocated to Colorado. Not only would this company need a warehouse, but many suppliers that the company relies on for support (cleaning, maintenance, landscaping, and various business services) will also need space. The demand cycle continues exponentially and trickles to the residential side as the company’s workers and support personnel all need housing.
On the flip side, supply is tight throughout the Front Range. There has not been enough building to keep us with demand and there is also limited large building tracts left to build. As a result, prices have been going through the roof in many areas. Even though prices have been increasing rapidly, two prospective ballot initiatives would likely squash future price gains (and could lead to price declines).
Although demand continues to increase for Colorado real estate, this variable could change overnight with the coming election and in particular two ballot initiatives. What are the initiatives and how will they impact real estate demand?
The two ballot initiatives are 69 and 70. Initiative 69 would basically make Colorado the first state with a full government-run health insurance. This would cost taxpayers more than $25 billion, doubling the size of the state budget.
Why is this such a pivotal initiative? Businesses have been flocking to Colorado based on a business-friendly environment. This initiative will substantially increase the tax burden on both individuals and businesses and creates huge uncertainty.
Nobody knows what the true cost would be (this would be the first experiment) and how taxes would be impacted, but there is a huge probability that taxes would need to be raised substantially. Also, what happens when costs increase by 20 percent (this happened to an insurer in PA)? Both individual and businesses would be on the hook.
Initiative 70 would increase the minimum wage to $12 an hour by 2020 and no more than $3 an hour can be used to offset tip income (so in essence, many service workers who get tips would have a minimum wage of around $9) and adjust annually based on inflation (consumer price index).
There are differing opinions on how helpful or hurtful a mininumu wage is but, according to a study when New Jersey raised the minimum wage, the employment decreased by 4.6 percent for these workers (see study from the National Bureau of Economic Research). In essence, this solidified the author’s prediction that “minimum wage increases reduce employment of low wage workers”.
Why should you care about these initiatives? First initiative 69 is a huge problem for businesses in Colorado due to not only the increased costs, but also the increased uncertainty. Businesses have to plan far into the future. Consistent cost modeling is needed to accurately make these decisions which can’t be accomplished if an initiative like 69 were to pass.
In essence, nobody knows how high costs will/can go (look at our currently health care crisis with rates rising exponentially and many exchange companies either leaving the exchange due to costs or going bankrupt). The cost liability for the new program would be on the state and ultimately taxpayers would be on the hook. This uncertainty will lead companies to either delay large capital projects or move to more friendly locals with predictable and lower costs. Workers will also be less willing to relocate to Colorado if income taxes rise substantially (which they likely will).
Initiative 70 will also have a huge impact on businesses substantially raising costs. Businesses will either relocate to lower cost areas, outsource more jobs or automate. Each of these strategies will ultimately lead to higher unemployment of the low wage workers.
What does this mean for real estate? The primary driver of Colorado’s appreciation is due to a healthy and diverse job growth and desire of employees to relocate to Colorado. If businesses or individuals no longer find Colorado as attractive from an income/tax perspective this would eliminate the largest driver of real estate appreciation.
If this job growth is halted (or even reversed) it is impossible for Colorado to continue on a positive growth trajectory. Amendment 69 in particular would be devastating for businesses and certainly lead to huge losses in jobs and ultimately a ripple effect on real estate. Will real estate double over the next 10 years? The choice is in your hands!