Why is Real Estate so Expensive in California | Reasons Explained
Housing affordability is a worry for nine out of 10 Californians, and almost one-third of them are contemplating leaving the state because of it. Tenants and landlords are suffering, homelessness is rising, and the real estate market has gotten out of hand. The COVID-19 epidemic is not the primary cause for this, but it exacerbated California’s long-standing housing crisis at the time. According to a March study by the Public Policy Institute of California, all of this is accurate. Let’s find out why is real estate so expensive in California.
Why is Real Estate so Expensive in California?
Not enough housing
Experts studying California’s housing crisis disagree on a variety of issues. Is rent control a good thing or a terrible one? Will the gleaming new skyscraper in your area help or worsen housing costs? To what degree should we place responsibility for our difficulties on “not in my backyard” (NIMBYs)?
However, the great majority of housing specialists agree on one point: Over the last two decades, California has not built enough houses to keep up with the growing population.
To keep prices stable, the state housing administration estimates that 180,000 new houses must be built each year. The average over the preceding 10 years has become less than half.
In the early and mid-2000s, new home development was on the rise. In coastal cities, no new houses or apartment complexes have been built.
While areas like the Inland Empire and Central Valley witnessed a development boom, cities like San Francisco and Los Angeles remained mostly stagnant.
The desire to live, work, and own property in metropolitan California has reached critical mass.
Californians have progressively attempted to cram into already overcrowded large cities during the last decade. The bay area is an example of this. Between 2000 and 2007, the Bay Area cities accounted for only 4% of the total population growth in the state.
Approximately 20% of all new Californians were born in or migrated to the Bay Area between 2010 and 2017. While the IT industry is undoubtedly to blame for much of this trend, the rising demand for housing in California’s urban cores is not limited to Silicon Valley.
Individuals desiring to live and work in Los Angeles and San Diego have increased significantly, resulting in increased competition for rental units.
Proposition 13 lessens the city’s desire to build new housing.
Why hasn’t California built enough housing to accommodate its growing population?
Proposition 13 is seen to be a contributing factor by the majority of housing researchers. The historic 1978 ballot proposition lowered the amount of property taxes collected by municipal governments. While Proposition 13 was intended to protect California homeowners from exorbitant property tax payments, it has resulted in a number of unintended effects. Assume you’re in a city with a large empty lot.
That land might be used for housing or commercial purposes, such as a hotel or a Target. Housing is in short supply in your community, and prices are skyrocketing.
Proposition 13 has made it far more difficult to make development choices. Local governments are becoming more reliant on other revenue sources as property taxes are constrained. If a huge retail store, rather than a multifamily residential complex, is built on that vacant land, it will be significantly more valuable to the city’s coffers.
It’s referred to as “land use taxation” by housing experts.
Why hasn’t California built enough housing to accommodate its growing population?
The approval process for new houses in most parts of California is lengthy, time-consuming, and expensive.
Being sympathetic to developers may be difficult. They seem to have grumbled about rules and limitations that they believe make it more difficult to establish their projects from the beginning of time.
While it’s tough to trust builders, it doesn’t mean they’re doing anything wrong. The process of approving land for a new building may be very bureaucratic, time-consuming, and dangerous.
While accurate statistics on housing costs are difficult to come by, the typical project authorization time in San Francisco is over a year. It will be eight months in Los Angeles. This does not take into account the need to rezone the property for residential development, which might take considerably longer.
What is the Reason for the Delay?
There are many layers of government review: Multiple government authorities, including the planning commission, department of health, fire dept, building unit, and, probably most importantly, the city council, must all approve a housing project.
There are several options for “Not in My Backyard” voices: Residents have an opportunity to express their opinions throughout the review process for new projects.
Neighbors may be concerned that new housing developments may alter the character of their neighborhoods, increase traffic, and depreciate their property values.
If a city councilman votes in favor of more housing, they may risk backlash from constituents.
Controls on local growth: Two-thirds of California’s coastline towns and counties have enacted ordinances that expressly restrict the number of new houses that may get constructed within their boundaries, as well as regulations that limit the density of new development.
