California Study Says Public Housing Costs More Than Private

Published March 1, 2004

“The road to state-subsidized housing may be paved with good intentions, but it’s marked by an unavoidable fact: It actually costs more to build housing that costs less,” reported the Bakersfield Californian in a January 25 story addressing a University of California – Berkeley study that reviewed the costs associated with building government-subsidized housing.

The study, first released in September 2003 and updated in January 2004, discovered subsidized housing costs more to build than similar housing built by the private sector.

“University of California at Berkeley’s center on real estate and urban economics has taken a look at the costs of building low-income housing and found that state-subsidized housing costs between 10 percent and 32 percent more to build than private housing projects,” explained Dr. Adrian Moore, vice president of the Los Angeles-based Reason Foundation. “The short story is that state subsidies come with politics, and from politics come requirements that drive up costs.”

I November 2002, California voters approved Proposition 46, a $2.1 billion bond measure dedicated to affordable housing development and related programs. About half those funds—roughly $1 billion—are directed to new multi-family construction. The Berkeley study suggests taxpayers would save between $100 million and $320 million if that multifamily housing were built by the private sector.

According to Moore and the Californian, the UC-Berkeley study offers three explanations for why public housing costs are higher than in the private sector:

  • higher design standards, to “blend in and temper neighborhood opposition to lower-income projects.”
  • longer turnaround times, because “nonprofit developers spend [more time] chasing other financial sources to put deals together.”
  • state laws, especially those that “require the highest prevailing union wages on projects built with public funds.”

Prevailing Wage Laws a Key Culprit

According to the Californian, the study “estimated that union-supported prevailing wage laws typically drive up construction costs 10 to 20 percent.”

“There can be little doubt that prevailing wage requirements in California substantially increase the cost and decrease the supply of dwellings available to low- and moderate-income households,” reported the study, conducted by analysts in the University’s Fisher Center for Real Estate and Urban Economics.

California has budgeted “$1.1 billion for low and moderate-income apartments and supportive facilities,” said Richard Friedman, chief counsel of the state’s Department of Housing and Community Development. Prevailing wage laws apply to all of that construction.

“It’s really a political transfer of subsidies from housing to workers,” said Larry Rosenthal, a coauthor of the Berkeley study. “That might be a good thing or a bad thing, but it does have a price.”

Prevailing wage laws date back to the Great Depression of the 1930s and the 1931 passage by Congress of the Davis-Bacon Act. According to the study, Davis-Bacon was intended to “preserve jobs and wages for local construction workers.” Traditionally, the federal government awarded construction contracts to the lowest bidder. Davis-Bacon sought to “limit a contractor’s ability to lower wages for its workers in order to win contracts” and also to discourage non-local firms from competing for government contracts and “driving down wage rates.”

California’s prevailing wage law was passed in 1931, the same year as the federal act. A 1995 study of state prevailing wage laws found California’s to be one of the most stringent in the nation. The California law was updated slightly in 2001 to address ambiguity regarding interaction between the state law and its federal counterpart.

“One of the Berkeley authors argues that state rules are just a means of shifting money from the low-income housing program to unionized construction workers,” noted Moore. “I would add to the analysis the observation that private housing development does the most to increase the supply of housing and thereby create affordable housing.”

John Skorburg is managing editor of Budget & Tax News. His email address is [email protected].

For more information …

Working Paper No. W03-003, “The Effects of Prevailing Wage Requirements on the Cost of Low-Income Housing,” is available online at