Restricted supply and improving economy boost sky-high California rents
What do you get when you combine a strengthening economy with a chronic shortages of housing? Sky-high rents.
California began restricting growth in the 1970s with regulations like CEQA. Local opposition groups sprang up ostensibly to protect their quality of life. What started as a reaction to poorly designed and executed suburban sprawl devolved into an attempt by Nimbys to cast their neighborhoods in amber to prevent any future changes or development, even reasonable development. As a result of various growth restrictions, we simply don’t have enough housing stock to meet the needs of our growing population, either rental or owner-occupied.
When any commodity is in short supply, prices tend to rise, and rentals are no exception. There are not enough rentals to go around, so people substitute down in quality to obtain a place to live. We can tell how much of the increase in rent is due to an improving economy and how much is due to the substitution effect. Rent growth should exactly mirror wage growth because renters pay their bills out of current income. When rent growth exceeds wage growth, as it does today, that is a sign of downward substitution, a direct response to the lack of inventory.
My reports consistently say that housing is no more expensive relative to rent than it was in the 1990s; this isn’t supposition, it’s fact supported by data. The premise of my reports is that house prices are fairly valued due to their relationship with rent, and rent is always fairly valued relative to income. What if the second assumption is wrong? What if rents are not fairly valued relative to income? Is it all a bubble then?
We know house prices are 30% too high relative to income, but most of that difference is due to low mortgage rates. But what if house prices are actually 50% too high because rents are inflated and mortgage rates are too low?
Only time will give us those answers. What we know for certain today is that rents are rising rapidly, more rapidly than wages, so unless we approve and construction a great many more houses and rental units, rents will continue to exceed wage growth, and everyone’s quality of life suffers.
Rent growth is not unsustainably high, but it is certainly a signal to builders and developers to provide even more rental units. I imagine the Irvine Company is quite happy they overbuilt during the recession. They took a big risk, and they are enjoying the rewards.
The problem is even more acute in LA County.
Rent increases are pushing up into the unsustainable range.
In the post from New Year’s day, I talked about Alternate housing market price measurements. My reports use the $/SF metric to measure changes in rents and resale prices as it more accurately reflects what people are getting for their money.
Riverside County rents haven’t been rising quite as fast, but they are going up.
San Bernardino shows similar strength.
The trend is the same across California.
By Leo Rosett, 1/4/2016
Welcome to the Apartment List California Rent Report! California continues to be one of the priciest states in the country for rents, and in many places they’re still growing quickly. In this report, we’ll look at trends across the whole state as well as variations between cities.
California Rent Price
In California, 1 bedroom rents decreased by 1.8% and 2 bedroom rents decreased by 2.3% between November and December. They are now up 7.6% and 4.9% over the last year at median prices of $1500 and $1640, respectively.
Top 10 most expensive cities
- San Francisco: San Francisco once again claimed the highest rents statewide for both 1 and 2 bedroom units, averaging $3500 and $4610, respectively. 2 bedroom rents show growth of 3.7% since December 2014, while 1 bedroom rents have grown 5.5% year-over-year.
- Marina del Rey: Located on the California cost just 30 minutes from downtown Los Angeles, Marina del Rey was the 3rd most expensive city with average prices at $3940 for a 2 bedroom. A 1 bedroom there averages $3080.
- Berkeley: Right across the bay from San Francisco, Berkeley was the 6th most expensive city in California for the month of December. A 2 bedroom averages $3400 there, while a 1 bedroom goes for $2600.
Top 10 cities with the fastest rent growth
- Salinas: Salinas had the strongest year-over-year rent growth with an 15.1% increase over December 2014 for 2 bedroom figures. A 2 bedroom in Salinas costs $1520.
- Santa Clara: Santa Clara showed the 5th largest rent increase with 8.4% growth over December 2014. Rents in Santa Clara average $2740 for a 2 bedroom.
- San Mateo: This Bay Area city claimed the 8th strongest rent increase over last year, up 7.3% for 2 bedrooms. San Mateo also ranked as the 9th most expensive city in California for the month of December, averaging $3200 for a 2 bedroom.
We’ve discussed at length the problems likely to face the market when mortgage rates rise, but what happens if rent growth stops or we get declining rents as more supply comes to market? Could we see falling rents and falling house prices like we did during the housing bust?
While all these scenarios are possible, I consider a housing bubble based on inflated rents to be unlikely. Rents rarely go down, and almost never in the absence of economic recession. I doubt we will see declining rents during a period when the economy is improving and interest rates are rising.
High rents and high house prices are bad for families who must put more money toward shelter, but it isn’t the sign of a bubble ready to pop. Realistically, the only way we can get the growth of rent under control is to provide more supply. Rent control is not the answer as most socialist solutions to housing affordability problems really suck.