Some suburbs in Indiana are waking up to the fact at their pattern of development is unsustainable in the most important way – financially.
An article in the Indianapolis Business Journal describes the scene in booming, upscale Hamilton County:
Hamilton County officials are closely watching new-housing prices, knowing that local governments’ long-term financial security could depend on it.
If a residential development doesn’t promise homes with a high enough price tag, a municipality could end up losing money. That’s because, under the state’s property tax caps, lower assessed values might not generate enough tax to cover the cost of city services.
No one seems to know exactly what that break-even price is—estimates range from $250,000 to $450,000—but most developers and government officials agree anything below $200,000 is no longer worth approving.
This is presented as an artifact of tax caps, but those caps are simply doing the service of revealing early, while there is still time to do something about it, that the financial model of too much of suburbia is not sustainable on a long term basis.
Indiana caps property taxes at 1% of a home’s value. That’s all the property tax money local government has to work with to provide all the services on which that property depends.
Houses that are too cheap – and too cheap could mean as expensive as $450,000 – will not produce enough property taxes to sustain municipal services.
This means housing for working class people isn’t going to get approved. This requires no recourse to racism, elitism, etc. to explain. Lower cost housing simply has a negative ROI for these communities.
Maybe they can get away with building some lower cost housing that requires subsidies to support, but too much of this and a town will quickly be in real trouble.
The problem is worse than these leaders know. They are in a favored quarter region that is still rapidly expanding in population, and every town here has physical room for more development.
Cities that are newer or still in their growth phase experience artificially low costs because of the power of greenfield economics. Their building stock is new, liabilities are low, the population is well off, and by simple economies of scale alone they are becoming more cost efficient as they grow.
But when they reach maturity and stop growing, costs escalate rapidly. This is why so many older suburbs around the country (paging Ferguson, MO) are in such bad shape, financially and otherwise.
One way to solve the problem is to only build houses expensive enough to make the math work. That’s what Hamilton County seems to be doing. They are also smartly realizing that developers used to be able to offload infrastructure costs onto the municipality, and they are now making sure everything is paid for by the developer up front.
But even a place without tax caps would end up like too many East Coast cities. They might in theory have a housing stock that would sustainably support a wider range of incomes. But in these towns sky high property taxes keep the working class out. This type of development, once the lifecycle phase of cheap costs is over, will send taxes through the roof, which we see in many places.
These towns are ahead of the game in terms of coming to grips with the problem. Too many are not, however. They are simply approving developments pell-mell that are going to leave them saddled with massive future costs and a resident base that cannot afford to pay them.