Nonpartisan California Government Report Links High Housing Costs To Lack Of Supply

Count me as a supply-sider. Not when it comes to Reaganomics, where supply-side economics has reliably led to deficits and inequality.  No, I’m talking about addressing California’s insanely high housing costs.  These high costs are squeezing the middle class and businesses alike, creating economic inequality and environmental ruin as residents move to far-flung housing over open space and agricultural land with long commutes.

As a supply-sider, I believe we can address this crisis by increasing housing supply, particularly in coastal areas.  And now the nonpartisan California Legislative Analyst’s Office (LAO) has comprehensively documented how this lack of housing supply as led to corresponding price increases in a new report. The report compares California’s housing prices to the nationwide average, and the trends are bad:

Beginning in about 1970, however, home prices throughout the state began to accelerate. Prices were 80 percent above U.S. levels by 1980, and by 2010, the typical California home was twice as expensive as the typical U.S. home. As of 2015, average California home prices were two–and–a–half times higher than average national home prices.

It’s even worse in our coastal metropolitan areas, such as San Francisco, Los Angeles, and San Diego.  Compared to other metropolitan areas, coastal California cities haven’t built housing like they should have:

For example, Seattle—a coastal metro with economic characteristics and average temperatures that are similar to California’s Bay Area metros—added new housing units at about twice the rate as San Francisco and San Jose over the last two decades. (Specifically, Seattle’s housing stock—its total number of housing units—grew at an average annual rate of 1.4 percent per year while San Francisco and San Jose’s housing stock grew by only 0.7 percent per year.)

Per Economics 101 and overwhelming statistical analysis, the LAO firmly attributes the price rise to the lack of supply:

Our review indicates that that the relationship between growth of housing supply and increased housing costs is complex and affected by other factors—such as demographics, local economies, and weather. Nonetheless, using common statistical techniques to account for the influence of these other factors, there remains a strong relationship between home building and prices. For example, our analysis suggests that—after controlling for other factors—if a county with a home building rate in the bottom fifth of all counties during the 2000s had instead been among the top fifth, its median home price in 2010 would have been roughly 25 percent lower. Similarly, its median rent would have been roughly 10 percent lower.

It’s worth noting that some local housing activists dispute this causal link.  They claim that the problem isn’t with supply but with other factors like income levels.  San Francisco Supervisor Jane Kim even tweeted a link to this article that claimed to debunk the supply-side argument, although it only analyzed housing production in the City of San Francisco and failed to examine supply issues across the metropolitan region.  The LAO (and I) certainly concede that there are multiple factors affecting housing prices, but the lack of supply is certainly — indisputably — a big one.

So what is stopping new supply?  The LAO first and foremost points to restrictive local land use policies.  Conservatives like to bag on California for all of its supposedly anti-business regulations (although I’d like to note that California has been doing better in the past year than every state, including conservative poster child Texas, in the economic output department).  But they always seem to ignore our over-regulated local housing sector.

Local governments in California’s coastal areas have steadfastly refused to allow enough housing production.  They make it illegal under zoning codes; they approve retail projects over housing to chase sales tax dollars; their residents threaten ballot initiatives over new housing projects; and neighborhood groups sue housing developers under the California Environmental Quality Act (CEQA).

The state is rife with examples.  Santa Monica residents get their pitchforks out over new housing and office towers near transit, San Franciscans rebel against waterfront housing development, and Oakland and Berkeley residents gnarl down a Safeway redevelopment near BART.  The result is that young families and the middle class are chased out.  New businesses can’t locate in coastal areas because workers require high salaries to afford a middle-class existence.  The air quality worsens for everyone as people drive long distances.  Open space is paved over in outlying areas for cheaper housing away from wealthy coastal residents.  And income inequality soars as California becomes a place for the wealthy on the coast and the working class inland.

In short, it’s not a recipe for success or quality-of-life, and it should be a priority to deregulate land use in our coastal areas.  Otherwise, the LAO reports of the future are going to be even more bleak.


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