Why is housing so expensive in California?

Los Angeles has more than 15,000 homeless residents living in their vehicles. In San Francisco, the median home price is $1.4 million, 59% of Silicon Valley tech workers can’t afford a place to live, and 88% of all households can’t afford to purchase a home. In San Diego, some have turned parking lots into de facto apartment complexes whose “residents” live out of their cars. Silicon Valley firm MainStreet has gone so far as to pay $10,000 for some employees to relocate out-of-state. Facebook is donating millions to build an apartment complex for teachers.  Apple has pledged to spend $2.5 billion to do what it can to alleviate the housing crisis.

The cost of housing has steadily increased since 2012, according to Zillow, which at the time of this writing lists the median California home price as $550,800. Four of the top five most expensive metro areas for housing are in California. Indeed, the cost of housing in California is one of the main reasons cited by people who either have left the state altogether or are considering doing so. Indeed, about half of Californian voters have considered moving out of state. Not surprising when Californians spend more than half their income on housing.

Except, that doesn’t actually make sense. In 2018, 700,000 people left California. This marks the eighth year in a row that the number of Californians moving away has increased, an the 15th that the state has experienced a net population loss. A basic understanding of supply and demand would make one think California’s housing prices should be going down, not up.

For comparison, neighboring Arizona’s median housing price is half of California’s. Now, you may say, that’s Arizona, a land of arid deserts with 100+ degree weather for much of the year. Yet Oregon, another state on the beautiful and temperate West Coast, is still far cheaper than California for housing. On the East Coast, meanwhile, states like South Carolina are cheaper even than Arizona.

So, why is California’s housing so expensive?

Because California hasn’t built enough houses.

I mean, on the surface, that seems like an obvious answer. If demand is decreasing, but prices are still rising, it logically follows that the demand must still be far higher than the supply. California’s high housing costs are a simple result of there being too many people trying to buy or rent places to live in California. Mystery solved!

Except, that immediately leads to a follow-up question: why hasn’t California built enough homes?

There are a few reasons. For starters, building in California is difficult. Look at a map of the state, and you will see a rugged terrain of mountains and coastlines that aren’t exactly amenable to tons of construction.

California map from the USGS

Not only that, but California is a known for its earthquakes, presenting architects and engineers with an expensive challenge to make structures that will be safe when the ground shakes. Then there’s the wildfires, some of which have recently destroyed once-thriving communities. News headlines like this raise safety concerns about letting new developments sprawl into areas that could be vulnerable to fires, such as forested hills and mountains.

Another factor is the labor pool. The housing crisis is something of a self-reinforcing vicious cycle. The types of skilled and unskilled labor that are required for a healthy construction industry don’t generally pay enough to afford the cost of housing in California, and that means a shortage of construction workers and higher labor costs for construction projects. This, in turn, makes it harder to build affordable housing.

Even with these factors taken into account, there is still another key reason that housing in this state is so expensive that popped up again and again in the sources I found when researching this topic: the state and local governments.

Let’s say you want to build a brand-new affordable housing complex in some California community. First, you better do your research: California has extensive land-use regulations that have increased in number year after year for decades, making it far harder to even get a land-use permit. Next, you have to have your proposal reviewed by a myriad of government agencies and bureaucracies, each of which can place additional restrictions you have to abide by in order to get permission to build (making your project more expensive). This process can take months, by the way.

Oh, and let’s not forget that you are building in CALIFORNIA, a state that has a long history of taking environmentalism seriously. Any new building project has to have its environmental impact assessed, a process that can literally take years.

Did I mention that you have to pay fees at every stage of this process? Many of these fees are not exactly easy to learn about in advance, either, with hidden fees bringing up the total you would have to pay up to 18% of the cost of your project in some jurisdictions.

Then, you have to get the final approval from the city council or county board of supervisors. These local politicians are under immense pressure from NIMBY voters (short for “Not In My BackYard”), most of whom already own property in the community and like having high housing prices as it makes their own homes more valuable. They will probably give long-winded speeches about how your development could “change the character” of their community. Pressure from these voters have already pushed quite a few communities to adopt laws that explicitly restrict housing growth.

Now, a few observant Cat Flaggers may be wondering, “Won’t the high housing costs cause these people to have to pay skyrocketing property taxes?” Well, no, thanks to a 1978 ballot initiative passed by California voters known as Prop 13. This law caps the property taxes that can be assessed on housing. Basically, California bases property taxes on the value of a home at the time of purchase, and only allows a slight annual inflation increase. This means that Californians who have owned their home for decades are taxed far lower than the actual current market value of their property would indicate.

This law is incredibly popular among Californians, especially homeowners (for obvious reasons). Yet one big unintended side-effect is that it eliminates the incentive for local governments to approve residential developments. The city or county would earn far more revenue from approving a retail store.

Is it any wonder, then, that California’s housing is so expensive? It is remarkably difficult and expensive to even get a housing project past all the immense red tape that the state and local governments put up and all the objections of those who already have their own houses. Add onto this the higher cost of labor and the practical challenges of even building in California, and it seems a miracle that any housing is built here at all. A report in 2016 by McKinsey & Company says California needs 3.5 million new homes in the next six years to alleviate this crisis, yet the system is stacked against housing construction at every step. Meanwhile, California is now home to one out of four homeless Americans.

Thus, we can see that burdensome regulations, a voter-mandated tax policy, and the high cost of construction in California have left people stuck either scrambling and competing against each other to be able to find any housing at all, or giving up altogether and leaving for other states. Until all of these problems are addressed, this crisis will only continue.