The key to solving California’s housing crisis starts with calling it the right name
By Christopher Thornberg
There is little doubt that California’s economy is booming. State employment and output are all growing substantially faster than the nation as a whole. Government revenues are coming in above expectations. And California’s share of national personal income has never been higher than it is today, even as state unemployment levels are coming close to a record low. But this prosperity is creating a crisis in its own right: the rapidly rising cost of housing. Growth in median home prices and apartment rents continue to outpace the nation and California is back to being the most expensive place to live in the United States. While this issue is the center of debate among policy makers at many levels, they have yet to find any solution.
To be clear: this is not a bubble we are experiencing. A bubble is a period of time when the market is growing in ways that are clearly unsustainable given market fundamentals. This is typically driven either by an excessive degree of new construction (think late eighties) or an excessive degree of borrowing (think middle of the last decade). Neither driver is occurring now.
Why have policy makers been so unable to move the needle? It is largely due to a failure of language. The operative term to describe California’s housing problem in government circles is as an “affordable housing crisis.” This is incorrect. What California is experiencing is a housing supply shortage which in turn is making housing unaffordable.
This may seem a trivial distinction, but the slight shift in terminology leads the state towards pursuing the wrong policies. The term “affordable housing crisis” focuses policy maker attention largely on lower income households, and on trying to reduce the costs of housing for these families through special investment funds, inclusionary housing rules, rent controls, and other such programs.
Yet when we recognize that this is actually a housing shortage issue, we start to realize that all Californians are impacted by the problem, not just low-income families. And even a brief look at the data shows how important a fact this is. For example, 56 percent of renting families in California are rent burdened (more than 30 percent of income spent on housing) compared to 49 percent for the balance of the United States. Among homeowners, 33 percent of owners in the state are housing cost burdened, compared to just 23 percent for the balance of the United States. The crisis is worse for owners than renters—and this fails to take into account how much lower ownership rates are here in California than in the rest of the nation.
This word problem has severe ramifications. Many of the policies that the state is considering will actually make the current problem worse. Affordable housing mandates, for example, force market rate families to subsidize lower income families. And, overall, such programs reduce new supply coming online.
Why don’t our elected officials want to use the right words? Because dealing with the housing shortage necessitates policy makers take on a number of sacred cows—something they are simply afraid to do. Really addressing the shortage would include changing state revenue systems (specifically dumping Prop 13 and apportioning local revenues on the basis of population rather than economic activity) in order to financially incentivize local jurisdictions to allow for new housing construction through densification. It would also mean disempowering the state’s mighty NIMBY (Not In My Backyard) armies by substantially reforming the California Environmental Quality Act (CEQA). These are treacherous steps for even the bravest legislative member.
Today, the crisis in California is reaching a breaking point. New supply is still way behind current needs and unemployment recently dropped below 5 percent. There is no more excess supply of labor and the state’s ability to continue growing faster than the nation will critically rely on expanding the labor force—an issue rendered largely impossible by the housing shortage.
Still, despite the housing crisis, California will remain an economic dynamo. High-powered sectors that pay high incomes will continue to attract the best and brightest from across the world. But by definition these folks are able to move to California only through the displacement of lower-income families pushed out by ever-higher housing costs.
While the state will grow a little slower in some ways, it will see the benefits of this substitution effect through higher incomes and less demand on the social safety net. Country club California will be a great place to live—as long as you can afford the entry fee. If you want to see this in action, simply consider the western reaches of the San Francisco Bay Area or the coastal areas of Orange County where the long run impacts of such gentrification are stark.
Words matter. The current language being used to describe California’s housing problems is simply wrong. And the failure of words is causing policy makers to harm the very families they say they are trying to help.
Christopher Thornberg is the Director of the UCR Business School Center for Forecasting and Founding Partner of Beacon Economics. He may be reached at beaconecon.com.