For other reports and posts related to our November 2018 Fiscal Outlook, see here.
New construction is a key driver of growth in assessed property values and, in turn, property tax revenue. More construction leads to higher assessed values. Below we discuss the details of our residential and commercial construction estimates used for our assessed value forecast.
Building Permit Estimates. Throughout 2017 and into the first quarter of 2018, the value each quarter of permitted construction hovered around $15.5 billion ($8.5 billion residential and $7 billion commercial). The second quarter of 2018 saw a significant uptick in residential and commercial permits. Total permitted construction jumped 40 percent relative to a year prior. In the third quarter of 2018, however, permits returned to the levels seen prior to the second quarter uptick. Moving forward, we expect permits to continue on at a level consistent with third quarter 2018, with no growth or modest declines through 2020.
How Do We Forecast New Construction? Our forecast of permitted construction in California is an aggregation of permit forecasts for each of the state’s counties. Our method of forecasting the value of permits issued in each county has two main components:
- Economic Model. The first component attempts to measure the relationships between residential and commercial permits and other economic variables. Based on these relationships and assumptions about what will happen with the other economic variables, we estimate future permit issuances. For example, as shown in figure below, residential permits tend to be higher when home prices have been growing rapidly and lower when price growth has been slow. Similarly, commercial permits tend to be higher when job growth is strong and lower when job growth is weak. The availability of lending also affects construction activity, with tighter lending leading to less construction. Moving forward, we anticipate slower growth in home prices and jobs. In addition, the consensus among economists is that lending will tighten over the next few years. All of these factors suggest that growth in construction will slow.
- Trend Model. The second component of our forecast examines trends in permit activity for each county. We then develop estimates of future permits within each county based on the assumption that recent trends continue.
Our final permit forecast combines the results of the economic model and the trend model into a single forecast.
