Urban containment has significant costs. In commenting on the association between London’s urban growth boundary,1 and the higher costs of housing, The Economist said: “Suburbs rarely cease growing of their own accord. The only reliable way to stop them, it turns out, is to stop them forcefully. But the consequences of doing that are severe.”2 These are evident in California:
- Middle-Income Housing Affordability: Downs noted that even a 10 percent increase in house prices is "socially significant” because of the number of households it denies home ownership.3 As the Economic Report of the President shows, this is a price premium long since exceeded in California.4
- High Poverty Rates: California is testimony to those consequences, with the highest cost of living adjusted poverty rate of any state (including better known centers of poverty, like Mississippi and West Virginia).5
- Worsening Inequality: By definition, as housing affordability becomes more severe, inequality is increased, because fewer households can afford the higher prices. Some are forced to seek housing subsidies, which can require years on waiting lists, assuming that waiting lists are open. For example, all nine waiting lists are closed in the city of San Francisco.6 And, as noted above, nearly all of the cost of living difference between high cost metros and the national average is explained by higher housing costs.7 Moreover, higher cost housing has resulted in a massive intergenerational wealth transfer, as existing owners have reaped huge gains in house values, which has severely limited homeownership among younger households. Unaffordable housing is a principal driver of rising inequality.
- Retarded Economic Growth: Research indicates that tighter land-use regulation has diminished national economic growth, while relaxation could produce “significant growth effects.” 8 One estimate indicates that US labor productivity would be 12.4% higher if states rolled back their housing regulation levels halfway to the Texas level.9
- Declining population growth and increasing domestic migration: For nearly all the 20th century, California was the national growth leader. In every census from 1930 to 2000, California added more residents than any other state. In 1900, California ranked 21st in population in 1900, and by 1970 had reached the top position, which it has occupied since that time. But much has changed since then. California lost 70,000 residents in 2019-20, and there has been a net outflow of residents to other states of 2.7 million since 2000 10, as housing affordability has deteriorated.
Without restoring the competitive supply of land on the urban fringe, material improvement in housing affordability is likely impossible. Indeed the prospect is for further worsening, with pent-up demand driving prices even higher.
This article is adapted and updated from Chapter 2 (“California’s Housing Crisis”) by Wendell Cox in Saving California: Solutions to California’s Biggest Policy Problems, Stephen Greenhut, editor. The chapter is being published by newgeography.com with permission of the Pacific Research Institute, in three parts:
Part I: Housing Affordability in California: The Situation
Part II: Housing Affordability in California: Urban Land Markets
Part III: Housing Affordability in California: A Way Forward (this piece)
A Way Forward: The Housing Opportunity Area
Solving California’s housing crisis will require addressing the root of the problem — land values have risen to a point that prevents production for all but the most affluent middle-income households in the four coastal markets.
However, though housing is severely unaffordable in the interior markets, it is far better than on the coast. There may be an opportunity to stop further affordability retardation, by preserving a modicum of middle-income affordability, while giving businesses a relocation area sufficiently competitive relative with other states.
A Housing Opportunity Area
It is recommended that a “Housing Opportunity Area” (HOA) be legislated in the interior, to restore the competitive market for land, thereby preventing further deterioration in housing affordability.
Geographical Extent: The HOA would include the San Joaquin and Sacramento valley counties from Shasta to Kern, as well as San Bernardino, Riverside and Imperial and Antelope Valley in Los Angeles County. 11
Regulation in the HOA: Land-use regulation in the HOA would be liberalized.12 The HOA would be exempt from urban containment, and other post-1970 regulations associated with undermining the competitive market for land. Like the CEQA streamlining authorized for subsidized low-income housing in Senate Bill 7,13 it is proposed that zoning and land use regulatory streamlining would apply to middle-income and low income greenfield projects. Authorization would be virtually automatic for developments of, say, at least 50 plus houses or apartments, that is to be served by infrastructure (public or private). Adjacent development would not be required, though reasonable detached housing maximum lot sizes would be allowed (consistent with California’s historic small lot sizes). This type of development would be particularly appropriate given the current shift to much greater remote working.
