Why Are Housing Prices so High in the Bay Area?

Why Are Housing Prices so High in the Bay Area?

By: Alice Liang | October 24, 2018

It’s a question on every potential Bay Area resident’s mind. At a more basic level, it boils down to supply and demand, just like with any other commodity. Numerous people want to live in the Bay Area, but there aren’t enough homes for them all.

It doesn’t help that the area lies on a peninsula surrounded either by water, or by protected land in form of forests, hills, or mountains. These factors, among others, have increased the price tag of Bay Area homes to painful proportions.

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As is evident on the infographic above, housing prices in Palo Alto have more than doubled in the past five years. An average 1 bedroom now goes for over 1 million dollars. More than double the national average for similar homes.

As a result, over 20% of tenants in this area spend over half their income on housing alone.

So the question begs, what are the reasons behind this phenomenon?

1. Numerous job opportunities

San Franciscans and Californians at large have over the last decade enjoyed rising job opportunities thanks to Silicon Valley. Not surprisingly, the Bay Area has been the preferred residential area for newcomers and old-timers as well.

As a major urban center, the Bay Area has seen an influx of residents cramming to own a piece of the peninsula. The numbers show that between 2010 and 2017, almost 20% of all new California residents were flocking to the Bay. This is in contrast with the 4% of new Californians that settled there over a similar period from 2000 to 2007.

2. Housing Shortage

For a long time, the Bay Area and California, in general, has lagged behind the national average in building new houses for new residents. The Bay Area, in particular, has also been held captive by NIMBYs (not in my backyard), a movement that campaigns against the development of high rises in residential areas.

To put the figures into perspective, it is estimated by the housing department that California should build 180,000 new houses to stabilize the prices. However, over the last decade, the number of new housing units have been less than half that estimate. During the last construction boom in California which was in the mid-2000s, coastal cities, which are where most residents work, missed out. The building craze back then fell on places including Central Valley and the Inland Empire while San Francisco and Los Angeles were left out.

3. Getting approval for New Housing projects is expensive, cumbersome, and time-consuming

San Francisco is one of the areas in California with the highest waiting times for housing approvals. On average, it takes a whopping 12 months after the application for approval before a new housing development is approved.

And this timeline excludes instances where the city councils need to rezone the land in question, an exercise that lengthens the approval periods.

Factors that influence the timeline for approvals include:

• Numerous Stages of Government Review: Government agencies involved in this process include the city council which is arguably the most important of them all. Other agencies with a say include the building department, fire and health departments as well as the planning department.

• Public participation: As proposals are reviewed, locals are given a lot of avenues and chances to voice their concerns. As it happens, most longtime residents have always been against new high-rise developments, arguing that the neighborhood characters would change from what they were looking for in the first place.

• Environmental Laws: California Environmental laws include the Environmental Quality Act. Popularly known as CEQA, the law requires that new housing developments take environmental impact into consideration. Unfortunately, the law has been subject to abuse to the extent of being used to shoot down even environmentally friendly developments. When this law is applied during the review process, it delays the project by two and a half years on average.

4. Government Policies

Government policies have as well contributed to the slow growth of housing units in the Bay Area. One such policy is Proposition 13. The initiative, passed in 1978, capped the amount local governments could collect as property taxes.

While its initial intention was to protect homeowners in California, the proposition has instead produced a multitude of unforeseen consequences.

With local governments relying on alternative sources of revenue, they have resorted to frustrating housing development efforts in favor of commercial development, from which they can collect more taxes from businesses.

5. Demographics

Lastly, as evidenced in the housing infographic, demographics also influence housing prices. With most homeowners in Bay Area being between 40-60 years old, it’s understandable that they are incentivized to hold off from moving or selling their residences – they are either burdened by children or are saving for or entering retirement.

Ultimately, the factors above feed into the Bay Area’s housing problem, with no clear solution at the present.

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