Theoretical Supply Is Not The Solution To Portland’s Housing Deficit

Portland’s housing crisis is nothing new, and it isn’t just a local phenomenon. Since the turn of the millennium, the number of housing units built across the nation totaled 1.2 million annually, down from 1.5 million annually before 2000. 

Before the Great Recession, Portland was already well behind on housing stock and unable to satisfy increasing demand. Starting from this deficit, the financial crash meant fewer homes were being built even as Portland’s population continued to grow at an increasingly rapid pace. 

This imbalance of supply and demand contributed to skyrocketing home prices. The rising cost of housing is complicated, and many factors can increase the cost of a project: land scarcity in urban areas, the cost of labor and materials, as well as an increasingly complicated regulatory environment. Now, actual inflation and threat of rising interest rates are also a concern.  

The Case-Shiller house price index identifies Portland as the sixth fastest appreciating market in the U.S. since 2000, putting it in company with California cities like San Francisco, San Diego and Los Angeles. Regrettably, many of Portland’s policymakers are trying to mitigate housing cost appreciation, rather than treating the root cause of these price increases.

According to Gerard C.S. Mildner, an associate professor of real estate finance in the School of Business at Portland State University, “Rapid housing appreciation is one of the biggest problems facing the Portland metropolitan area and the Willamette Valley.”

Mildner holds that although Portland is growing by 28,000 people each year, this demand is manageable with better policy tools. He points out that Portland’s population is actually growing at a slower rate than markets like Atlanta, Dallas and Minneapolis, all of which have experienced significantly less housing cost appreciation. 

Instead, Mildner attributes Portland’s lack of adequate housing supply to the incremental, often highly political, and always retrospective expansion of the Urban Growth Boundary as the real source of the problem. 

From 1990 to 2007, the three-county Metro region produced 14,300 housing units per year. That figure dropped by 15% to only 12,200 housing units per year between 2011 and 2020. Over the same period, rapid population growth, increased home values, and higher rents should have yielded more housing development. However, during this same period the Metro region produced far less single-family suburban housing than was needed. The inevitable result was rapid price appreciate and decreased affordability for all consumers.

Mildner opined, “Our housing supply problems begin with our outmoded land-use planning system, which was designed by young Baby Boomers in the 1970s. The system we’ve inherited promises a system of well-defined community plans and a 20-year supply of developable land inside a flexible urban growth boundary, so that we would avoid the housing calamity of our neighbors in California, where housing production is anemic and a median home price of over $800,000. In theory, infrastructure is built in Oregon to accommodate new development, and developers can proceed without the concerns of NIMBY objections.”

The current land use system is blocking both neighborhood and regional housing production. Since the system’s genesis in 1979, Portland’s regional population has doubled, but the Urban Growth Boundary has expanded by only 15%. Metro expanded the boundary by only 0.8% in 2018 — instituting a five-year rest period before revisiting the decision. Meanwhile, the region’s population continues to grow by more than 1% per year.

“Metro justifies this starvation land diet by measuring housing capacity by the theoretical level of housing production allowed by zoning, rather than the likely development outcome determined by cost of construction and consumer demand,” Mildner said.

Freedom Financials’ Vice President Eric Shoemaker leads the firm’s Northwest office. He states, “By benchmarking housing capacity against the theoretical supply created by effectively up-zoning urban properties, we ignore reality and compound the problem. Theoretical units are not actual units. Until we rationalize our entitlement process and start to make it easier to deliver infill housing, we continue to restrict supply further ratchet the cost-curve upwards.”

In practice, multi-family construction in dense urban centers is expensive for everybody. When developers switch from two-story to five-story structures, rents must be approximately 50% higher to account for increase construction costs. And anything above five stories requires steel and concrete or mass timber construction, pushing rents an additional 50% higher. The math is simple: expensive rent + minimal housing supply = out-of-control price increases.

Suburban housing development in Portland is currently suppressed by antiquated regulations. Land use reform would address the misallocation of resources and apportion more land for housing. It is possible to create more housing supply while still supporting the regional policy goals inherent in Oregon’s land use system.

Statewide rent control, inclusionary zoning, and increasingly onerous municipal and statewide regulations are among the litany of additional barriers limiting market-rational levels of housing production in the Metro region. In the current environment, everybody loses: builders, investors, and buyers of all kinds across the socio-economic spectrum.

Freedom Financial responds to the financing needs of real estate professionals seeking capital for construction, renovation, and conversion of commercial and residential real estate in the Western United States. Freedom also offers build-to-suit financing nationally. Freedom serves markets throughout the Western U.S. from its locations in California, Arizona, Oregon and Texas.