Incentivizing ADU Development - A Proven Housing Solution for Cities & States

A market based approach to accelerate housing development is possible.

Where's the evidence?

California is in the midst of a major housing crisis. Stakeholders from across the aisle argue that the state government has been slow to take action, let alone take bold, decisive policies to solve it. California, a place that people across the world dream of living in, is increasingly unaffordable for everyone except the very wealthiest segments of the population.

From Hollywood to The Mission, from San Diego’s Pacific Beach to Los Gatos and everywhere in-between, the state is blanketed by exorbitantly high housing prices. Some people worry that California will lose its spirit if artists and entrepreneurs- and young people in general- cannot afford to live here anymore.

This is uncharacteristic of a state which is on the cutting edge in so many other areas. With more than six and a half million single-family homes across the state, California has the opportunity to take the programs demonstrated by other progressive municipalities (like Portland and Vancouver) to a new scale and get on the path to solving the crisis for good.

The good news is that the state has made important progress recently. In 2016, the State Legislature passed legislation, SB1069 and SB 2299 to mandate that all local governments legalize and incorporate accessory dwelling units (ADUs) into their zoning codes.

More recently, California has adopted legislation in 2020 expanding on these laws, read a summary of these laws to see get a better idea of the ADU movement in California!

ADUs are second units that can be added to existing residential properties - think converted garages or backyard apartments. They are also known as granny flats, in-law units, or casitas. These new regulations now make ADUs a legal option to increase property value for millions of single family homeowners in California.

Find out whether you are eligible to build an ADU on your property by using Housable's free property check tool

Are you interested in adding an ADU to your California property? Find out whether you are eligible using Housable's free property check tool

ADUs are just now becoming popular in California, but they’ve actually been around for a while. Believe it or not, California has had legislation on the books encouraging cities to allow ADUs since the early 1990s. These laws were not widely communicated or enforced, so ADU development made virtually no progress. The new mandates are really just an extension of the older bill that has been on the books for decades, but it gives the state the ability to enforce the laws and minimum standards in every municipality statewide.

The lesson here is that if we want the affordable housing situation to get better, we need the involvement of the state and local governments to push smart new regulation forward. Optional guidelines won’t cut it; we need strict mandates.

ADUs are not a blanket solution to the housing crisis - this is a holistic problem that needs to be addressed from a number of different angles. However, it is clear that ADUs are an evidenced-based solution that can partially address the broader crisis

1. ADU development can be rapidly accelerated when homeowners are educated and properly incentivized.

2. The positive impact of ADU development is effectively unlimited; it is only capped by the total number of eligible homeowners statewide, and how quickly they can be convinced to build.

We can look to ADU development in Portland and Vancouver to back this up.

In response to the financial crisis in 2009, The City of Portland took bold steps to build affordable housing in the city. It created new financial and regulatory incentives for homeowners to build ADUs.

Eleven years later, it’s clear this program has turned out to be a more powerful force in the city’s housing market than nearly anyone thought was possible.

Portland invested in programs to educate citizens and waived costly permit fees. In response, the city’s production of ADUs has risen more than 20 fold from about 30 per year pre-2010 to just over 600 units last year. What’s more impressive, this shows that in just eight short years, when compared with primary single family homes, the city has nearly doubled its annual housing production. - There were around 800 permits for SFRs issued in 2016 in Portland.

Portland’s housing market as a whole has recovered faster and stronger than average which has caused rents to recover from record highs. Portland faces similar challenges to those of the Bay Area and Los Angeles, but has carved out a promising long term solution by rapidly increasing ADU production.

By recognizing that income investment potential is a financial boon for homeowners the city has catalyzed the creation of an entirely new market by simply educating and incentivizing. Digging into the details shows the success of this program more clearly. This chart shows the growth ADU permits issued annually in Portland. It’s been hockey stick growth ever since the program was first approved in 2009.

The steps the city took to incentivize ADUs were simple, which probably deserves much of the credit for their effectiveness.

-Temporarily reduce the total cost to permit an ADU by suspending systems development charges, which are typically to $8,000 to $13,000.

-Educate homeowners about their eligibility to develop ADUs and what the benefits are. Also making clear that the new fee waivers were being made available on a temporary basis. (Though it has since been extended twice since its original implementation and is expected to continue it further based on its widespread success.)

In total, there have been over 1,900 permits have been issued since the start of the program in 2010. However, this is a drop in the bucket compared to the potential long term impact for the city. Less than 2% of the estimated 148,000 single family residential properties in Portland that could add a second unit currently have one. The city’s long term goal is for ADUs to exceed 10% of all housing supply.

On their own, these results are impressive, but they bring up larger questions - How much impact can ADUs have? What is the upper limit? How many of the eligible homeowners would actually consider adding a second unit to their property if they were aware and had access to capital?

Fortunately, answers to these questions may be found by looking to another pioneering Northwestern city…

Where is the upper limit?

Enter Vancouver, BC - The Canadian city’s homeowners have supplemented housing supply with the development of ADUs for more than four decades. Locally referred to as “Laneways”, Vancouver homeowners began adding ADUs at a steady pace back in the 1970s to increase density in response to rising housing costs. Fast forward to today, with about 75,000 single family residences in the city, over 26,000 (35%) have a permitted ADU.

Even at this level of penetration, the market still sees no sign of slowing down. The city is currently permitting about 1,000 units per year, a 1.3% addition to its total housing stock annually.

One neighborhood in Vancouver, the Kitsilano District, was originally developed in the 1920s with two and three bed, single bath homes. The community was designed then for density of about 6.5 dwellings per acre. Fast forward to the 1990s, and thanks to laneways, garage conversions and basement units, this same neighborhood boasts more than twice the original density at 13.4 dwellings per acre.

The data speaks. Both Vancouver and Portland provide us with proven models for understanding the short run and the long run impact that supportive zoning policies for ADUs can have on the production of new housing in cities. We can follow the same proven policies in California: educate and incentivize. Imagine if every neighborhood in Los Angeles was packed with ADUs. Venice Beach and Santa Monica would be affordable to artists again. Silver Lake could stay funky.

ADUs aren’t just about housing; they are about making California work for all of its current and future residents.

In 100 years, will all single family homes in California be paired with a second unit? Maybe, maybe not, but the evidence that ADUs can become a larger part of the housing solution not only in the far off future but also today is too compelling to ignore. It is a shame that these policies were not implemented more vigorously back in the 1990s. It is hard to say how many more tens or even hundreds of thousands of homes we would have today as a direct result. That aside, the next best time to act is right now.

Find out whether you are eligible to build an ADU on your property by using Housable's free property check tool