Why is the Rent So Damn High?
Today I went to SPUR’s brown bag discussion on “Understanding the Bay Area Housing Market,” featuring presentations from Jon Haveman, Enrico Moretti, and Tim Cornwell. The tl;dr version of the talk is that both the market to rent and the market to buy residential housing are expensive due to: 1. runaway job growth (fueling the demand side) and 2. a regulatory (hello, CEQA!) and permitting process that drives up the price of developing new housing (constricting the supply side).
Professor Moretti of UC Berkeley had some good data points for why prices are rising insanely at the moment. First, even though 20,000 new jobs were created in SF last year, there were only 2,548 new housing permits issued (and this housing hasn’t come on the market yet). The western part of the Bay Area (San Francisco, San Mateo, Santa Clara Counties) are now all above peak employment, so for every new job created, there is new demand for housing. He also explained the multiplier effect of tech jobs, where for every tech job added, 5 additional jobs are created, since they create the demand for local services which employ teachers, nurses, lawyers, taxi drivers, waitress, sales clerk, etc.
Tim Cornwall, who does a lot of real estate modelling, explained where we might be in 5 years. The current 5-year pipeline for Bay Area housing has 70,000 new units to rent (9% of the existing inventory) and 56,000 new units for sale (6% of the existing inventory). He put up a chart of the 5-year forecast of supply and demand, and the SF supply seemed to be just a smidge below the demand line. However, there were huge gaps between available supply 5 years down the road in San Mateo, Santa Clara, and the urbanized East Bay. The gap for San Mateo and Santa Clara counties was particularly striking to me, because in my head that translates to more shuttles between San Francisco and the South Bay, as more people are pushed up to San Francisco. As someone else blogged (I want to give him/her credit, but I can’t remember who), Google, Facebook, and Apple have no choice but to run shuttles up to SF because Mountain View, Palo Alto, Cupertino, and the entire Peninsula have restrictive planning policies that prevent adequately dense housing for their workers down there.
In terms the East Bay, it has lagged in terms of job creation, but the prices are being run up with the housing spillover from San Francisco. Cornwall has looked at the BART station boarding / exiting data and the run up in East Bay rental prices near BART stops correlates with SF job growth. Right now, Berkeley rentals are about the same as the bottom of the SF market.
Finally, on the issue of demand side prognostication, Cornwall pointed to where Gen Y is in their life stage. Between 2006 and 2013, San Francisco has seen its share of Gen Y’ers and Boomers* go up, whereas those around age 35 leave the city. Right now, Gen Y is perfectly happy in their 20’s renting and having mobility, but as they get married and have children in the next decade, housing demand will change.
*The topic of Boomers wasn’t really discussed today, but I’m thinking these are mildly affluent, empty nester boomers, who are trading in their suburban homes for the convenience and cultural attractions of the city.