By Luke Teater

Colorado’s legislative budget writers are about to receive updated revenue forecasts and begin making final cuts to close a historic budget gap, and Proposition 123’s affordable housing financing tools are on the chopping block. 

But in their urgency to close one deficit, legislators risk deepening another.

As a Deputy Director at the Office of State Planning and Budgeting (OSPB) during the COVID pandemic, I viscerally understand the painful challenge of trying to balance the state’s $44 billion budget during a fiscal crisis. But as an independent housing economist and one of the authors of Proposition 123, I also understand the critical role that Prop 123 plays in addressing the most severe effects of our state’s housing shortage. 

First, some genuinely good news: Rents have been falling across the board, and they’ve been falling the most for units at the bottom of the market. Research I co-authored with Housing Forward Colorado found that Denver’s recent construction boom reduced rents the most in the most affordable market segments — Class C (older, more affordable) apartment rents are down by 10%, more than double the decline seen in Class A (newer, high-amenity) properties. 

This also illustrates an important framework for understanding the housing crisis. Think of the housing market as a game of musical chairs, where the chairs are auctioned off to the highest bidder. When we don’t have enough homes for everyone, it disproportionately increases competition and raises rents for the most affordable units, ultimately displacing anyone who can’t afford to keep up. When we relieve the housing shortage (adding more chairs to the game), the effect is reversed.

Some people are pointing to these recent rent declines as evidence that we can now safely afford to cut Prop 123 funding, but this misses critical context. The building surge that gave us these rent declines has already ended — Colorado issued nearly 60,000 housing permits in 2021, but barely more than 30,000 permits in each of the last two years. Because of construction timelines, we won’t feel the effects of this slowdown for another two or three years, but it’s already baked in. 

When this lagged effect arrives, the same market dynamic that delivered disproportionate relief to low-income renters will reverse, and we’ll again see the lowest-income households get squeezed hardest. 

So instead, this is the worst time to reduce funding for affordable housing, because the affordable homes Prop 123 would otherwise fund this year would come online in two to three years, right as the coming rent squeeze is hitting hardest. Cutting funding now means those units won’t exist right when they are needed most. 

A recent study by ECONorthwest found over its first two years, Prop 123’s financing fund has leveraged $288 million in state funds to unlock $2.3 billion in affordable housing investment — a nearly 8:1 leverage ratio that is building more than 7,200 new homes for Coloradans (not to mention bringing in an estimated $66 million in new state revenues). 

This cost-effectiveness wasn’t a happy surprise, it’s exactly how Prop 123 was designed — as a catalytic investment that unlocks private and federal financing and then recycles it back to the state. 

But the reverse is also true. Because of how Prop 123 strategically leverages outside investment, cuts to this fund reduce total affordable housing investment in Colorado by many times more than the dollar amount of savings the state will realize. Based on the outcomes we’ve seen over the first two years, a proposed $105 million budget cut could actually result in a loss of nearly $800 million in total affordable housing investment and about 2,500 fewer affordable homes for Coloradans.

The challenge facing the legislature is that Colorado doesn’t only have a budget deficit, it has a housing deficit as well, and the costs of the housing deficit are dramatically regressive. The State Demography Office estimates that Colorado is short 106,000 housing units, and some other estimates are even larger. Fully funding Prop 123 will not “solve” this housing shortage on its own — other policy measures, like HB26-1114 to reduce excessive lot size requirements and HB26-1308 to allow landowners to split their lots, are absolutely essential — but cutting Prop 123 will deepen our housing deficit on the backs of those low-income Coloradans who are already disproportionately bearing the costs of this shortage. 

Colorado’s constitution requires the legislature to pass a balanced budget by the end of session, and it will. But there is no constitutional deadline for addressing the housing deficit, no committee required to close it before sine die — just hundreds of thousands of rent-burdened Coloradans who will bear the costs of delay. 

The legislature should balance the budget it’s required to balance without deepening the deficit that it’s allowed to ignore.

Luke Teater is an applied housing economist and the principal of Thrive Economics. His work integrates policy analysis with economic, demographic and administrative data to deliver actionable insights on housing supply, affordability and the regulatory and financial barriers and incentives that shape local housing markets.