Dec 19, 2016 BISNOW.COM
The way ahead in Los Angeles requires denser development that would ease the supply issues that make housing unaffordable for so many LA residents, according to UCLA Anderson Forecast economist William Yu.
Peter Strauss of Iconic Investments (above left) chatted with William about his expectations for the coming year. Peter gave Bisnow an exclusive look.
Peter Strauss: Some real estate owners and value-add players see development restrictions such as the recent ballot initiatives (Build Better LA, Neighborhood Integrity Initiative) as a potential windfall as they will limit new supply. There seems to be a heightened sense of NIMBY-ism and anti-development sentiment. How could Los Angeles’ long-term housing be jeopardized?
William Yu: I think the devil is in the details. Some ballot initiatives are simply political choices by voters with mixed economic pros and cons. For example, Build Better LA (Measure JJJ), which was approved by LA voters on Nov. 8, requires 20% or more of affordable housing units for low-income people. This will provide the local poor or working class a chance to continue living in LA. This is a balanced compromise through the democratic process. Most importantly, if this measure could make the development process more transparent, more predictable, more efficient, and facing less resistance from the NIMBY, I think it is better than the current situation. Santa Monica’s Measure LV proposed...certain size development projects to be approved by the voters. It is highly inefficient and counterproductive. I am glad that it did not pass.
Strauss: The last recession was arguably about too much debt that too few people understood. Today we see issues with European debt and stagnation, China’s slowdown, rising debt levels in US governments, and corporate and pension fund liability gaps. Does something stand out as a contagion risk today?
Yu: Indeed. Europe and the US have been issuing government debts and printing money to relieve debts in the aftermath of the Great Recession. I think the US economy is in better shape than Europe because the US is a unified country. In contrast, Europe has a unified currency (Euro) controlled by the European Central Bank with 19 governments with different fiscal disciplines and economic productivity. But I think China’s debt is the most worrisome to me because of its opaque system and a problem called moral hazard coming from its vast state-owned enterprises. These SOEs are like Freddie Mac in the US before the financial crisis. They could borrow like a risk-free entity because of implicit government support. China’s problem is these SOEs [are] doing many investments with zero or negative returns. In the long run, many of those debts will default. All these regions face long-term pension underfunding liability because of the changing demographics, in which retired people live longer and longer while the societies are facing lower fertility rates. Meanwhile, the low interest rates make pension fund investment more difficult to earn sufficient returns through fixed-income portfolios that they could rely [on] in the past.
Strauss: What are the key growth drivers in Los Angeles for the next decade? How are they different from other cities?
Yu: There are two key drivers. [First], real estate. LA is one of the best places in the world in terms of its impeccable weather, beautiful beaches, and being a gateway to the Asia Pacific economy. All these desirable factors make LA real estate an appealing market in the long run, for domestic and international investors and immigrants. As we talked about previously, NIMBY [activists] need to consider the housing affordability issue and be more open-minded for a more dense LA. For welcoming a denser LA, public transit and mass transportation investment is extremely important. I am glad to see Measure M was approved by LA voters so we will have more resources to invest in much-needed transportation. The second key driver is the entertainment industry, Silicon Beach, and some combination of these two. Hollywood is the capital of the entertainment industry in the world. And this industry will not be easily automated or outsourced.
Strauss: Los Angeles has seen explosive rent growth over the last four years. Historically, the acceptable rent-to-income ratio was 33%. Now the average LA renter is spending near 47% of their income on rent. As the affordability gap widens, where do you see the future of rents and incomes?
Yu: Indeed, LA is one of the least affordable metros in the US in terms of owning or renting. Among the 30 largest metropolitan areas in the US, LA has the highest percentage of residents being...renters because [most] residents cannot afford [the required] down payment and mortgage. There is no easy short-term solution. There are three solutions in the long run:
1) As we mentioned before, keep housing supply growth in line with the demand to contain the price/rent appreciation.
2) Be more business-friendly so residents have more chance to get a better job with higher income.
3) Enhance human capital level by investing in public education. High human capital residents will be more productive and [find it] easier to get good jobs and earn higher incomes to afford the housing.
Strauss: Rent control has become a hot button topic across many California municipalities. What are your thoughts on rent control and the effect it has on market dynamics?
Yu: Rent control is not an efficient policy for housing inclusiveness. It protects a small amount of existing local renters while excluding the rights of landlords and young and middle-class Americans who want to move to LA. They [end up paying] more for less available housing. It keeps LA status quo because of the rigidity of rental markets. The sustainable and inclusive solution is to have urban planning with a denser LA.
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