More subtle growth constraints include a lack of available land for a new building or the need for super-majorities to allow more residences.
Land, labor, and raw material costs are higher in California than elsewhere in the US.
Almost anywhere else! There’s also the ocean to consider. You can’t go all the way to the ocean. Due to a scarcity of land and high demand, prices are high. In many California marketplaces, the land on which a single-family house or apartment complex is constructed accounts for the majority of its value.
However, although the land itself accounts for the majority of a developer’s expenditure in California’s hotter markets, it is not the only cost component.
Construction workforce and raw material prices have risen in California over the last five years and are higher than in other states.
Construction labor is 20 percent more costly in California’s major domestic sites than in the rest of the nation, according to the Legislative Analyst’s Office.
When it comes to labor, the scarcity of competent construction workers is mostly to blame.
Construction workers departed in droves as the housing market crashed in the late 2000s. Those same employees haven’t shown up.
Construction now does not seem to entice younger employees in the same way it did in the past. Companies are frantically recruiting younger employees to supplement and ultimately replace an older population. Many California communities have building codes and environmentally friendly design regulations that necessitate the use of various kinds of raw materials in construction, many of which are more costly than in other areas.
In addition, the cost of crucial commodities like timber and concrete is rising throughout the nation.
How Hard is it to Buy a Property in California?
It’s challenging and demanding at the same time. This is in comparison to how difficult it is in other states. And in addition to how difficult it was for previous generations of Californians.
The typical California house was roughly three times the average family’s salary in the late 1960s. It now costs more than seven times as much as the typical household makes. While buying a house in California has always been more costly. The disparity with the rest of the nation has grown into a chasm. According to 2019 Census statistics, the typical California house costs more than 2.5 times the national median home.
The outbreak has had little effect on the housing market. In California, demand has historically outstripped supply, particularly true right now. Even though many families are suffering from the financial consequences of COVID-19, wealthy households with cash to spend and access to low-cost borrowing have pushed prices further higher.
California’s median house price hit an all-time high of $712,430 in September 2020.
Frequently Asked Questions
Will the California home market rise or decline in 2022?
California’s typical home price will rise 5.2 percent to $834,400 in 2022, following a 20.3 percent gain to $793,100 in 2021.
How severe is California’s housing crisis?
New home construction in California has been somewhat slower than in the rest of the country during the past few decades. The majority of these new dwellings are in inland areas without development. As a result, California’s housing supply has lagged behind the state’s demand for emissions and housing higher than the mainland.
We built a quantitative model of California’s housing market to give the legislature an estimate of the magnitude of this housing gap.
This section describes the model and its outcomes before assessing the likelihood of sustained housing shortages of comparable magnitude in the future.
Is selling your California property a good time to sell?
According to the survey, nearly a third (70 percent) of Californians say now is a good time to sell a home. This is a decrease of -2 points from the August 2021 survey. Half (53 percent) of consumers surveyed believe property prices will climb over 12 months.
This represents a decrease of 1% from the previous month. Less than half of the respondents expressed optimism about the economy’s revival. Only 38% (down from 38% last month) expect economic conditions in the state will improve over the next 12 months, while 62% remain pessimistic.
Why are California home values so high?
Numerous people aspire to live in California. The state is stunning, the weather is pleasant, and the cities are, to put it mildly, iconic. However, California has some of the highest property values in the country. This makes it difficult for many residents of the Golden State to afford a home.
This high cost per home results has some variables. The most significant one is the high cost of labor and instruments.
How many additional homes is California in desperate need of?
California would require 500,000 housing units per year to meet Newsom’s targets. Even if California Housing and Community Development’s more modest prediction of a 1.8 million unit shortage is used, the state would require tens of thousands more homes.
Bottom line
California is a progressive state that has implemented numerous policies to lower carbon emissions and protect the environment. This affects a variety of prices, including housing.
California’s land-use rules have harmed the availability of homes in major cities. Regulation prevents residential growth in the first place by limiting the amount of housing that companies can build. In California, the average cost of building an apartment or a house is $326,000. This also contributes to the state’s high housing costs, and that land is more expensive there.
