Regulating California’s Housing Crisis

Relaxing growth management rules can remove obstacles, reduce housing shortage

Contrary to popular belief, California’s skyrocketing housing prices-with a median single-family home price of $548,400 last year, compared to $215,000 nationally-are not due to greedy developers and homeowners charging exorbitant prices for homes: the real culprits are stringent state and local government regulations, which have increasingly placed land off limits and prevented new housing from coming on the market where it is most needed.

A new report by the Oregon-based Thoreau Institute concludes that housing costs in California and numerous other parts of the country have been steadily driven up by a housing supply crunch caused by urban planning and land use regulations aimed at controlling growth. These regulations take a variety of forms, such as urban growth boundaries that restrict development on land outside cities, limitations on building permits, cumbersome development approval processes, and numerous environmental and open space preservation rules.

But they share two things in common: they make land harder to develop and they prevent new housing from keeping up with demand.

The Thoreau Institute’s report estimates the costs imposed by growth management regulations on the price of a median-priced home in hundreds of metropolitan areas, and these costs are enormous. For example, regulation alone added over $850,000 to the cost of a median-priced home ($1.1 million in 2005) in San Francisco last year, totaling $591 billion across the San Fran and Oakland metro areas. Similarly, growth management tacked on $316,000 to the cost of the median home in Los Angeles ($463,000 in 2005), and the aggregate costs across the entire metro area total almost $700 billion, the highest of any major U.S. metro area.

Looking at the state as a whole, regulation increased housing costs in all California metropolitan areas by a staggering $2.7 trillion, which accounts for almost half of the nationwide total of $5.5 trillion. Nearly $2.5 trillion of these costs are attributable to growth management regulations in the state’s coastal metro areas—like the Bay Area, Los Angeles, and San Diego—alone.

Who pays the costs of these regulations? While the community-at-large ostensibly reaps the benefits of local growth management regulation, the costs are largely borne by individual homebuyers who pay artificially-inflated housing prices.

There are hidden costs as well. Property owners whose land has been restricted from development effectively lose the rights to use their land in the ways they intended when they purchased their property and have suffered dramatic reductions in their property’s market values. According to the report, per-acre land values within San Jose’s urban growth boundary can easily total at least one hundred times that of values outside the boundary. If the boundary were to disappear, land inside would be worth less and land outside would be worth more.

Another unintended outcome of growth management regulations is the disproportionate effect on first-time homebuyers, particularly minorities and low-income families. By limiting the supply and raising the costs of housing, these regulations act to price a significant portion of families out of the housing market and erect a barrier to achieving the American Dream of homeownership and wealth generation.

A recent study by the California Building Industry Association (CBIA) puts homeownership in California in perspective. While homeownership it at a record high-almost 70 percent-nationally, the study found that the homeownership rate in California lags behind at 57 percent. Most states have homeownership rates well over 60 percent, and only New York state had a lower homeownership rate than California. The study also found that African-Americans and non-Hispanic whites have far lower homeownership rates, 38.8 percent and 62.6 percent respectively, in California than they do in the rest of the nation.

The CBIA study concludes that if California’s current homeownership rate was increased to the national average of 70 percent, over 1.6 million additional California families would own homes. Yet, to achieve this rate would require the creation of 81,000 new housing units per year over the next 20 years, an almost impossible feat given California’s current regulatory climate. And this figure does not even account for future population growth, which will steadily add to the demand for new housing.

The only realistic way for California to begin to produce the massive quantities of new housing needed to address the supply-demand imbalance and reduce housing costs is for state and local governments to remove regulatory obstacles to new housing and ensure a sufficient supply of developable land to meet long-term housing needs.

This is no small task. Current homeowners have a strong incentive to maintain their high property values by keeping a tight rein on new development. California law gives citizens a strong voice in local planning decisions, and in many areas, citizens have successfully used the ballot box to impose strict local growth limits. Likewise, California’s strong environmental lobby is heavily invested in current policies aimed at controlling growth and restricting development and will likely resist any effort to relax growth controls.

Hence, California politicians are trapped between a rock and a hard place. If they embrace sweeping reforms that would relax land use regulations and limit citizen involvement in the development process, then they are likely to face a backlash in the current political climate. If they do nothing, then housing supply shortage is likely to worsen, the repercussions of which could ultimately drive citizens and businesses to other states and damage California’s long-term economic outlook.

The key to California’s future is increasing the awareness on the part of politicians and citizens of the high costs of the state’s current approach to growth management and the severe economic impacts on millions of families. Without strengthening the political will to radically revamp growth management in California, then we face the danger of killing the goose that laid the Golden State.

Leonard Gilroy is a certified planner and policy analyst at the Reason Foundation. An archive of Gilroy’s research and commentary is here. Reason Foundation’s California research and commentary is here and Reason’s growth and land use research is here.