David Luberoff Commentary: The High Cost of Affordable Housing

The Boston Globe

IS IT getting too expensive to build affordable housing in Massachusetts?

On average, it costs more than $200,000 a unit to build such housing and many projects cost significantly more. A new proposal in the state Senate would make those projects even more expensive.

The Senate housing bill would require nonprofit entities and for-profit firms that build most of the region's affordable housing to pay construction workers the "prevailing wage," a legal term for whatever unionized workers get for doing the work. (Construction projects carried out by most public-sector entities have long been subject to this provision.)

Because wages set under prevailing wage provisions are substantially higher than non-union rates, the Senate proposal would dramatically increase the cost of affordable housing. A 2007 study by the Massachusetts Housing Partnership found that projects in cities that impose this requirement are 34-to-40 percent more costly than projects not subject to the wage rule. This means that if the bill becomes law, the state will either have to raise taxes, cut spending in other areas, or build less housing.

Noting the former outcome is unlikely and the latter two are unappealing, housing advocates generally oppose the prevailing wage provision. Union advocates, on the other hand, argue that is unfair to pit the needs of workers against the need for affordable housing.

Lost in this debate is the fact that such housing in Massachusetts already is expensive. This is not a new finding. A decade ago, Denise DiPasquale and Jean Cummings of the Housing Economics consulting firm found that the costs for affordable housing projects in Boston were more than $100,000 per unit, greater than those in any metropolitan area except Los Angeles and Philadelphia.

Costs now are more than $200,000 a unit, according to the Massachusetts Housing Partnership, which means they have risen much faster than inflation. At this price, developers need about $2,000 a month in income from each unit just to cover their costs. Without subsidies, tenants would need to make about $72,000 a year to pay their rent, 30 percent more than the average household income in Massachusetts and 80 percent more than in Boston.

To make matters worse, some "affordable" units cost significantly more. For example, in Cambridge, which has invested heavily in affordable housing, several recent projects cost more than $300,000 a unit and some cost more than $400,000. The problem is not that affordable units are unusually expensive. Rather, it's that building any housing is costly in Massachusetts. As Harvard University's Edward Glaeser and others have demonstrated, some of this is due to stringent controls on land use in Greater Boston.

In addition, construction costs in Greater Boston are 15 percent higher than the average for the nation's 55 largest metropolitan areas and more than 40 percent higher than the cheapest areas, such as Austin, Texas, and Raleigh-Durham in North Carolina, according to Joseph Gyourko and Albert Saiz of the University of Pennsylvania. This region has the third highest construction costs in the country, trailing New York and San Francisco.

Gyourko and Saiz found that a few factors explain the bulk of the differences. Most notably, costs are about 11 percent higher in areas where about a third of construction workers were unionized (such as Boston, New York, and San Francisco) than in areas unionization is much less common, such as Austin and Raleigh-Durham. Construction costs are also noticeably higher in places with high average wages and in places with varied terrain - two attributes that also characterize this region.

Given that costs in Massachusetts are already high in part because construction workers are paid relatively high wages, and given that housing prices here are still much higher than elsewhere, lawmakers should think carefully before imposing any mandate that would make already expensive housing even more costly. Rather, they should look for opportunities to lower the cost of these projects.

David Luberoff is executive director of the Rappaport Institute for Greater Boston at Harvard Kennedy School. The views expressed in this article are his own.