Why Are Houses In California So Expensive? 5 Main Reasons
California is seen as a golden haven of pop culture, technology, and business, but the Hollywood dream has a startling downside: California’s average house price is almost double that of other states. In some places, you can get several houses for what you’d pay for a single house in California!
So, why exactly are houses in Cali so darn expensive? We’re here to take a closer look at the nitty-gritty reasons.
Top 5 Reasons Why Houses in California are so Expensive
1. Not Enough Housing
This is fairly simple to understand: if there’s not enough of something, what’s left is going to be more expensive. In the past 20 years, there hasn’t been enough housing, affordable and otherwise, built to keep up with the number of people buying houses.
To keep up with the demand for housing, California needs millions of more homes. As you’ll see in the rest of this article, it’s quite difficult to build houses in that kind of volume.
Even where housing is being built, it’s not usually in areas people want to live. Central Valley had a housing boom some years ago, but that’s not where most people want to live or buy a house.
2. High Demand To Live In California
This one is probably obvious, too: People love California. The state has something for everyone, whether it’s Silicon Valley, Hollywood, or any other number of distinctly Californian dreams. If people didn’t want to live in California, the housing prices wouldn’t be so high.
Is it really that simple? Kind of. There’s tons of speculation that foreign investors buying up Californian houses for cash is inflating the average price of homes, but that could just be in certain areas like San Francisco.
3. Proposition 13 Disincentivizes Housing
In case you’re out of the loop, Proposition 13 was a ballot initiative capping how much local governments get from property taxes. In theory, it was supposed to help homeowners from paying insanely high property taxes, but it has actually harmed the housing market.
Simply put, governments make little in tax revenue from, say, apartment buildings. Because property taxes are capped, a used car dealer or Wal-Mart makes the city more in taxes. This has removed the incentive to build affordable housing in California, further widening the gulf in real estate prices.
The state of California itself has argued a lot about whether this is a significant problem, but most agree that it’s irrefutably an issue.
4. Difficulty Getting Housing Projects Approved
A more bureaucratic reason that California is so expensive is that it simply takes a lot of time to have housing projects approved. Hard data is scarce on this topic, but research from the University of Wharton says that it takes up to a year just to get approved for a new housing development in San Diego, while L.A. can take as long as 8 months!
This time estimate is solely for getting housing developments approved, so it doesn’t even take into account how long it takes to have the land rezoned from commercial to residential.
There are several pieces to this bureaucracy, which we’ll briefly review.
So, if you factor in the hundreds of thousands of dollars or more in fees from this lengthy approval process, it makes sense why the houses are at a markup.
5. Things Are More Expensive There
This includes labor and raw materials, both of which are vital aspects of any construction project. Labor is a staggering 20% higher in California than in other states, which is only rising as social unrest calls for higher wages in the wake of the COVID-19 pandemic.
While Californian land is the highest factor in home prices, those pretty houses don’t build themselves either. Some of the highest raw material prices are for wood and timber, though concrete and cement aren’t cheap. Tariffs on Chinese products alone have driven up the cost of a Californian house by $20,000 to $30,000!
Why Is California So Expensive?
Housing isn’t the only area where California is more expensive than the rest of the country. Everything from gas to groceries costs more in the Golden State, but why?
It’s complicated, but two factors include high taxes and regulation. California is known as a liberal bastion in the U.S, so it implements a lot of environmental regulations. Between regulations and a high federal excise tax, California pays the most in the country for gas.
Cars are more expensive to insure, too. Because of the dense urban sprawl where many people live, accidents are far more common than in, say, Middletown, Iowa. Long commutes are also pretty common, so that’s a factor too.
Finally, you have to consider that California is a high-income state. While housing is out of control, income is generally pretty even when it comes to other costs and expenses.
It’s easy to look at California and lay the blame for its housing shortage, but the truth is that there are numerous contributing factors that all come together to exacerbate the issue. Between excessive regulation and simple supply and demand, it’s not likely to be solved any time soon.
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