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Moving to coastal California may be a dream, but for startlingly few is it a reality. Residential real estate prices in California are extremely high — the state’s median home value is almost $550,000, more than double the average U.S. median home listing price of $276,000.
While the demand to live in California exceeds the available home supply, additional factors come into play to make purchasing property more challenging for hopeful residents. Here are five key factors that are contributing to coastal California’s high residential real estate prices.
1. Retail giants and commercial projects are more attractive than residential housing builds.
While “build more housing to meet demands” is a logical suggestion, it’s not quite that simple thanks to Proposition 13. In simple terms, Proposition 13 essentially limits how much money cities can collect from property taxes. It was introduced in 1978 as a measure to prevent California homeowners from drowning in unmanageable property tax bills. In effect, it’s caused cities to favor commercial zoning over residential, as the property tax revenue from a major retailer or hotel chain far exceeds what residential development would generate.
The revenue potential of a residential housing development or a multifamily complex is capped, whereas commercial use development has an open ceiling. So, if there is vacant land available for development, a city may be more likely to approve it for commercial use, regardless of housing needs.
As it stands now, the only way I see to overcome the challenge that Proposition 13 poses would be to impose the same limitations on commercial properties, but I don’t imagine that would happen any time soon.
2. California’s land values, construction costs, materials and labor costs are sky-high and climbing.
The state of California limits where you can expand development, and when you combine that with the current demand it results in high land prices. Then, mix in the rising cost of materials and labor and you can see why home prices in the area are the highest in the United States.
The Terner Center for Housing Innovation at the University of California, Berkeley, released some interesting data that really helps paint the picture. The 76% increase in land pricing across the United States over a 16-year period is extremely high, but then when you look at California specifically, with San Francisco and Los Angeles more than doubling and tripling that, respectively, you really understand how California’s real estate market is unlike any other in terms of cost.
3. Home construction has been slow on the coast and nowhere close to meeting demand.
California’s Inland Empire new home construction is booming: Approximately 55% more housing units were permitted in the Inland Empire in the first half of 2017 over the previous year. While this region may be meeting housing demands, coastal areas have failed to. Los Angeles offers incentives to build more affordable housing, which is a step in the right direction. The current tax code allowances for tax deferral of capital gains if invested in designated Opportunity Zones in California, which should lead to incremental construction in Los Angeles and San Francisco, which may alleviate the supply shortage in the coming years, but it will take time.
I believe both these incentives were necessary, and if applied properly will help fulfill both the need for more housing. However, it’s not going to be an overnight remedy — it may be years until it impacts the market.
4. Approval time for new housing projects is painfully slow.
The longer it takes for a home to be built, the more expensive the home becomes. This is common sense, and the approval time for new housing projects in coastal California is extremely slow. The average coastal California city takes seven months to approve a project. In Los Angeles, it’s eight months. The same approval process in most major U.S. cities is four and a half months.
See the problem here? It takes almost twice as long to get an approval in coastal California than every major U.S. city. While there are several local agencies that a proposed project must pass through, there needs to be an effort to help streamline the process if California wants to bridge the gap between the approval times in other cities. Doing so would help make housing a bit more affordable.
Local residents also have plenty of time to challenge and express their dissatisfaction in regard to new projects, and I would encourage them to speak up. From not wanting additional home congestion to fearing even more traffic, concerns are often legitimate, and city council members take these concerns into consideration (often with their own reelection in mind). Some pocket markets are working on Specific Plans and Local Coastal Programs that give the area’s neighborhood committee rights to take over the permit process, and should these concepts get approved, homebuyers may get a reprieve.
5. There is worldwide demand to own coastal California property that far exceeds supply.
The demand for coastal California property is at an all-time high among foreign investors; nearly 40% of the properties being bought by Chinese investors are located in coastal California — it’s a hotbed right now, with demand exceeding supply. In addition, the Department of Finance’s 2017 report shows just how fast coastal California’s population is growing. While Silicon Valley is still responsible for drawing new residents, interest in the Los Angeles and surrounding coastal communities now also contributes to the low to nonexistent supply of property.
Coastal property will always be in demand; that will never change. What we may see in the future, though, are incentives for businesses to expand inland. Doing this could help spread the demand more evenly across Southern California. Over time, with correct policy and implementation, zoning allowances and variances may also make things easier for supply to catch up to demand.
For now, if you want your piece of coastal California heaven, I suggest looking for coastlines around prime markets that are yet to gentrify. As they say, they only make so much coastal land and, eventually, the relative price differences will collapse. Look at San Pedro, Long Beach and other communities in Los Angeles or Larkspur near San Francisco. Just as it did for Venice Beach, their time, too, shall come.