Are High Housing Costs Restraining California's Growth?

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It's no secret. California is expensive. But is it a little more nuanced than that; coastal California is very expensive while inland California is just moderately expensive. Yet, despite being a well-known fact, Sacramento doesn't appear too concerned with California's growing price tag even though there is evidence it could be slowing the Golden State's economic growth.

Real estate is typically the go-to indicator to gauge how expensive a state is. And California has, arguably, the most overvalued real estate market in the country. Based on analysis by Jed Kolko, Chief Economist at Trulia, 8 of the top 10 most overvalued markets are in California cities. Possibly more problematic for California is that both coastal and inland California home prices are well above the national median. The average listing price nationwide is just approximately $341,000. Meanwhile, California's average listing price is over twice that. Even excluding the non-coastal counties, California's median average listing price is still about 10 percent higher than the nation as a whole. This is problematic since there is evidence of a clear correlation between California's high home prices and domestic out-migration from the Golden State.

Yet, California's real estate isn't the only pricey item that could be causing the state problems. Looking at purchasing power across the country reveals that a dollar doesn't go very far in California. Purchasing power is how much of the same thing a dollar can buy in different areas. California's purchasing power is 112.9, which means California is 13 percent more expensive than the national average. Another way to think of this is how much $100 can buy in each of the states. For California, $100 can only buy $88.57 worth of goods, while, for example, $100 can purchase $101.21 in neighboring Oregon. And again, both inland and coastal California have weaker purchasing power than nationwide; indeed, while inland California is just slightly more expensive than the national average, coastal California is about 5 percent more expensive than inland.

The 'priceyness' of California affects individuals, particularly the poor and middle-class, who increasingly cannot afford the state's quality of life. Importantly, these expenses also affect, determinately, California's business environment. On a cost per job basis, California ranks 46th in the nation; this is the root of California's anti-business climate. The more expensive it is to hire and employ workers, the fewer jobs businesses will create. Assuming business requires expansion, it is cheaper to explore other areas. Overall, California's cost per employee is about 19 percent higher than the national average. Of the western neighbors, Washington is the closest to California, but it is still 5 percent cheaper. Indeed, California's cost per employee is 15 percent more expensive than the average western state.

Across the board, California labor costs per employee are higher, ranging from 14 percent higher than average for labor wages to 61 percent higher for workers' compensation. Compared to the other western states, California's wages are 11 percent higher and workers' comp is 55 percent higher.

But labor costs are not the only factor behind high California costs. Taxes and legal fees also tilt business expenses upward. Not only is California's corporate income tax about 32 percent higher than its western neighbors (12 percent higher than the national average), the state's business fees are also 63 percent higher than other western states (31 percent higher than the national average). On average, California businesses pay 22 percent more in commercial liability costs per employee than other western states.

The biggest problem with California's costs is that there is no single, simple fix. Obviously in the area of business costs the state's burdensome corporate taxes and fees represent a clear policy problem. In that case, eliminating the corporate income tax entirely (it brought in only 6 percent of state tax revenues in FY 2012-2013) would clearly yield large dividends for the state's economy. Tort reform and other legal fixes to reduce frivolous lawsuits would certainly help also. But when it comes to other costs, the answer isn't as obvious. In some areas new housing development would certainly help, but it would also reduce the excess equity current homeowners have.

Nonetheless, Sacramento has largely ignored these pricey problems (and in some cases, worked to exacerbate them). If California's leaders truly want a comeback, working to ensure the Golden State is affordable - both for individuals and businesses - would be a good starting point.


Carson Bruno is the assistant dean for admission and program relations at the Pepperdine School of Public Policy. Follow him on Twitter @CarsonJFBruno.

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