Portland, OR, approves 1% construction excise tax to spur new affordable housing

Dive Brief:

The Portland (OR) City Council has approved a 1% construction excise tax, which is expected to raise $8 million a year in order to help fund the city's affordable housing initiatives, Forbes reported.
The tax on residential projects will be split between the city's Inclusionary Housing Fund (IHF) and the Oregon Department of Housing and Community Services — 85% and 15% respectively — while 100% of the tax on commercial projects will go to the IHF.
The Oregon Legislature repealed the 17-year-old ban on inclusionary housing rules earlier this year and authorized cities and counties to enact construction excise tax programs for the benefit of affordable housing.

Dive Insight

Portland's excise tax on both commercial and residential projects worth more than $100,000 in value will assist in building housing for those city households making less than 80% of the national median income, but there is concern on the part of local real estate professionals about the long-range effect of the new law.

The limited availability of buildable land in Portland, Realtor Nick Krautter told Forbes, shouldn't affect the pace of building activity in the short-term, but if out-of-state buyer demand starts to drag, inventory significantly increases or interest rates go up, the new tax could result in a new-project slowdown. In addition, he said, the extra cost to builders and general contractors will result in higher prices for their customers.

Portland made the National Association of Realtors' Top 10 list of the best real estate markets for millennials last month because it, as with the other ranked metros, had a high percentage of millennials already living there, good job opportunities and, generally speaking, a lower income needed to qualify for a mortgage. However, even though the city might be millennial-friendly, it is still becoming one of the most expensive. According to March's 20-city S&P/Case-Shiller national Home Price Index, Portland home prices increased the most that month, at 12.3%.

According to an Apartment List rundown of U.S. Census data, U.S. rental rates, adjusted for inflation, have risen 64% since 1960, but incomes have only increased 18%. Many cities with skyrocketing home prices are trying to bridge this gap with various affordable housing strategies, such as requiring builders to include a percentage of below-market units within new developments. The city of San Francisco just doubled its requirements for this kind of inclusionary housing. Builders of the city's residential developments must now include 25% affordable units, up from 12%.