Commentary

Why California Home Prices are So High

Thanks to land-use planning and regulation, California has the least-affordable housing in the nation. The most affordable housing market in California is less affordable than 90 percent of the other housing markets in the U.S. These high prices impose hardships on low- and middle-income families and discourage employers from locating in the state.

Under the mantra of “stopping sprawl,” urban planners have crammed nearly 95 percent of Californians into just 5.1 percent of the state’s land area. The nation’s three densest urban areas, and 11 of the 20 densest urban areas, are all in California. Thanks to urban-growth boundaries, greenbelts and other planning restrictions, the average California urbanite lives in communities that are 80 percent denser than in the rest of the country.

In addition to extraordinarily high housing prices, this density drives up business costs, taxes and traffic congestion.

LAFCOs trap taxpayers

It wasn’t always this way. In the 1960s, California was growing much faster than it is today, yet housing was no more expensive than in most other parts of the country. California was growing so fast that cities often competed with one another over which would get to annex (and collect taxes on) land suitable for development.

To minimize such competition, in 1963 the California Legislature created a local area formation commission (LAFCO) for each county. These commissions could approve or veto the formation of new cities or special service districts and annexations to those cities or districts. Most commissions were dominated by representatives of the city councils in each county.

The cities soon realized they could use LAFCOs to keep most taxpayers within their boundaries. No longer could a developer build houses on vacant land outside of a city’s limits and incorporate a new city or service district to provide the water, sewer and other infrastructure needs for those homes.

After eliminating the competition from such developments, cities could impose costly and time-consuming planning restrictions that further drove up housing costs. What was portrayed in public as a war on sprawl was, in reality, a war on taxpayers seeking to escape the high tax rates imposed by cities.

Scarcity drives up prices

In fact, a war on sprawl was and is unnecessary. If Californians could live at the same densities as the rest of the U.S., the state’s urban areas would cover 8.5 percent of the state instead of 5.1 percent. Is it really worth paying three times as much as most of the rest of the country for homes in order to save 3.4 percent of the state from development?

In effect, California has become like an exclusive country club, open only to the very wealthy.”

Homeowners may think they benefit from high housing prices, but that is not necessarily the case. An artificial land shortage not only makes prices high, it makes them more volatile as well. Since prices fall during recessions by more than in other parts of the country, California suffers more foreclosures and bankruptcies.

Even if you can pay for your house, you only benefit from the high prices if you are willing to sell and move to a less-expensive state or a smaller house. Those who want to move up to a larger house in California face as big an obstacle as first-time home buyers.

California Country Club

The effects of high housing prices fall hardest on low- and middle-income families. One reason why some Californians commute such long distances and congestion is so bad is that people have to go far from work to find housing they can afford. While America is known for its mobility, research has shown that when housing is expensive, unemployment rates go up because people can’t afford to move to places where they can find jobs.

In effect, California has become like an exclusive country club, open only to the very wealthy. While its members may enjoy its amenities, everyone else is either denied access or forced to pay an extremely high price just to peer inside the club’s gates.

California’s artificial land shortage also increases costs to businesses and stifles growth. Despite being home to fast-growing high-tech industries, for example, Silicon Valley actually had fewer jobs in 2006 than it had in 1990.

Restore the dream

Historically, the American dream of homeownership has been key to California’s prosperity. Land-use restrictions threaten that dream, stifle growth, and are particularly unfair to low- and moderate-income families.

Restoring the dream would mean allowing developers to build outside of existing urban boundaries. Since California is nearly 95 percent rural open space, developing a few thousand acres of marginal farm and rangelands will not hurt the state’s economy or its environment, but it will greatly improve the state’s affordability and livability for both present and future residents.

Randal O’Toole is a senior fellow with the Cato Institute, which recently published O’Toole’s paper, “Do You Know the Way to L.A.?” and which is co-sponsoring the Preserving the American Dream conference in San Jose on Nov. 10-12 (americandreamcoalition.org).