Effect: Prevention of further housing affordability deterioration would provide an otherwise fleeting opportunity for middle-income households to achieve the California Dream of home ownership, rather than leave California. Moreover, the stronger economic and housing affordability in the interior could unleash competitive pressures on the coastal markets that could influence better housing affordability.
The HOA would be transformational, but is the type of root cause solution that may be necessary to address California’s housing crisis.
Impact Fee Reform: The state needs to identify means to finance new development from general revenue sources, not new owners and apartment dwellers.
Conclusion
The major regulatory changes adopted in California but not in most other places have been widespread urban containment (growth control and CEQA) at the housing market level and, to a lesser extent, the excessively high municipal impact fees. The association between these strategies and deteriorated housing affordability is clear.
Appendix Boxes
Box 1
Urban Sprawl in California
Urban planning has been pre-occupied with curbing urban expansion, popularly called “urban sprawl,” and has embraced urban containment as a principal solution. Regrettably, urban containment is strongly associated with severely unaffordable housing and its consequences (below).
Paradoxically, California is the least sprawling of any state. California has the highest urban densities, at 4,304 residents per square mile in 2010. New York ranks second, at 4,161. Further, California’s density of new urban development was more than double that of any other state and more than 5.5 times the national average between 2000 and 2010.14 The three densest large urban areas in the United States are Los Angeles, San Francisco and San Jose, all denser, perhaps surprisingly, than New York.15
Box 2
Evaluation of Other Explanations
There are other views on the causes of California’s housing affordability crisis.
Shortage of Developable Land: In the San Francisco Bay Area, for example, the high house prices are often blamed on a shortage of land. However,, there is no shortage of agricultural land, which has typically been used for new urban development. In 2017, the total agricultural land in just the San Francisco and San Jose metropolitan areas alone was equal to 150% of the urbanized land.16
As a matter of interest, geographer John Fraser Hart of the University of Minnesota has noted that “The loss of cropland to suburban encroachment may be cause for intense local concern, but attempts to thwart development cannot be justified on grounds of a net national loss of good cropland.17
Moreover, agricultural land costs have increased 30% per acre since 1969,18 far less than the nine times increase in land values.19 The 2017 value of agricultural averaged $1,800 per quarter acre,20 far less than the average quarter acre residential lot in metro San Francisco ($900,000) and San Jose metros ($1,200,000) — from 500 to more than 660 times agricultural values.21 The “land shortage” results from public policy, not topography.
Demand: Housing affordability deterioration is frequently blamed on increased demand, especially by international interests, major investors, and investment or “speculation.” Demand generally leads to higher prices only if there is not enough supply, which makes it more difficult to build houses affordable to middle-income households. Housing affordability can then worsen further, as demand continues to increase, without sufficient supply enhancement.
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Wendell Cox is principal of Demographia, an international public policy firm located in the St. Louis metropolitan area. He is a founding senior fellow at the Urban Reform Institute, Houston, a Senior Fellow with the Frontier Centre for Public Policy in Winnipeg and a member of the Advisory Board of the Center for Demographics and Policy at Chapman University in Orange, California. He has served as a visiting professor at the Conservatoire National des Arts et Metiers in Paris. His principal interests are economics, poverty alleviation, demographics, urban policy and transport. He is co-author of the annual Demographia International Housing Affordability Survey and author of Demographia World Urban Areas.
Mayor Tom Bradley appointed him to three terms on the Los Angeles County Transportation Commission (1977-1985) and Speaker of the House Newt Gingrich appointed him to the Amtrak Reform Council, to complete the unexpired term of New Jersey Governor Christine Todd Whitman (1999-2002). He is author of War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life and Toward More Prosperous Cities: A Framing Essay on Urban Areas, Transport, Planning and the Dimensions of Sustainability.
Photo: The Bakersfield Arch, by Nick Chapman; used under CC 2.0 License. Bakersfield, California: Metropolitan area in the California Central Valley, nearly 1,000,000 residents
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Infrastructure
To be clear, this greenfield development model would include full internalization of the public-facilities cost, including increased congestion in nearby established areas?