tl;dr: California needs a lot more market rate construction. And at least in San Francisco, a rough calculation suggests that allowing enough housing construction over the last 30 years would have decreased rents for low-income renters more than doubling rent subsidies would have.

The California Legislative Analyst’s Office, which provides nonpartisan advice to the state legislature, just released an interesting report on the high cost of housing in the state.

They found that California has much higher housing costs than the rest of the country (shocker!) and that barriers to new construction are largely responsible:

Building Less Housing Than People Demand Drives High Housing Costs. California is a desirable place to live. Yet not enough housing exists in the state’s major coastal communities to accommodate all of the households that want to live there. In these areas, community resistance to housing, environmental policies, lack of fiscal incentives for local governments to approve housing, and limited land constrains new housing construction. A shortage of housing along California’s coast means households wishing to live there compete for limited housing. This competition bids up home prices and rents.

In order to keep rental prices in California in line with the rest of the country, coastal cities would have had to allow roughly twice as much new construction as they did between 1980 and 2010:

For San Francisco, this would be a particularly big deal: the city would end up with a population of around 1.7 million, instead of its current ~800,000.

But from my perspective, the most interesting and surprising part of the report is what it says about the impact of the housing shortfall on low-income Californians.

As a result of its high housing costs, California has the highest real poverty rate in the country:

For households in the bottom 25% of the income distribution, housing makes up two-thirds of all their spending:

The conventional cutoff for “housing affordability” is spending no more than 30% of income on housing, so the median low-income household in California is spending more than double what they should be (while the median household in the second quartile of income is also slightly cost-burdened on this measure).

This is really bad in its own right, but it’s also interesting because it plugs into a discussion going on in Washington, D.C. right now (literally, not metonymically). Cheryl Cort recently wrote a blog post for Greater Greater Washington making the point that even if significantly more construction was allowed, the market still wouldn’t supply housing at a price point that’s within 30% of income for someone making half or a third of the area median income. Matt Yglesias responded by granting Cort’s point that the market wouldn’t supply housing at that price point, but arguing that liberalizing land use policies would be good for the middle class and for the poor in the longer run through filtering and improved access to jobs.

I agree with both of them, but I also think they’re missing a couple things. One is that the (arbitrary) 30% figure is not particularly relevant when the median bottom-quartile household in California is spending 67% of their income on housing — cutting their rent in half would be extremely valuable to them, but still wouldn’t get them to 30%. This point isn’t particularly important because new construction still probably wouldn’t pencil out with rent at 50% of the median income for the bottom quartile: the mean income of the lowest quintile of households in California is $12,707, so we’re talking $530/month, and it’s hard (impossible?) to produce new housing at that price point.

The more substantive point Cort and Yglesias skip over is that allowing enough construction so that prices wouldn’t have risen more in California than they have nationally would have helped low-income renters a lot, maybe more than substantial expansions of subsidized housing would.

I couldn’t find numbers on subsidized housing for all of California, but according to SPUR, San Francisco has about 30,000 subsidized units (with rent generally capped at 30% of income). The Census reports that in 2013, there were 85,997 San Francisco households with incomes below $75,000 (roughly the median) who were spending 30% or more of their income on rent. So even doubling the number of subsidized units wouldn’t come close to providing housing for all the rent-burdened households. But how would doubling the number of subsidized units (i.e., adding another 30,000) compare to not allowing supply and demand to get out of whack in the first place?

According to Census figures, SF had 120,179 renter households making under $75,000/year in 2013. Of those, 85,997 were paying more than 30% of their income in rent. The Census doesn’t publish detailed data on how much they’re overpaying, but we can extrapolate from the microdata sample it does publish. The 2013 California household microdata sample (zip file here; you’re gonna need statistical software to make sense of it) includes 3739 San Francisco households, 1510 of which made less than $75,000 in income and 972 of which paid cash rent. Rent took up 41% of income for the median of those 972 renters making under $75K, and of the 692 of them spending more than 30% of income on rent, the median annual overpayment was $6,360, or ~24% of income. Multiplying these figures together suggests that covering an additional 30,000 households with subsidies would save them ~$190 million/year in rent (and presumably cost the city a roughly similar amount to provide).

What if we had allowed (much) more market-rate construction? The LAO report models what it would have taken for California rents to stay at their 1980 level of 16% above the national average; today they’re ~35% higher. How useful would that 16% reduction in median rents be?

In the SF context, we can look at the Census microdata figures to get a sense: the median annual rent payment of the renter households making under $75K is $13,440. Reducing rents by 16% for all 120,179 SF renter households making under $75K would save them roughly $250 million/year (at no immediate fiscal cost to the city). So according to these figures, the population that we care about — renter households making under $75,000/year in 2013 (which is roughly SF’s median household income) — would have benefited more from allowing more construction than from a doubling of the number of units of subsidized housing.

This is obviously just a back of the envelope calculation, and it is certainly flawed in a variety of ways (see note on the right), but I think the basic intuition is reasonably robust: the large majority of low and middle-income renters who are rent-burdened are not currently subsidized, and aren’t going to be in the foreseeable future, so what happens in the unsubsidized market matters a lot to them.

The LAO report does a good job of describing how we have two choices in responding to high housing demand. We can build more, or we can allow prices to rise:

In places where housing is relatively abundant, such as much of inland California, building costs generally determine housing costs. This is because landlords and home sellers compete for tenants and homebuyers. This competition benefits renters and prospective homebuyers by depressing prices and rents, keeping them close to building costs. In these types of housing markets, building costs account for the vast majority of home prices. In two major inland metros — Riverside–San Bernardino and Sacramento — building costs account for over fourth–fifths of home prices. In contrast, in coastal California, the opposite is true. Renters and home buyers compete for a limited number of apartments and homes, bidding up prices far in excess of building costs. Building costs account for around one–third of home prices in California’s coastal metros. Under these circumstances, as Figure 6 shows, building costs explain only a small portion of growth in housing costs. Instead, increasing competition for limited housing is the primary driver of housing cost growth in coastal California.

Even if lower-income households aren’t going to live in new construction, allowing a lot more of it will prevent them from having to engage in a bidding war over the existing housing stock. Competition for housing, and the associated price increases, hurt low- and middle-income renters the most.

If you want to help do something about this problem, you might consider joining the SF Bay Area Renters’ Federation, which organizes people to support housing growth. You can join their Google Group here or like them on Facebook here.