California's Affordable Housing Crisis Is a Crisis for Business
Proposition 30, the California Environmental Quality Act (CEQA), not reforming education post-Vergara v. California, and AB 32 - are all easily identifiable policies contributing to California's struggling business climate. But let me add another one: California's housing affordability crisis.
California's housing affordability crisis extends not just to those wishing they could become homeowners, but also to renters. The average renter makes about $18 per hour in California, yet to afford the state's fair market rent requires an average wage of about $26 per hour. For would-be homeowners, there is a similar affordability gap. The median home sale price in California is just under $401,000, but the annual salary needed to afford such a home (assuming typical monthly payments) requires a salary of $77,000, which is about $16,000 above California's median household income.
California's knee-jerk response has been to relieve the symptoms, but ignore the disease. Rent control, inclusionary zoning (the practice of setting aside a certain percentage of new units for low-income tenants), and targeted subsidies all help individuals afford housing in a world without consequences, but as logic dictates, there are always consequences when governments meddle with prices. As one would expect, these subsidies increase demand. In fact, rent control and inclusionary zoning are both forms of price ceilings, which actually decrease supply, thus exacerbating the underlying problem further.
California's affordability crisis isn't a market failure; it is a government failure and one of our own doing. By restricting supply artificially through bad public policy, Californians are being priced out of their own state. For instance, between 2011 and November 2014, the City of Houston, Texas approved more housing permits than the entire state of California. In San Francisco, housing supply is about half of what is demanded. As UC Berkeley economist Enrico Moretti puts it, "the problem with high rents is the very, very constrained supply of housing, and the housing supply is so constrained because we made it so constrained."
And the issue impacts California's economic success. California's average business climate rank across the three major rankings (CEO Magazine, Forbes, and CNBC) is 40th. Most of the main contributors (i.e. those categories pulling California down) and areas of concern (i.e. categories where California ranks mediocrely, but not terribly) can be linked back to the affordability crisis. High regulations are the culprit restricting supply; high property and housing costs increase business costs and cost of living, thus making it harder for businesses to get off the ground and recruit workers; high housing prices impact the quality of life, and by eventual extension, the quality of the labor supply (those moving out of the state are more likely to be middle-class families and recent college grads); and because residents have to live on the outskirts of urban areas such that they're forced to commute long distances, high housing prices put pressure on the state's already inadequate transportation system.
Yet what's most threatening about the affordability crisis is how concerned Silicon Valley is about it. 90% of Silicon Valley CEOs list housing costs as one of the top three living challenges for their workers, while 72% of those same CEOs list housing costs among the top five business challenges. And because California's economy relies so heavily on Silicon Valley - the region has accounted for 30% of California's post-recession job creation despite it representing just 22% of the state's population growth - if the region falters for any reason, the Golden State will struggle to economically recover.
On the state-level, CEQA reform is a first step. Environmentalists use CEQA to stop all development, while unions use it as a tool to strong-arm developers into employing unionized labor. One solution: exempt all housing development construction from CEQA. There is no reason housing shouldn't be treated differently than a football stadium in Los Angeles or a basketball arena in Sacramento. The problem is that state-level policy is limited since most housing rules are local issues. Local leaders need to realize that their restrictive housing policies are negatively impacting their local economies, in addition to the state's.
By unleashing the power of increased housing supply, Californians would more easily be able to climb the housing ladder. Think of each "quality" level of housing being a rung on a ladder. By adding a new rung at the top, you have opened up supply for someone to climb up. Once that individual moves up, there's new supply below. While increasing housing supply takes time to fully implement, it is the only way to remedy the California affordability crisis. Only then will California have eliminated one of its barriers to vibrant and consistent economic success.
