New Colorado initiative that could destroy Colorado real estate

Colorado Real Estate values

There is a new initiative in town to drastically limit growth throughout the front range.  Lakewood successfully passed (still in litigation) an initiative to limit new residential development to 1% of the existing housing stock.  Why is this important?  A very similar new statewide initiative is likely heading to the ballots in November that would limit growth to 1% of housing stock in the 10 metro counties from CO springs to Greeley.   Will this pass?  What are the implications of a growth limiting law?

What is the amendment?

If approved, Initiative #66 would limit residential growth to 1 percent annually over the next two years in Adams, Arapahoe, Boulder, Broomfield, Denver, Douglas, El Paso, Jefferson, Larimer and Weld counties. That means that for all of 2019 and 2020, any local government within those counties would be required to limit the number of residential building permits so that the number of new units for the year does not exceed 1 percent of current housing stock.  Here is the full initiative from the Colorado Secretary of State: https://www.sos.state.co.us/pubs/elections/Initiatives/titleBoard/results/2017-2018/66Results.html

What is the impact?

Prices will increase!  According to the nonpartisan Director of Research of the Colorado Legislative Council, the initial fiscal impact of Initiative #4 will be that the “value of existing housing units may increase in communities where there are binding growth limits, impacting homeowners and landlords. For Colorado residents that would like to move into communities with binding housing limits, this measure may make it more expensive to find homes to buy or rent.  Limits on housing permits will also impact the distribution of construction employment, retail trade, and population within Colorado.” (source CO director of research)  The fiscal impact estimate clearly predicts that if Initiative #4 is passed, the housing crisis in Colorado would worsen and home prices would increase.  I doubt this initiative would tank the Colorado economy, but it would have substantial impacts on the construction industry/real estate industry.  If this passes in the front range, I would suspect other counties/towns would pass similar initiatives.

Will it pass?

A ballot initiative is how Colorado passed legal marijuana!  I think there is a greater than 60% chance this will pass.  If you look at the political climate in the front range (where most of the state population is located) it is clearly trending more liberal.  This new political climate has passed a green roof initiative and Lakewood (in Jefferson county, metro Denver) passed the same local growth initiative which demonstrates a will.  Furthermore, most people living in the state for a while would agree that the state has changed quite a bit with all the new growth/building and would like to see some sort of limit to moderate the growth (which is why Lakewood passed their initiative).

The wild card

This week the Colorado Supreme Court blocked the implementation of amendment 71 (see Denver post article) which required any ballot initiative to have signatures from every county in Colorado.  This amendment gave larger sway to less populated districts that also tend to vote more conservatively.  The recent ruling looks like this amendment could be nullified by the Colorado Supreme Court.  Why is this significant?  Metro counties are skewing much more liberal on initiatives like the green roof initiative that passed and likely will be much more supportive of the growth initiative measure.  This recent court case on amendment 71 will make it much easier to pass amendment 66 since basically whatever happens in the front range metro area will carry enough votes to pass.

 

What does it really mean?

I’m always amazed at human phycology.  On one hand voters overwhelmingly passed initiatives throughout the state to fund affordable housing initiatives.  While at the same time support is gathering for initiative 66 that would drastically reduce supply therefore reducing the amount of affordable housing.  This is quite counterintuitive!

If this initiative passes, there is no doubt that residential construction will be substantially reduced.  If there is a cap on growth of 1%, where do you think builders will focus?  Builders will focus on the projects with the higher margins.  For example, if a builder could only build one house due to the cap, would they build a 300k house or a 2m house?  Let’s assume the builder has a 20% profit margin; on the 300k house the profit would be 60k, on the 2m house the profit would be 400k?  It is not difficult to see which one the builder will choose and that this will further erode affordable housing.

Along with the increases in price, taxes will also go up.  The amount of taxes paid is based on the value of the property (in every odd year in Colorado).  As prices increase so do property taxes. This new initiative, will have far reaching impacts on real estate throughout the Denver metro and the entire front range corridor.

Sources/Additional Reading

  1. https://www.denverpost.com/2018/02/07/colorado-ballot-initiative-limit-new-housing-real-estate/
  2. https://www.thedenverchannel.com/lifestyle/real-estate/proposed-ballot-initiative-would-limit-new-housing-construction-in-10-colorado-counties
  3. https://www.denverpost.com/2017/08/31/lakewood-growth-initiative-puts-economic-growth-at-risk/
  4. https://www.sos.state.co.us/pubs/elections/Initiatives/titleBoard/results/2017-2018/66Results.html
  5. https://www.denverpost.com/2018/02/14/colorado-amendment-71-raise-the-bar-unconstitutional/

 

 

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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