California’s Silicon Valley area set records earlier this year as the median home price surpassed $1 million. The natural response, of course, was to blame wealthy tech companies for bidding up housing prices. While blaming the tech industry is a convenient narrative, it misses the main driver of high housing prices—government policies that limit residential construction.
How Bad is California for Home Ownership?
The Bureau of Economic Analysis calculates a regional price index for rent in every metropolitan region in the United States. Distorting market forces for over 40 years takes a special dedication to failed policies.The most recent data show that in 2014, the Silicon Valley region had the highest rent in the nation with an index value of 200.7, meaning that rent is double the average U.S. rent. However, Silicon Valley is not an isolated problem in the Golden State. The average California metro area’s index value was 150.5, and 16 California metro areas boasted index values greater than 100.
California’s statewide housing crisis is also remarkably long lasting. Starting between 1970 and 1980, housing prices increased to 80 percent more than the national average. Today, a California home costs two and a half times more than that average.
Distorting market forces for over 40 years takes a special dedication to failed policies. A tangled web of zoning restrictions, environmental regulations, community planning commissions, and affordable housing initiatives have successfully prevented necessary construction and made California the most expensive state to live in the continental United States.
Take, for example, the recent saga of Banning Ranch, the largest remaining parcel of undeveloped coastal property south of Los Angeles. In a state with widespread housing crises, one could expect the Banning Ranch construction proposal to be celebrated, and construction was initially approved back in 2012 by the Newport Beach City Council. However, the developers were ordered to present a smaller plan to the Coastal Commission in 2015 after three years of environmentalist stalling.
Government's War on Building
The Coastal Commission rejected the Banning Ranch proposal earlier this fall by citing its different vision for the property—development on about 20 acres with 330 acres set aside as a nature preserve. Over two-thirds of California’s coastal metropolitan areas have adopted additional local anti-growth policies.These demands from the commission came after developers had already offered to leave 80 percent of the 400-acre parcel as open space and reduce current oil drilling on the site. Instead of embracing almost 900 new homes and an environmental compromise, the Coastal Commission gave into demands from locals who appreciate living in a less congested area and who have incentives to keep their own home prices high by banning other development. Environmentalists jumped on the anti-growth bandwagon to protest on behalf of burrowing owls.
From this one example, it is easy to see why no one is building in California. Even more absurd than the Coastal Commission dictating its vision on private development is that the Banning Ranch developers cannot resubmit a new proposal until waiting another six months and paying at least $250,000.
These policies are not simply a nuisance for developers; they come at a direct cost to residents. While the Coastal Commission is a state agency, over two-thirds of California’s coastal metropolitan areas have adopted additional local anti-growth policies such as capping new construction or giving far-reaching authority to review boards. Each one of these countless community policies is associated with a three to five percent increase in housing costs, according to the state’s Legislative Analyst’s Office. Similarly, each independent review of a development leads to a four percent increase in housing prices in the area. In communities with multiple growth control policies, these little increases costs add up for renters and prospective homeowners alike.
Layers Upon Layers of Disincentive
On top of costly local regulations and independent review boards, state law adds another layer that drives up housing costs. Disguised as a measure to increase access to affordable housing, inclusionary zoning in California requires any developer building more than 20 units to sell 15 percent of units below market value or pay a large fee. A 2004 study found that new construction in the Bay Area drastically fell after an inclusionary zoning policy was put in place, leading to a 31 percent decrease in new construction one year after implantation. The cost of inclusionary zoning policies in the Bay Area alone was estimated to be $2.2 billion.
Another state law, Proposition 13, limited property taxes to one percent of a home’s purchase price instead of basing it off current market value, which is the norm throughout the United States. This creates incentives for homeowners not to move and for local politicians to zone for retail spaces instead of residential areas in order to increase tax revenue. Furthermore, such low property taxes make developers much more likely to hold onto vacant land.
There is no doubt that the demand for high-paying jobs in Silicon Valley and the rest of California contributes to higher rents. But state and local governments should not attack successful industries that drive economic growth. They need to realize that the outrageous home prices in Silicon Valley are a reaction to the overarching problem of a lack of available housing—not the cause. The true driver of sky-high rents and housing prices are the multitude of zoning restrictions, environmental regulations, community planning commissions, and affordable housing initiatives that stymie necessary development. Residents of the Golden State would be wise to roll them back.
Reprinted from Economics21.