New Colorado initiative that could destroy Colorado real estate

There is a new initiative in town to drastically limit growth in one metro Denver City.  Lakewood just won major litigation that had derailed a “growth initiative”  that limits new residential development to 1% of the existing housing stock.  Why is this important?  Will this pass?  What are the implications of a growth limiting law?

What is the initiative?

There is a proposed ordinance in Lakewood (Denver metro suburb) to limit any new housing development to 1% of existing units per year.  Last year 1500 housing units were permitted, under the new proposal the number would be closer to 600 -650.  This initiative would also require Lakewood city council to hold a public hearing and vote on any projects greater than 40 units.

This initiative was not included in the last ballot due to a pending court case where a property owner claimed they would be harmed by the initiative.  The case against the initiative was just dismissed allowing the initiative to appear on a special election ballot.

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)

There was another prior initiative to limit growth throughout the front range that was withdrawn from the ballot, but a there was a fiscal impact estimate which predicted that if the initiative were passed, the housing crisis in Colorado would worsen and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.

Boulder has a similar ordinance limiting growth to 1% which has led to skyrocketing prices and elimination of any housing for middle class workers.  Either housing is over 1m or it is considered affordable housing.  With land costs and building costs so high now due to the restriction on growth it is impossible to build a middle-class property.

Lakewood would be the first larger city to create a growth ordinance in the metro area.  If this passes in the front range, I would suspect other counties/towns would pass similar initiatives.

Will it pass?

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, affordable housing initiatives, and other progressive initiatives.

Furthermore, many 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.

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 voters are entertaining initiatives to further limit growth (aka supply).  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.  This is exactly how the growth initiative has played out in Boulder.

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 if other cities/counties follow suit.

Sources/Additional Reading

1. https://www.denverpost.com/2017/07/31/lakewood-housing-growth-ordinance/
2. https://www.thedenverchannel.com/news/local-news/boulder-controls-growth-through-affordable-housing-fund-fees
3. https://www.denverpost.com/2018/12/27/lakewood-new-home-contruction-growth-ballot-measure/

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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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